Shareholders and stakeholders and stakeholders are taking quite a bath these days. Take for example, Citigroup shareholders. Citi stock, once as sure a sure thing as sure things can surely be, was trading at just over $60 a share last year in early February. This February, Citi stocks market value is just a few pennies over three (3) dollars. In simple terms, if you were Citi rich last year; take your stock value from last February, divide it into 20 equal bags of money, and then pretend you lost 19 of them.

What was Citi’s big blunder? Specifically, they rushed to enter the derivative mortgages market. For those of you who don’t know what a derivative mortgage is, it’s an investment you hope to sell, and then rush to the bank to cash the commission check before reality sets in. Generally speaking, Citi did what a lot of other banks and companies do when things look bright, they got into a business they weren’t really in.

Was Citi unique or special? Absolutely not. Consider the fact that almost every business is in several businesses, every day. Let’s look at the example of Hostess, and further drill down to Hostess cupcakes. The cupcake plant isn’t just in the business of making cupcakes, although that was their charter in the beginning. Hostess stores, ships and delivers its cupcakes. So now they’re in the logistics business. Let’s say they own their trucks, now they’re in the fleet business. Of course they have a team to hire employees, administer benefits and manage worker complaints, so now they’re in the human resource business. Let’s not forget that they manage the money in and money out, along with numerous financial functions, so now they’re in the finance business. Last but not least, they have a team to manage their procurement of goods and services, so now they’re in the purchasing business.

All those non-cupcake functions, they’re called “support” functions, so the assumption is that they’re necessary costs to sell the cupcakes. They’re also the functions that drag 30-40% gross margins down to low, single digit % net profits. The answer to that huge delta is to give away those processes that do not add value to the core offering.

The need to control support services is a flawed assumption. A flaw that represents tremendous opportunity for firms that can deliver competently managed services, procurement or otherwise. For those of us in the “outsource resource” business, we should tailor our services to assume these non-core functions and operate them profitably. It represents not only tremendous growth in the procurement service industry, but also light at the end of the tunnel for fledgling enterprises weighed down by the businesses in which they are not.

For too long, firms have been able to afford the luxury of inefficient, unprofitable support services by ratcheting up prices and passing the pain along to the consumer. But tough times find the customer scrutinizing every purchase that much more closely. In tough times there is always a flight to quality. With so many imaginary fortunes disappearing into the ether, every company’s survival will be tied to delivering both top quality and rock bottom prices.

The next year or two will be as close to the “state of nature” we’ve seen in business since the industrial revolution. The fittest will survive only by refining core competence while farming out non-value added functions. It’s gonna be a bumpy ride, but those who prepare themselves for the him and haw will be better able to compete in the next new economy.
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