I know, I know, yet another post on the foibles of outsourcing. But maybe a little reinforcement will help peel back the nonsense that justifies outsourcing in the minds of many executives.
Outsourcing is primarily driven by a desire to achieve cost reductions, particularly with labor. Traditional financial methods create this situation as they don’t adequately account for nuances such as longer supply chains, training costs, turnover costs, and cash sitting as WIP on the high seas. Just yesterday we told you about a couple studies that poke holes in the myth of cost reductions created by outsourcing. So leave it to a bunch of traditional financial executives to try to squeeze even more imaginary cost savings out of outsourcing.
An article in Financial Executive, the magazine of Financial Executives International, attempts to describe "outsourcing’s next wave." You have to know the secret handshake to read the article on their website, but it has been reposted openly at E-Commerce Times.
Most companies have outsourced some portion of their business to lower costs and, over time, have achieved cost savings in the outsourced portion of the business. Unless your efforts in outsourcing to lower costs are unusually good, you are not gaining a sustainable competitive advantage, since your competitors are outsourcing just like you are.
Very true… that’s what leads to globe-trotting, constantly in search of cheaper labor. As more companies move into a region, supply constriction will increase labor cost. And as pointed out above, the net advantage becomes nil as competitors also take advantage of those same reductions. So what should be done? Why, find even more areas to outsource! Of course! At least that’s what "Financial Executives International" believes you should do.
The next wave of outsourcing is about assessing all aspects of an organization’s business activities to determine if and where there are opportunities to leverage outsourcers’ capabilities, intellectual property, best practices, global infrastructure or geographic presence to access resources and capabilities around the globe that may not be available to your business today.
The ultimate goal, of course, is to outsource everything. Some company, somewhere, can obviously do it cheaper. And that’s exactly what the "leading edge of outsourcing" are doing. Citing just one example from the article:
On Jan. 15, 2007, Banco Pichincha, Ecuador’s largest private bank, announced the strategic outsourcing of its core banking solution, followed by its information technology (IT) and business operational processes to Indian outsourcer Tata Consultancy Services (TCS). The deal is valued at US$140 million over five years.
Let’s see… Core banking… check. IT processes… check. Business operational processes… check. What’s left? I guess a few tellers in some lonely buildings across the beautiful country of Ecuador. Presumably those tellers can be outsourced to a temp agency and the buildings leased. Voila! A virtual company!
So what value does the original company create? Beats me.
The article goes on to describe the supposed benefits of transferring R&D, engineering, and product development to GSP’s (global service providers). Those benefits apparently include faster time-to-market and lower costs. But who owns the intellectual property… or at least who possesses it and can transfer it… officially or not?
All driven by financial systems that measure labor costs down to the penny, but in no way account for the value of experience, creativity, innovation, and knowledge. I wonder what would happen if all the effort that went into setting up complex outsourcing arrangements was instead applied to reducing internal waste.
Maybe Ecuador’s Banco Pichincha would actually create real value.
Sean Meecham says
Another problem with companies that outsource basically all of their processes is that they can’t improve. Just like the “lights out factory” that old style managers aspired to be, a “hollow company” doesn’t have people to continually improve the processes. Therefore they will slowly fall behind companies that can develop and implement improved processes.