During the past 20 years, companies around the world have embraced sometimes wrenching operational-improvement programs, from total quality management and lean manufacturing to reengineering. While the press may have exaggerated their benefits, many such companies did succeed in boosting productivity.

But the harsh truth is that for all the recent gains in quality and productivity, the global economy demands operational improvement at an ever-accelerating pace. Best practices soon give way to better ones. So do best operations. Managers assume that a secondary activity outsourced to a specialist can realize not only higher performance levels but also significant savings. Furthermore, these managers view almost any savings at all as a reason to act—a serious error. Companies give away value when they outsource a slice of operations (manufacturing assets, accounting services, the information technology unit) without first improving those operations to the extent that they can. The new provider of the outsourced service will make the improvements instead and reap the rewards, as Stephen J. Doig, Ronald C. Ritter, Kurt Speckhals, and Daniel Woolson show in "Has outsourcing gone too far?" In only one respect is value likely to be spread out: eliminating those latent inefficiencies raises the performance bar for "competing" activities that other large companies have kept inside.

There is more to successful outsourcing, however, than retaining as much value as a company can. Outsourcing may be a sterile pursuit unless its benefits are distributed throughout the value chain—a reality that is evident in the auto industry, note Anjan Chatterjee, T. V. Kumaresh, and Aurobind Satpathy in "Biting the hand that feeds you" (sidebar to "Has outsourcing gone too far?") The manufacture of automobiles, once the most vertically integrated of all businesses, is now among the most disaggregated. But if carmakers wield their disproportionate bargaining power to squeeze suppliers, the results may come back to haunt them. In the meantime, the only hope suppliers have for boosting their margins appears to lie in continually improving their operations.

While the trend to outsourcing may encourage operational excellence, it isn’t a panacea. It is true that stripping a company of expensive assets may improve its market-to-book ratio and make investors and stock analysts happy, at least for a while. But as some lighter-asset companies have discovered, factors (such as extreme swings in demand) that aren’t accounted for in the outsourcing assessment can lead to unexpectedly high working-capital costs or to novel customer service trade-offs. That is why managers must assess not only the current performance of a process or asset but also its potential for improvement. In addition, they must retain enough expertise to judge whether suppliers are, at a minimum, meeting standards and keeping pace with changes in the field. When managed well, assets will follow the operators—inside or outside an organization—that can create the most value.

Good management is vital in other ways as well. Consider the sorry state of manufacturing in the United Kingdom as described in "Better UK productivity: An inside job," by Stephen J. Dorgan, John Dowdy, and Peter Whawell. For years, UK manufacturing productivity has lagged behind that of the other Group of Seven nations, and McKinsey Global Institute research has found the gap to be a growing one. But the research shows that the shortfall isn’t related to the level of capital investment or to the quality of the workforce; rather, it reflects a failure of operational prowess. When foreign-owned companies such as Ford introduced lean-manufacturing techniques into Britain—and trained British workers in them—failing plants were turned around.

Yes, outsourcing can improve performance, deliver savings, and allow companies to focus on their core activities—but not if they simply hand over the keys to whatever company makes the most attractive bid. Before organizations put their assets into play, they must put their assets in order.