by
Edwin B. Dean
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Outsourcing is a means of giving someone else the problems within your business which you cannot solve well yourself. In NASA we call it throwing the problem over the fence. We are doing that well these days. Does it really solve problems? Or does it create possibly even worse problems? The results to date of outsourcing are largely anecdotal, rather than quantitative, so who can really say.Scherkenbach (1986) notes that
One well-respected company outsources at least 30 percent of major items in a plant even though they have the capacity to produce them. This serves as a buffer for their employees against the cyclic vagaries of the business. The unfortunate thing is that the supplier is then faced with layoffs because he is desourced as the business is brought in house. The customer ends up paying for this suboptimization.
Outsourcing does not always reduce cost and often does reduce revenue. Outsourcing to a low quality supplier will increase cost within your system due to the waste associated with bad product. It will also reduce revenue because of the lack of customer satisfaction from bad product. Outsourcing to a supplier whose quality is substantially superior to your own will probably both reduce your cost and increase your revenue. The quality of the product should be a primary criteria for outsourcing.
Outsourcing your customer interface, as many companies have done recently, can be disastrous. Your customer wants to be able to deal with the company responsible for the product, particularly if there are problems. If you don't interface with your customer, how are you going to determine their expectations, their desires, and even more importantly, what excites them? Customer contact is necessary for increased revenue! Cost savings which reduce revenue are self defeating. Personally, nothing turns me off more than to try to discuss a product or service problem with someone who says "I'm sorry I can't help you, I am just a contractor."
One of several articles in a special section of the Communications of the ACM on outsourcing, Gurbaxani, V. (1996) examines three management beliefs underlying information technology outsourcing. In the same issue, Rajagopalan, Rao. and Chaudhury (1996) use transaction cost economics and regression to analyze 15 hypotheses about information technology outsourcing.
Although it only addresses information systems (IS) outsourcing, I believe that Lacity and Hirschheim (1993) is must reading for anyone considering outsourcing of any kind. The lessons learned drawn from their research are:
- Public information sources portray an overly optimistic view of IS outsourcing.
- Outsourcing appears to be a symptom of the problem of demonstrating the value of IS.
- Organizational members may initiate outsourcing for reasons other than cost efficiency.
- An outsourcing vendor may not be inherently more efficient than an internal IS department.
- The internal IS department may be able to achieve similar results without vendor assistance.
- If a company decides to outsource, the contract is the only mechanism to ensure that expectations are realized.
- The metaphor that IS is merely a utility is misguided.
A key recommendation is that:
Above all else, it is concluded that while an organization may decide to outsource some portion of its information processing activities, it should not outsource the management of IS.
Slaughter and Ang (1996) argue that:
- Computing firms are more likely to insource IS employees than noncomputing firms....
- Firms in the public sector are more likely to outsource IS employment than firms in the private sector....
- Firms are more likely to outsource for jobs that have volatile demand....
- Firms are more likely to insource employment for IS skills that are relatively abundant in the marketplace.
They have demonstrated by experiment that these symptoms are statistically significant. They also hypothesize causes. They do not examine organizational and economic implications. Consider (3) and (4), for example. Because of the high volatility and skill requirements of software development, India and Singapore are rapidly becomming software development powerhouses where the new software engineers are forming a strong middle class. The more highly paid high technology jobs are leaving the USA, creating the beginning of a reverse brain drain, but the lower paid low technology jobs are staying. As we enter the information age, we outsource the capabilty to implement it. Americans can thank their management for this tremendous strategy. The recipients in India and Singapore already are. But, what is new? The steel, clothing, and machine tool industries met their demise in the US because of the same American management strategy (Dertouzos, Lester, and Solow, 1989).
The more I read of the literature on outsourcing, the more I believe that outsourcing is the incorrect solution to the internal problems which seem to be the cause of the outsourcing decision. I suggest that the best solution is for management to change the system they have implemented, which is the cause of the perceived need to outsource. Outsourcing does not alter the cause. Thus, in most cases, outsourcing will suffer from the same system which created the need to outsource. Moreover, the outsourcing will add it's own problems. Stop addressing the symptom, address the cause! The cause is found by asking the question "why?". Usually 5 times will get you there. Then use the seven management tools, function analysis, and a little creativity to help you plan a new system which eliminates the cause.
Outsourcing Bibliography
Outsourcing, Insourcing or Resourcing? Exploring Outsourcing as a Process
The Outsourcing Institute
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