Is outsourcing good or bad?
I just held a presentation at our ISIS Papyrus OpenHouse in Vienna and I presented the comparison table of central, decentral and outsourcing parameters. I proposed that indescriminate outsourcing for a large organization has many negative side effects. Obviously that caused objections from the visitors that are in the outsourcing or services business. I am in a squeeze here, because many of ISIS Papyrus’ customers are huge outsourcing companies from all over the world. Our software helps them to be better outsourcers because they can be a lot more dynamic and customer focused. Nevertheless it is my position that outsourcing is heavily overrated as a cost-lowering device. I propose that most cost lowering actions cause a drop in product or service quality and so does outsourcing for cost reasons. Most companies outsource because they do not have the right people and/or the right tools. So outsourcing covers up a management weakness and presents it as financial chuzpe to lower costs. Initially these cost reductions can be achieved and no one asks questions later. Hm, so now I am also attacking my non-outsourcing customers? No, I am not attacking anyone, I am just voicing what everyone knows to be the case. Let me explain my position on outsourcing more clearly.
The typical claim is that outsourcing allows a business to focus on its core competencies. Is that all there is to it? I can focus on my core competency and do the support services myself as well if their quality is important to me. One example was that when a car manufacturer purchases parts to build cars that is also outsourcing. I disagree, because that is having a supply chain. The other objection was that our customers outsource software development to ISIS. I disagree, because we do not develop anything specifically for a particular customer. Customers buy our knowhow, but they do not outsource THEIR knowhow to us. It is one of the reasons why we do not outsource our core development, not even to freelance programmers. I would never outsource our call center or service or support hotline. We do not even outsource our software sales to partners, because we see our customer relationship as THAT ESSENTIAL! Having said that I admit that we will use outsourcing for projects and non-core programming.
First, outsourcing a non-core competency can obviously be good, but where do you draw the line? Much of the cost saving is an illusion. We have corporate customers who have three different outsourcers for their IT. One does the hardware, another one network and a third does software. We have seen expensive consultants sometimes sit around for days not being able to move the project forward while waiting for these IT outsourcers to do something for them. That may cost the business a 1000€ in unproductive time if you outsource and use consultants. If you have a large business and there is one such situation each day – that is not a lot – then the outsourcing costs an extra €30k a month or €300k per year. That is a lot of cash. Over the usual 5 year timescale of outsourcing we could talk about €1m !!!
All in all that is just one example and there must be many such samples and situations. The extra cost of doing things that are not in the outsourcing contract must be staggering too. The drop in quality may even endanger future business. These things do not get calculated into the formula. Outsourcing anything that has to do with customer contact is in any case not a good idea in my mind. If a company outsources only to lower cost, then their core competency is to make money and not to be a good service business. When an outsourcer calls me my first question is; ‘Can you increase the quality of what I do?’
Having said that, there are a few good reasons to outsource non-core activities:
- Measurable increase in quality for a special activity
- Peak loads for anything
- Short term special skills needs
- Reducing risk for activities that are uncertain (a kind of insurance)
- Continuous low volume requirement for special skills (manpower availability)
- Activities where outsourcer has benefits of scale
- Flexibility of manpower
- A few more lesser subjects …
So I am not really against outsourcing as you can see. I am against outsourcing for a few quarters of illusionary cost savings that hurts a business in the long run.