Companies are outsourcing more and enjoying it less these days. According to a Bain survey, 82% of large firms in Europe, Asia and North America use outsourcers, and 51% are using offshore outsourcers. But nearly half say their outsourcing programs don't meet expectations, even when measured purely on cost improvements. A mere 6% say they are "extremely satisfied" with their outsourcing arrangements.

The problem is that few companies have developed comprehensive sourcing strategies. For years, "sourcing" has meant procurement-a financially material but strategically peripheral corporate function. Many companies continue to make sourcing decisions on a piecemeal basis, guided by the traditional, narrow goal of minimizing costs.

Today, however, outsourcing has become so sophisticated that even engineering, R&D, manufacturing and marketing can-and often should-be moved outside. It's no longer a company's ownership of capabilities that matters but rather its ability to control and make the most of critical capabilities, whether or not they reside on a company's balance sheet. We call this new discipline capability sourcing.

It's no longer a company's ownership of capabilities that matters but rather its ability to control and make the most of critical capabilities. -Mark Gottfredson Click to start audio presentation Click for text transcript of the presentation

One company that transformed itself through a comprehensive sourcing strategy is 7-Eleven, the convenience store retailer. A decade ago, 7-Eleven owned every capability from gasoline distribution right down to the cows that made its milk. Today, 7-Eleven basically retains data on what its customers buy, along with unique merchandising skills. Nearly everything else is shared with joint-venture allies or outsourced. Along the way, 7-Eleven began outpacing its rivals in stock price and inventory turns, which run at twice the industry average.

Deciding what's at the center is crucial. Companies need to identify the part of their business that is the core of the core. They must ask themselves: What is my source of differentiation? Where do I have world-class cost advantage and proprietary technology processes or profit models?

Companies also want to locate opportunities for alternative sourcing, striking the right balance between maintaining control and employing the scale and skills of outside specialists. Processes and functions that are common across industries but not proprietary are ripe for outsourcing. A company needs a clear understanding of the strength and the relative cost and quality of its current capabilities. 7-Eleven, for instance, outsourced gasoline operations to Citgo but retained control over pricing.

There's also the question of physical proximity, or "right-shoring": Can the source be far away, or does it have characteristics that require it to be nearby? In announcing Dell's recent decision to build a plant in North Carolina, CEO Kevin Rollins explained that the company's sourcing strategy points to the US as a cost-competitive location for computer assembly. "The cost of moving a PC around is much more expensive than the labor cost [of building one]," Rollins said, "so we locate close to customers."

Finally, companies should ask if they can perform the same functions for others if their own capabilities are best in class. FedEx, for example, plans and manages inbound transportation for more than 1,500 product suppliers into 26 General Motors Powertrain facilities, a capability that's at the leading edge of the $225 billion logistics outsourcing industry.

7-Eleven CEO Jim Keyes saw sourcing's impact during a business review in 1991. His biggest surprise was that functions he had viewed as strategic-product distribution, advertising, even purchasing-could flourish in the hands of proficient outsiders. Indeed, carefully structured partnerships produced fresher sandwiches, brighter signs, more choices at the coffee counter and competitive gasoline prices.

As 7-Eleven discovered, a company's skill in quickly remolding its sourcing arrangements when industries and markets change may become its strongest competitive advantage.

Mark Gottfredson is a partner at Bain & Company in Dallas, and Rudy Puryear is a Bain partner based in Chicago.

For a fuller account of capability sourcing, purchase "Strategic Sourcing: From Periphery to the Core," by Mark Gottfredson, Rudy Puryear and Stephen Phillips, which appeared in Harvard Business Review in February. Also, listen to Mark Gottfredson highlight the keys to successful capability sourcing in an audio slideshow presented here.