When it comes to creating a sustainable, competitive strategy, the “how” question is central to your organization’s success. In this context, “how” means deciding how to build and deliver the capabilities that fulfill your mission and differentiate your company in the market. This involves two main considerations: first, knowing which capabilities to keep in-house versus which to outsource or partner on, and second, understanding how to leverage process power—the way your organization operates—as a unique advantage.
Part 1: When to Hire, Outsource, or Partner
The question of how you build capabilities depends on one key factor: strategic value. Some functions are integral to your mission and differentiation, while others are necessary but less central. Here’s a framework for deciding whether to build internally, outsource, or partner.
1. Identify Strategic Capabilities
Start by defining what your organization must be exceptional at to succeed. Strategic capabilities are functions that are tightly linked to your mission, brand, or competitive edge. For example, if you’re a tech company, software development might be a strategic capability that you want in-house to ensure innovation and control.
- In-House: For these high-value capabilities, hiring and building internal teams allows you to cultivate deep expertise, maintain quality control, and develop unique processes. When a function is directly tied to your value proposition or differentiation, keeping it internal ensures you can constantly refine and optimize it without relying on third parties.
- Example: Tesla builds its battery technology in-house, a core capability for its electric vehicles. This keeps its innovation proprietary and enhances control over quality and performance.
2. Determine Non-Strategic, Supporting Functions
Functions that are essential but don’t directly drive competitive advantage can often be outsourced or managed via partnerships. This keeps your team focused on high-impact work, while outsourcing provides specialized services without the need for in-house resources.
- Outsource: For capabilities that need to be “good enough” rather than exceptional, outsourcing offers efficiency and allows your team to concentrate on core strengths. Services like payroll, HR, or IT support are often outsourced by companies that don’t rely on these functions for their differentiation.
- Example: Many startups and even established companies outsource payroll management to firms like ADP, letting them streamline an essential function without adding complexity to their operations.
3. Consider Partnerships for Capabilities Requiring Specialized Expertise
Partnerships can be powerful for areas requiring specialized knowledge or technology that would be costly or time-consuming to build in-house. This strategy allows you to access expertise quickly without a large upfront investment.
- Partner: For functions that benefit from expertise and shared risk, partnerships allow you to leverage another organization’s strengths while focusing on your primary objectives. Partnerships work best in fast-evolving areas where expertise is crucial, such as R&D, marketing, or global distribution.
- Example: Spotify partnered with Google Cloud for its data storage and processing needs, enabling it to scale without needing to build and maintain its own cloud infrastructure.
4. Use Outsourcing and Partnerships to Maintain Focus
At the heart of these decisions is the need to stay focused. By outsourcing or partnering on non-core capabilities, you keep your team’s attention on what matters most, avoiding distractions and resource drain. The goal is to allocate time and resources to areas that enhance your strategic value and competitive position.
Part 2: Building Process Power with Insights from No Rules Rules
One of the most effective ways to create a competitive edge is through process power—the unique ways your organization runs itself. Process power is about making operational decisions that aren’t easily replicated, creating a culture and system that sets you apart. Netflix, as described in No Rules Rules by Erin Meyer and Reed Hastings, is an excellent example of how process power can create lasting differentiation.
Here are key principles from Netflix’s approach to process power and how you can apply them to build a resilient, agile organization:
1. Focus on Talent Density
Netflix believes in “talent density”—hiring and retaining only top performers—and gives these employees freedom to drive results. High talent density enables your team to operate with minimal oversight, replacing strict rules with trust and autonomy. By focusing on hiring the best, you reduce the need for micromanagement and create a more agile team that’s equipped to handle complex challenges.
- Application: Make talent density a strategic focus. Prioritize hiring employees who can work independently and deliver high-impact results. By building a team of exceptional performers, you reduce the need for process-heavy oversight and can rely more on trust and responsibility.
2. Foster Radical Candor and Feedback Loops
At Netflix, open feedback is a cornerstone of the culture, with employees encouraged to give and receive feedback honestly and constructively. This level of transparency drives faster learning and helps prevent small issues from becoming major problems. Radical candor cultivates trust and keeps everyone aligned with organizational goals.
- Application: Build a feedback culture by encouraging open communication and frequent, constructive feedback. Consider implementing regular review sessions or peer feedback processes to keep performance high and provide opportunities for course corrections.
3. Provide Freedom and Responsibility
Netflix’s model of “freedom and responsibility” is about giving employees the autonomy to make decisions within a framework of accountability. There are no strict vacation policies or rigid expense reports; instead, employees are expected to “act in Netflix’s best interest.” This approach frees people to be creative and responsive, enabling faster decision-making and innovation.
- Application: Find ways to reduce rules and increase autonomy within your organization. Create clear boundaries and expectations but empower your team to make decisions independently. Freedom balanced with responsibility enhances employee ownership and accelerates the pace of innovation.
4. Lead with Context, Not Control
Rather than controlling every decision, Netflix leaders focus on providing context so employees can make informed decisions on their own. Leadership communicates company vision, goals, and market positioning, allowing teams to make decisions aligned with the organization’s direction.
- Application: Train managers to focus on sharing context—why decisions are made, the strategic goals behind them, and the market conditions that impact them. When employees understand the “why” behind decisions, they can act more autonomously while remaining aligned with organizational priorities.
5. Embrace Transparency in Information Sharing
Netflix practices radical transparency, openly sharing business strategies, performance metrics, and challenges with employees. This level of openness allows everyone to stay informed, make aligned decisions, and feel trusted within the organization.
- Application: Foster transparency by regularly sharing key performance data and strategic plans with your team. Hold quarterly updates or all-hands meetings where leadership discusses goals, setbacks, and upcoming priorities. Transparency builds trust and keeps employees engaged in the organization’s mission.
6. Evaluate with the “Keeper Test”
The “Keeper Test” is a tool Netflix uses to ensure talent density by evaluating if a manager would fight to keep an employee if they were to leave. If the answer is no, Netflix encourages managers to let that person go, ensuring a team of high performers.
- Application: Regularly assess team fit and performance through feedback and candid evaluations. If employees no longer align with the organization’s values or strategic needs, consider whether retaining them is truly beneficial. A rigorous commitment to talent density reinforces process power by keeping the team’s performance and alignment high.
Bringing It All Together: Developing Your Internal “How”
Building process power and deciding what to develop in-house vs. outsource are deeply interconnected. By focusing on what matters most—your strategic capabilities and the processes that differentiate you—you create an organization that’s lean, focused, and highly adaptable. Here’s a final framework to help:
- Build Key Capabilities In-House: Develop strategic functions internally to maintain control over what sets you apart. This is where you should prioritize talent density, autonomy, and continuous improvement.
- Outsource Non-Core Functions: For capabilities that don’t directly drive differentiation, look for trusted partners or outsourced solutions. This lets you keep internal resources focused on your mission-critical work.
- Leverage Process Power: Take insights from No Rules Rules and develop processes that support trust, transparency, and autonomy. By creating a high-talent, empowered workforce, you build a unique culture that becomes a competitive advantage in itself.
Answering the “how” question thoughtfully ensures that your organization is set up not only to perform but to innovate, evolve, and stay ahead of the competition. Through clear decisions on hiring, outsourcing, and leveraging process power, you build an internal structure that’s aligned, efficient, and built to last.