One of the key themes in Living on the Fault Line, the new book authored by my colleague
Geoffrey Moore, is one referred to as \u201cCore versus Context\u201d. The book addresses challenges
faced by businesses that have to deal with disruptive change equivalent to shifts in the earth\u2019s
surface, hence the \u201cFault Line\u201d metaphor. Companies not experiencing any level of disruptive
change to their business model or technology platforms can probably ignore the lessons contained
in this book \u2013 though the number of organizations in this category are few and far between in
today\u2019s internet-impacted economy.

The basic definition of core vs. context is simple. Activities that differentiate the company in the
marketplace are defined as core. All other activities, including many mission-critical operations,
are context. Context tasks and projects steal precious resources - time, talent, and management
attention - from core. In order to be sure of allocating these scarce resources where they count
most (i.e., building dominant or leading share in target markets) plentiful resources such as
capital (including stock), software packages, and outsourced service providers, should be
consumed in essential context activities. The internet now provides us with a platform on which a
huge number of companies are able to offer cost-effective services. Thus, operations that are
context for one company are core for another company, and can be outsourced to the latter. As
you will see toward the end of this section, this new model provides B2B service providers with a
powerful marketing argument to promote their services.

Continuing the definition of core - as opposed to context - operations, on the market-facing side,
core activities focus on differentiating the company in its primary target markets, where the
objective is to achieve market leadership - preferably becoming number one or two in its
category. Thus, market development activities that fall under the definition of context might

include efforts in primary markets where your companycannot achieve any leading market share, or alternatively marketing, sales and support in secondary or maturing markets, where business is more opportunistic, growth is slower, and there is limited reward for your efforts to differentiate.

Inside organizations, context activities include core tasks that are surrounded by context
behaviors, such as strategic decision-making that is hindered by turf battles, decisions being
constantly revisited, excessive concern for the welfare of the \u201cinmates\u201d over that of customers,
and so on. Besides these activities, operations that were recently defined (correctly) as core, may
now have become context. A good example in IT might be client-server ERP applications,
email/messaging systems, and HR-focused programs. Early users of these applications may have
rightfully claimed some measurable competitive differentiation by deploying them before their
competitors. A good example of this might be ERP in the early nineties, when the first
multinational corporations to use ERP to consolidate financial results worldwide increased their
profitability faster than their competitors. Nowadays, the picture has changed, as virtually every
major and mid-size company has implemented some form of ERP. Though still critically
important to the company\u2019s smooth functioning, who could state that such applications continue
to produce competitive advantage for the company, in terms of superior profitability?

Therefore, all the Time, IT Talent and Management Attention allocated to implementing and maintaining the ERP system means that these same precious resources are not focused on core projects, such as a new e-commerce marketplace aimed at increasing the company\u2019s sales and profits.The key lesson here is that just because it\u2019s mission-critical, it doesn\u2019t mean we should

When you decide that your organization must shed a given context task or activity, you
essentially have four main options: (a) de-activate the activity, (b) spin it out or sell it, (c) partner
with a third party in a joint venture, and (d) outsource it. Assuming you have determined that de-
activation or spin-out is not the right solution, you face one of the last two options. Partnering
and outsourcing are not identical. In the former case, you have to allocate your own management
attention, alongside that of your partner, to make sure that the task is executed satisfactorily.
Outsourcing, as defined within the core versus context framework, is quite different: it requires
that you hand over to the outsource service provider the full responsibility for resolving the
problem, within clearly defined service management guidelines.

Unfortunately for many companies, the brand of outsourcing practiced during the past fifteen
years or so, since the \u201cO\u201d word first entered our business vernacular, has had a checkered record.
It began as a cost-savings mechanism, in which companies sought to hand a \u201chot potato\u201d task or
application to a willing third party. A good example of this was large corporations outsourcing
their data centers and mainframe applications to firms such as EDS, in long-term arrangements
spanning up to ten years. Years later, the same corporate customer might discover that their
mission-critical application was not being adequately enhanced, and they then stripped it from the
contract, leaving EDS to run the data center. In this situation, core (new mission-critical
applications) was outsourced along with context (data center operations), which set up a win/lose
dynamic if/when EDS was unable to maintain the desired level of enhancements to the critical
application.

Another example, this time regarding the outsourcing of core processes or tasks \u2013 which
according to this new definition is a mistake \u2013 was the massive outsourcing of sales tasks that
started in the early eighties, principally in high-tech businesses. Conventional wisdom from the
mainframe and minicomputer eras regarding the importance of managing your own relationships
with large corporate customers was overturned, and executives aggressively questioned the \u201ccost\u201d
of every sales call. The new PC hardware and software vendors were among the first to
outsource virtually all their sales activities to specialized channel partners. Years later, some
companies, including many shrink-wrapped software companies, took this a stage further, relying
on indirect channels for most of their revenues.

Among major hardware vendors, HP took this even further, eventually becoming so distanced
from its customers that when Sun and IBM decided to make their assaults on HP\u2019s Unix server
market stronghold among large enterprises, HP soon lost precious ground with key customers.
Today, Sun has supplanted HP as the de facto market leader in Unix servers for mission-critical
applications in large corporations, especially when viewed in terms of revenue growth \u2013 so much
so, that Sun\u2019s sales growth today is more than three times that of HP. The lesson of this
experience: outsourcing core is a high-risk strategy that can lose you your leadership position in a
heartbeat \u2013 and it is almost impossible to regain positive momentum in such cases.

In today\u2019s outsourcing model, companiesmus t make it work, because of the scarcity of time,
talent, and management attention \u2013 the new factors that unbalance the former cost-focused
equation. Besides making sure that customer and provider reach a clear understanding of the
business issues driving this decision, a flexible transition process must be built in to allow the
outsource provider to customize their service around the application or business problem. The
service agreement corresponding to this process should accurately reflect these arrangements and,
in particular, the customer\u2019s and the provider\u2019s mutually agreed expectations regarding
performance requirements and commitments. Furthermore, companies need to invest in service-
level agreement (SLA) technology and know-how. In short, this means that (a) managers must be
trained in negotiating approaches and service management techniques oriented by a focus on
value rather than pure cost, and (b) companies should invest in automating the various service-
level arrangements in applications such as ERP, CRM, travel expense management, HRMS, and
operations such as desktop back-up, remote access, customer support, and version management,
so that human resources can cope with the task of managing escalating numbers of SLA
agreements.

Today you can also delegate a number of your IT SLA arrangements to a third party ASP or BSP
\u201caggregator\u201d, of which Jamcracker(*) is just one example. Founded in mid-1999 by K.B.
Chandrasekhar - who also founded Exodus Communications, the internet data-center operations
outsourcer - Jamcracker\u2019s system permits customers to centralize all their ASP services in one
portal with a single sign-on, single level of support, single billing and, essentially, centrally
managed service-level agreements. Other ASP-type organizations and alliances exist, with
similar value propositions.

The main message here is that companies must now elevate outsourcing to the status of strategic, rather than tactical, activity. In an economy increasingly crowded with entrepreneurial startups, new alliances, and new business models, if executives continue to regard outsourcing as merely a cost saver, they are unlikely to deploy it correctly. As a business saver, it deserves a completely different ranking in management\u2019s order of priorities. For this very reason, our advice is to avoid \u201cSLA light-weights\u201d among service providers, and instead qualify providers based on their ability