In the old days, companies actually produced stuff. They invented it, designed it, made it, marketed it, and sold it. Although there are still some companies like that, they're a lot less common now. Many companies have shifted to an "asset light" model where they no longer own their own factories and equipment. Instead, they hire other companies to do most of the work. Understand how this works and you can turn it in your favor.

I first came to understand this model with regard to publishing companies, so I'll use them as an example.

Publishing companies as specialized venture capital firms

What does a book publisher do? Very briefly, it finds things to publish, buys the rights, edits the manuscript, designs a book, markets it to bookstores (and other sales channels), has copies printed and bound, and sells them.

In the old days, one company would do all those things. Nowadays, very few do. In fact, some companies outsource every single one of those activities: Acquisition, editing, and book design are done by freelancers; marketing is outsourced to a marketing firm, printing and binding to a printer, and sales to a distributor.

Of course, a publishing firm may choose do one or more of those things, if it thinks it can do it better in-house--many firms still do their own acquisitions, a few old-line companies may do their own printing and binding, many do their own marketing. But they can all be outsourced if the company doesn't have the expertise in-house.

There is one exception: buying the rights. That--putting up the money--is now the core activity of a publishing firm.

This is why I call publishers specialized venture capital firms. Putting up the money--paying the writer's advance (and also fronting the money to pay the freelancers and the printer) in exchange for a big chunk of the profits from sales is a straight-up venture capital model. (Rights are usually acquired on a profit-sharing basis: The publisher pays an advance against royalties. If the book does especially well, the author will get further payments, if it does poorly he gets nothing more.)

Other companies as venture capital firms

As one aspect of globalization, more and more companies have shifted to this model over the last twenty or thirty years. Specialized tasks were outsourced early--everything from janitorial staff to lawyers got contracted out. Anything with high labor costs--manufacturing especially--was moved overseas in search of cheap labor. The idea was to identify a "core competence" and retain only that activity, outsourcing everything else.

To the extent that you can get things done better or cheaper, outsourcing is fine. At its current absurd limit, though, we've gotten to the point where companies no longer seem to have any "core competence" except hiring outsourcing firms. At this point their only competitive advantage would seem to be superior skill at managing deals with overseas contractors.

Actually, there's one other: cheaper access to money. In fact, for a specialized venture capital firm, access to cheap risk capital is the core competence. And US firms have had a huge competitive advantage, because in the years between the dotcom collapse and the recent financial panic, the Federal Reserve made money as cheap as it had ever been.

The financial crisis put an end to that. (The money is still cheap, but you can't get any of it.)

However, there's a more fundamental limitation to the whole system: When your competitors are all shopping from the same universe of outsourcing firms to hire things done, it gets a lot harder to find a competitive advantage.

Even if you have a real core competence, you're still suffering in this recession, but you're just suffering in the usual way--sales are down because your customers don't have any money. But if your so-called core competence was either your skill in managing outsourcing firms or your access to cheap money, you're in a world of hurt now. The people actually swimming in that quagmire don't need me to tell them that. But others are affected as well. Stockholders should take a close look at the companies they own. Vendors, clients, and suppliers should look at the companies they do business with. If the company still does something real, it may well have a bright future. If it hires everything out, though, there's no reason to think it will ever again do well (even if it might manage to hang on as a third-tier firm for a long time).

Why it matters

Having said all that, there are really two points I'd like to make.

First, ordinary people can also take advantage of the outsourcing phenomenon. If there's anything that you can do better than other people--if you have a core competence--there has never been a better chance to turn that into a business. The outsourcing firms that will do everything else for you will be begging for the work. Of course, since you're turning yourself into a specialized venture capital firm, you'd better have not only a core competence but also some capital--it's going to be tough to get much from the financial markets.

Second, though, understand that once your company gets to the point where it doesn't actually do anything except put some money at risk and manage contracts with other companies to do the work, it isn't really much fun to work for.

There are, I suppose, some people who like nothing better than managing contractors and managing risk, but the rest of us would prefer to actually do something--design something, build something, repair something, improve something, maintain something.

This matters for both managers and employees. Hire people whose skills complement your business's core competence. Work for companies where you'll be doing real work that you're interested in. Avoid owning or working for companies where there's no longer any real work going on. (Work instead for the outsourcing firms that are doing the work.)

In any case, understand what it means to own or work for a specialized venture capital firm: Success is mainly a matter of managing your contractors and coming up with risk capital that costs less than the profits of your firm. Finding some real work that you can do better than anyone else is both more promising for success and more fun.