Outsourcing – Right or Wrong? 9 Key Questions

Summary:

• Outsourcing has been very popular
• Outsourcing removes management options
• Outsourcing creates Lock-in, and makes it harder to deal with market shifts
• Most organizations see long-term performance deteriorate as a result of outsourcing

Outsourcing has been extremely popular – ever since the early 1990s.  We know it has led to a lot of jobs moving out of the USA.  Outsourcing manufacturing has exploded employment in China and other parts of Asia.  Outsourcing information technology has exploded employment in India and parts of Eastern Europe.

Economists tell us that outsourcing has driven down the cost of everything from the clothes and household items we buy at WalMart to the cost of social marketing, ad creation and even telephone services.

But has it helped businesses be more successful? As outsourcing popularity reaches 2 decades – both domestic and offshore – we now have a lot more insight.  And what we can see is that almost all outsourcing has been bad for the company that uses it! As things change, outsourcing has left them stuck competing the old way and further removed from market needs.

As my Sept. 29 column in CIOMagazine “Outourcing for the Right Reasons” (also published in ComputerWorld online under the same title) points out, the vast majority of outsourcing was done for the wrong reason.  And the result has been deteriorating performance for those who outsourced.

Most companies outsourced to cut cost.  The problem is, this has led to even worse lock-in than normal.  Where organizations had options when they controlled the function – from manufacturing to janitorial serivces to help desks to datacenters – there were options to make changes.  But when something is outsourced the contract takes away most options.  The die is cast, usually for years into the future —- regardless of what might happen in the world!

Outsourcing can be used to create flexibility.  But, honestly, how often have you seen it used that way?  In well over 90% of cases the outsourcing is intended to cut cost – and lock-in operations.  It is meant to remove options from the management discussion.  Once outsourced, there is no consideration as to undertaking those efforts again.  And if the outsourcing is done when business results are poor, the intent is to never revisit doing those things again.  Under the banner of “outsource everything that’s not core” the management team is left with nothing to manage – except “core”!!!  But if core has limited value, how do you now create a healthy business?  How do you move to meet shifting needs?

Outsourcing has been a tidal wave for 15 years.  Things might be cheaper, but has it made business performance better?  Take a hard look at your company – and you may well realize it hasn’t helped you be a better competitor.  When you outsource, how often are competitors able to equally outsource and match your short-term cost reductions?  Things might be a penny cheaper, but the business is likely much less flexible, more vulnerable to market shifts, and far more locked-in to doing what it always did!

If you are seriously considering outsourcing, ask some simple questions:

1. Am I doing this because I want to simplify my life, or offer the market something new?
2. Am I doing this so I can “focus” on my “core” business?
3. How will this advantage me versus competitors?  Would emerging competitors do this?
4. Can competitors do what I’m doing?  Can this lead to a price war?
5. How will this make me more competitive in 10 years?
6. How will this make me more connected to markets?
7. How will this make me more flexible to deal with shifting markets, and how will I exploit this flexibility?
8. Am I doing this because I’m desperate to cut costs?  
9. What could I be doing instead of outsourcing to be more competitive?

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Strategy

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