Outsourcing to save money is the wrong reason

OLYMPUS DIGITAL CAMERAAccording to some sources, one of the earliest examples of outsourcing was in 1949 when an accountant created a company in New Jersey to take on payroll admin from organisations. That’s over 60 years to get it right….and yet year on year I hear the same issues from clients, I witness the same mistakes over again, I encounter the same fairy tale sold by consultants that it’s going to save money.

And they’re wrong. Outsourcing done for a panicked cost saving exercise is a bad enough reason but coupled with x-shoring it’s a disaster (replace x with near or off, either works, believe me).

Here’s why.

Forget logistics. It’s about people and process. Whether you’re in manufacturing or financial services it doesn’t matter, the same problems will arise.

  1. Outsourcing to any other location means an increased span of control for the originator but it gets worse because of the fact that culturally the organisational structure you want your provider to follow may not be supported not matter how much you want to impose it upon them. This isn’t a failure on the provider, it’s a failure on the originator to understand the workforce culture of an entire country.
  2. Originators seem to think that they can manage attrition levels in the same way they do at home for the same reasons as above, or that incentives designed for one will apply to all. They don’t. It’s especially so of outsourcing technical development to another provider in another country, whilst the labour may be cheaper (in theory only) the reality is that constant attrition is going to happen and the cost of having to recruit and train a flow of new starts only to see them disappear in a matter of months is something frequently ignored. Hiring someone for a support role and expecting them to sit there for 10 years is incredibly naïve. Add on the demand pull on local subject matter experts to provide constant mentoring and support in the early stages and the costs begin to pile up exponentially.
  3. You think that FTE is cheaper ? You’ve not taken into account the time to train them on your organisation’s methods/ tools/ systems. Whether you hire a Java developer or assembly line worker, they may be skilled but have no idea on how to operate in your business. Add on the costs in (2) and that FTE starts to look expensive. Oh, don’t forget to add on Management time into the rate, after all they have to be accounted for as well (whether you think you’ve negotiated a direct cost or blended rate, you’re going to get stung somewhere with it)
  4. What does that FTE cost include ? What does it exclude ? Thought about travel budgets yet ? Didn’t think so.
  5. What’s happening to those costs as they sit idle while you scratch around trying to decide what to do with this new cost centre you’ve created ? You’re being charged for it, better make that call and quick.
  6. Have you even bothered to set up the governance structure and supporting processes to ensure service delivery is monitored ? Created a set of principles to measure effectiveness against yet ? SLAs ?
  7. Risk. It’s underestimated always. Whether regulatory, data or IT,  there will always be something in the way which you’ve never considered that will impact the effectiveness of the outsourced process.

When I said I see the same mistakes happening I meant it. None of these may be new but they are mistakes constantly repeated, and in some cases ignored by ‘experts’ who say it’s a cost effective way to create flexibility in the organisation. What they really mean is that it’s a cheap trick fix to a bigger long term problem they won’t be around to pick up for you until it hits. And the amount of times I’ve seen companies steamroll into this direction without considering any of the above is staggering.

So. You want to replace like for like, reduce onshore headcount as an expensive resource and replace with cheaper alternatives ? Take a look above then decide again.

Don’t get me wrong, outsourcing works but done for the right reasons. Perhaps it should be called rightsourcing to keep that in people’s minds.

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Categories: BPM, Process Management

Author:Theo Priestley

"I had more creative ideas from Theo in 6 months than I have had in 6 years from most people." Theo Priestley is one of the most recognised independent technology industry influencers and evangelists, ranking in the Top 100 thought leaders across Virtual/ Augmented Reality, FinTech, Artificial Intelligence, Big Data, Internet of Things and future trends. Theo has written insights for Forbes, Wired, The European Magazine, Venturebeat to name a few, and has been interviewed for many online publications including the BBC on his thoughts on technology and the future. A regular paid keynote speaker and panelist at conferences and events, Theo is engaged for his forthright views and isn't afraid to challenge conventional thinking and the marketing hype surrounding the industry when presenting, never pulling punches to get the message across on how technology can be applied to improve business and the customer experience. He has also successfully organised and run TEDx and Ignite events. Highly active across social networks, he sits in the Top 1% for social media engagement on Kred and Klout and is constantly sharing articles and his analysis that he feels his audience would be interested in. Theo is also active in the startup community, mentoring within UK and US accelerators and sits on a number of advisory boards. Former VP and Chief Technology Evangelist at a Top 25 European enterprise software company with a career spanning both innovation strategy and delivery of software and business change in Financial Services, and as an independent technology industry analyst. Follow Theo on Twitter @tprstly or connect here directly for constant insights on tech and marketing trends. • Top 1% Influencer on Kred (915) • Top 1% Influencer on Klout (70+) • 12,000+ Followers on LinkedIn • 13,000+ Followers on Twitter • Recognised Top Influencer in AI, Virtual/ Augmented Reality, Fintech, IOT and Wearable Tech, Big Data and Analytics.

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One Comment on “Outsourcing to save money is the wrong reason”

  1. December 21, 2012 at 10:51 am #

    Theo,

    Great analysis. I too support the idea that outsourcing is often more expensive than insourcing. You asked that the analysis exclude logistics so that the points you made stood on their own merit. And they do. But when you add in Logistics the case for building and selling your own stuff is even more obvious.

    We’ve done work in International Supply Chains. While we won Supply Chain of the Year, 2012, along with our customer it was apparent that a 7K mile long supply chain is less cost effective than a 500 mile supply chain. Lead times, quality (for the reasons you’ve stated), inventory levels and the ability to better serve the customer are all negatives when you produce outside of the country in which you sell. Therefore, make products in Asia, N.A., etc. if your markets are there; and only make for there what you intend to sell there.

    It costs over $6 per cubic foot to move product from S.E. Asia to a store shelf in the U.S. While we were able to help our customer get that below $4 per cubic foot it would be around $2.47 if that same product were made domestically. A carton of shoes is approximately 2.5 cubic feet. Typically there are 12 shoes in a carton. So saving over $7 per carton increases the profit by $0.58 per pair of shoes. Not to mention 4 weeks of inventory and the inability to react to real-time market demands. Domestic production, even outsourced (which ignores all the reasons you’ve identified), is dramatically more profitable. Add to that the domestic market into which you intend to sell your product is also fully employed.

    Again, great article.

    Steve

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