Outsourcing has become a highly emotive subject, joined through the media with the effects of redundancies and the flight of jobs to lower cost countries.
Off shoring is a subset of Outsourcing: the process is sub-contracted to an organisation in another country.
Outsourcing is a modern fashion. Henry Ford thought it wise to own or control the raw material supplies for his automobile plant. He owned iron ore mines, glassworks, a merchant fleet, a railroad, blast furnaces and an electrical power plant to ensure he could control everything needed to produce that black Ford automobile.
Not many companies have achieved that height of vertical integration. Today auto plants are assemblers of sub-contracted parts.
Outsourcing’s bad publicity is usually countered by quoting from David Ricardo, an economist, who died in 1823. His work on “Comparative advantage” shows that moving the supply of goods to a cheaper country enriches both countries.
His theory assumes a total flexibility in moving resources from one sector to another. It also assumes the comparative advantage between countries is flexible in the same way, adjusted through the currency exchange rates.
Realistically, it is farfetched to assume that the people who used to make ships on the Tyne have all moved to the City of London to work in the financial markets. Similarly, currency exchange rates are not free to find a “true” level.
The UK is running massive current account deficits. The UK now spends over £38.7 Billion a year (2019) more than we earn. 2020 is going to be a lot more! Those stories of the containers leaving Felixstowe full of fine English air are true.
Outsourcing holds out the hope of creating and sustaining a competitive advantage. Despite this, and according to a CIO Magazine survey, some 47% of outsourcing projects are cancelled due to poor performance.
Given the apparent huge advantages what goes wrong?
“Comparative advantage” is fine, and if it works, it does take time to move resources from one industry to another. In the meantime, people suffer a loss of livelihood.
There are problems for the outsourcer too.
Outsourcing should be regarded as a partnership. There are regulatory, governance, intellectual property and global economic issues to consider.
Stories of child labour, unsafe working practices, stolen bank details or even use of prison labour do great damage to Western brands. Equally, the fashion for off shoring has created shortages of resources in popular destination economies.
The single biggest cause of failure is a lack of detailed knowledge of the process.
Sadly, the experts in the process are the people who stand to lose their jobs. If you are not good at managing your people, they may not be over eager to help you understand how your processes work in real life.
Of course, if you are good at managing your people, you may find that source of competitive advantage is already available in your organisation!
Realistically though, it is economically necessary to take advantage of politically created windfalls created by managed economies.
The final point is to beware of outsourcing your unique selling proposition. Following the herd to outsource today’s fashionable process may leave you with a vital piece missing for the future.
You may discover you have outsourced your core competitive advantage!