When ‘best practice’ isn’t ‘the best practice’

A word of warning to the potential reader: this article may get a bit technical and theoretical, maybe even nonsensical. But I do hope there’s some value to be gleaned for some.

I guess many of us are familiar with the term "best practice." For those who aren’t, best practice simply means the best way of executing a particular process or activity. While this term can be applied to just about every activity man performs, it has been more commonly used in a business sense to refer to processes and activities which generate cost efficiencies (i.e., lower costs) and/or higher value to end customers at a cost-to-serve which delivers a healthy profit margin for the company.

As an example, if Internet Service Provider (ISP) A is able to deliver a valued service such as Internet access to its customers more quickly than any of its industry competitors, the onlooker might argue that ISP A has the best practice in the industry as far as access delivery. However, the more discerning onlooker might add a further question, "Does ISP A deliver this particularly valued service in a manner which still affords the company a good return?" Best practice isn’t best practice unless the company makes a good-enough profit (by industry standards).

A whole industry in search of "best practice" has been spawned globally. Many Consulting and other Services Firms have made a lot of money studying so-called best practices within particular geographic and/or industry sector groupings across several performance benchmarks. Some have even looked at cross-industry and global best practice for the Holy Grail. But has this endeavor been truly worthwhile?

In developed economies like the U.S., the drive to achieve industry (or even cross-industry) best practice has been unending. When one company achieves a particular performance benchmark, the others strive to copy the practice. Maybe another might outperform the existing benchmark, raising the bar then for the others to follow, although this becomes increasingly more difficult (and maybe impractical) when each succeeding bar-raising delivers less and less value to end customers as well as to the company at the end (i.e., you begin to reach the cost-to-serve and value thresholds for a particular process; in other words, the ol’ diminishing returns syndrome).

Theoretically, with leading industry players striving for and achieving "best practice," sooner or later, you may have what Professor Michael Porter of the Harvard Business School terms "competitive convergence" and this is not a good thing for that industry’s profitability/attractiveness. What this means is that all the competitors start looking, acting, and smelling the same that customers may not care who they are dealing with. In such an environment, lowering prices becomes the key competitive weapon and, as we saw in the fall of many dot-coms, the price game makes for an extremely unattractive industry structure. If "best practice" leads to competitive convergence, then best practice isn’t the right thing to do.

On a more practical sense, I think it’s really difficult to replicate a successful local competitor’s best practice, let alone a global best practice (it may not make sense for your company anyway), particularly if this best practice is in-bred (i.e., generated from organic growth and pain from within). Why? Because in order for a company like ISP A to achieve its best practice (in this example, providing the fastest Internet access cost-effectively), this involves a whole slew of other activities and processes this ISP performs, from sourcing to financing to marketing to customer service to human resource management, to etc., etc. These combinations of a whole bunch of mission-critical activities turning into a valued and attractively priced product or service offering are difficult (maybe even impossible) to replicate. This, then, is what differentiates industry leaders and makes the competitive business arena worthwhile and that much more interesting.

Using a final example for now which Porter has also examined, let’s look at the packaged software versus custom-built software game. Software and automation have obviously helped companies become more efficient and effective in their value-delivery systems. For larger scale endeavors, it has generally been less costly to just buy software off the shelf, tweak it a bit to meet certain internal company requirements, and then off you go. Well just imagine all these same industry competitors buying essentially the same global best packaged software to execute their various activities and processes. Yes it costs less to implement but, in the longer-run, are we spawning Porter’s competitive convergence dilemma? Are these companies, in fact, really being more cost-effective down the road, when they’re all doing the same things essentially the same way (driven by the dictates of the packaged product)?

And then there’s that other company which decides to build its own software system internally from scratch (or maybe it hires a systems integration consultant to customize for them). Hopefully the company has got the right folks and the right vision in mind to start with. And hopefully it’s been customer-centric throughout the process, factoring in not just its internal needs but its market’s desires as well. But it goes through a lot of pain and definitely more cost to come up with its in-grown system. At the end, the company has built its very own system which fully supports its unique activities and processes which deliver a best practice (i.e., valued and profitable) to the market. This, I argue, will be impossible for other industry competitors to copy and, if flexible over time, will be more sustainable and deliver longer-lasting profits to the company. Which, then, is the more cost-effective approach?