Lessons from the disruptive development front-line: In-sourcing vs. Partnering
My team and I are building our company with the mission to spur ‘disruptive development’ in the low-income economies we work in. We see business as a powerful agent for this development: our approach is to build and support market creators, companies that have the potential to employ thousands of people by developing scalable solutions to non-consumption.
Due to the nature of our focus markets, we interact daily with under-developed institutions, difficult regulatory frameworks and muddled macroeconomic realities — all this on top of the everyday operational challenges of building new businesses. This all requires significant patience and perseverance.
It also offers a unique opportunity for relentless learning. We think it’s important to pull up often and reflect on our lessons from the front-line. We ask ourselves: What have we learned in this period? What went well, and why? What might we have done differently? The lessons we pick up along the way are certainly helpful for our team, but they may also be instructive for other investors and entrepreneurs building market creators.
One recent reflection relates to the delicate art of choosing when to partner.
In our experience, most operators and investors recognize that they sometimes need partnerships, especially when working in difficult market environments with limited resources and time. However they don’t spend nearly enough time thinking about the trade-offs that must be made. Clearly it’s important that some capabilities are developed in-house, even if it requires buying high-end equipment, hiring new talent, or carrying out series of costly experiments over many months. Other capabilities, though helpful, are better outsourced.
But how does an entrepreneur or investor know when to in-source vs. outsource? Getting the two mixed up can lead to stymied business growth or open the door for opportunistic partners to capture an “unfair” portion of the profit pool.
We recently struggled with this issue on one of our core investments. We were considering partnering with a real estate services provider to source and manage retail locations for a consumer business, versus building our own in-house capability. On the surface, it seemed that an in-sourcing approach would prove a distinct advantage in the longer term, but we certainly didn’t have the resources or time to build one just yet.
To come to a decision, we asked ourselves three questions:
- Criticality: Is the capability mission-critical, given our ultimate vision and strategy?
- Urgency: Do we need to invest in building the capability now, or can we get away with doing it later?
- Availability: Can we make available the required resources to build/buy the capability?
For strategic problems where there’s an affirmative response to all three questions, in-sourcing is likely the right answer; for all-round negative responses, outsourcing or partnering is appropriate. In grey area situations with mixed responses, it may make sense to start with light-touch experiments, for example exploratory partnerships that provide an opportunity to “try before you buy”.
In our specific case, the strategic problem scored affirmatively on criticality, but negatively on urgency and availability. So we ultimately decided to explore a short-term partnership with the aim of bringing the capability in-house within a year.
Other businesses will certainly face their own unique circumstances, and the answers to the three questions may evolve over time. But we think the three questions can provide useful guidance for entrepreneurs and investors who are assessing the role of partnerships as they build market creators.
Further reading: The business theory of disruptive innovation provides some helpful guidance on how to think about when to build in-house capabilities, especially through the principles of modularity and interdependence.
