When Outsourcing Turns Sour

Once you read this you might feel that I am totally jaded and frustrated. I am certainly not. I am still standing and willing to fight. Unfortunately some subjects can’t be looked at with distant objectivity. One tries to stay away and accept that things look differently to other people. Ever so often that challenges ones willingness to be tolerant and objective to the max. Outsourcing is such a subject. Having tried to be quite reasonable about it lately, it has come back to haunt me. In the last few weeks one customer situation after the other turned sour and outsourcing was always the culprit.

So my patience is at an end. Let me tell you here and now what I think of outsourcing. Why I think it happens and what it does to businesses and people.

1. Outsourcing proves that the business is too big.

Why would anyone want to hand a part of a business to someone else? Because they can do it cheaper?  Comparing in-house costs to outsourcing costs is an invalid comparison. There is no basis for that. I have looked at a few business cases and the only thing that was compared was a total ESTIMATE of in-house cost to the offer of the outsourcer. Even different outsourcers were just compared on price only and not on their ability to deliver quality. Doing anything for cost only is already a mistake. The first measure in business has to be quality and not cost except if you are in a straight commodity market. Differentiation has to do with knowing your customers and their needs. If a business outsources it gives up some area of competitiveness for competing on price only. The business turns itself and its products into a commodity that has no appeal to a particular customer. Outsourcing reduces customer focus.

2. Outsourcing erodes competitive advantage.

It is quite obvious that an outsourcer is a business that needs to make a profit. That profit margin already erodes a good percentage of the cost advantage that makes outsourcing a good deal. Secondly the outsourcers want to achieve economies of scale and therefore they will go out and sell the same capability to other people. That in itself is a good thing. Our large document management and credit card outsourcers are one of the few areas where the complexity and technicality of the service makes sense to be outsourced. But also they are now trying to bring some of the flexibility back to their clients by offering them access to custom document management via the web. In other outsourcing areas this is not possible. In the end all this means that all businesses will use the same outsourced capability. Therefore there will be no competitive advantage in lower costs or better service available. This means that outsourcers will start to compete also in cost driving the offered quality ever lower.

3. Outsourcing hurts people and the economy.

In too many outsourcing deals people are simply ignored. Loyal employees are suddenly irrelevant. I have seen it. You have seen it. Why would anyone believe that this employee that is kicked out (because he is not valuable enough!) would suddenly do a better job at the outsourcer? He is being told in very clear words: ‘I don’t care about you!’ How ignorant can management be? What will the outsourcer do as soon as possible? Get in cheaper people from India or China to do that job. You think the employees don’t know that?

4. Outsourcing hurts the business by reducing agility.

In two recent situations the business had the need to perform services for projects. In both situations IT was outsourced to various other vendors. While the businesses had the dire need to complete the projects the times scales were multiplied by the contractual complexity of outsourcing. In one other case the upgrade of an existing system has been delayed for two years at least because the outsourcer wants to charge an exorbitant price for doing so, while we could do it for a quarter of the cost. The contract does not allow the business to perform these services themselves. The business users are now waiting for two years for something that could have been done in a few month at a quarter of the price.

My conclusion and prediction:

Outsourcing is in the diction of Thomas Sowell a ‘prevailing vision’ and being against it must have some darker hidden motive. Just like with process management there are NO empirical studies that proof that outsourcing is good for a business in the long term. It is however big business for the outsourcers who all make a lot of money.

The worst thing to come is therefore BUSINESS PROCESS OUTSOURCING that will move the last areas of business competence to third parties.

Here is the outsourcing version of Aldous Huxley ‘Brave New World’:

Executives will finally be sitting alone in the boardroom and direct an army of outsourcers in Asia. They outsource marketing to advertising agencies and writing outsourcing contracts to expensive law firms. What they make you buy IS A PRODUCT ILLUSION created by an advertising agency and continuous pounded into our heads by TV, radio and Internet. More than 50 % of most businesses revenue is already spent on marketing and sales! Most advertising is sublime and artsy and no longer tells us what the benefit of using a product is. Products are simply MUST HAVES because someone else will envy you for having it. I don’t want to go there so won’t wear a t-shirt with the name of the manufacturer as its only artwork. They would need to pay me for doing so.

Back to the real world: Obviously some of my outsourcing customers will be mad at me for saying these things. Fine. I go with James B. Laughlin, Nobel Laureate: ‘I rather be true to myself and hated than being a popular coward!’

I am the founder and Chief Technology Officer of Papyrus Software, a medium size software company offering solutions in communications and process management around the globe. I am also the owner and CEO of MJP Racing, a motorsports company focused on Rallycross or RX, a form of circuit racing on mixed surfaces that has been around for 40 years. I hold 8 national and international championship titles in RX. My team participates in the World Championship along Petter Solberg, Sebastian Loeb and Ken Block.

Posted in Executives

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Max J. Pucher

Max J. Pucher - Chief Architect ISIS Papyrus Software

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by Max J. Pucher. All rights reserved.
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