If all manufacturers sang from the same hymnal—and many do—they would outsource almost everything: management gospel holds that manufacturing is too labor- and capital-intensive to support the high margins and fast growth that investors demand. By shedding assets, companies can be born again as product designers, solutions providers, industry innovators, or supply chain integrators—and, it is said, quickly boost their return on invested capital. Indeed, Standard & Poor’s reports that in the year 2000, the market-to-book ratio of the S&P 500 was six times greater than it had been in 1981—a reflection of the declining importance of tangible assets.

Such pressures and perceptions make outsourcing an almost irresistible impulse for manufacturers. Global access to vendors, falling interaction costs, and improved information technologies and communications links are giving manufacturers unprecedented choice in structuring their businesses. Through outsourcing, companies can now dump operational headaches and bottlenecks downstream, often capture immediate cost savings, and avoid labor conflicts and management deficiencies. We are aware of no managers who have been taken to task for farming out in-house operations.

But in the race to hand over capital-intensive manufacturing assets to outside suppliers, companies may be ceding the very skills and processes that have distinguished...