This coming Thursday I’m participating on a panel at the Offshore Outsourcing Conference in Las Vegas. The panel’s subject is “Offshore outsourcing backlash.” If you can’t make the event, I’ll give you a preview of what I’m going to say: “Of course there’s backlash. Just what else, exactly, did you expect?”
Perhaps because of this panel, outsourcing, and more specifically the notoriously high failure rate of outsourcing arrangements, is on my mind. So is the too-seldom-remembered dictum that to optimize the whole you have to suboptimize the parts.
There’s a connection, and it lies in one of those well-hidden assumptions that only reveals itself when you’re looking from exactly the right angle.
Why do companies outsource? It’s often for the wrong reason — because a particular business function isn’t “core” to the business, which is to say the function doesn’t create competitive advantage. There’s little evidence to support this theory, and quite a few reasons to be skeptical, as has been mentioned in this space previously).
Here’s another reason: The logic for outsourcing non-core competencies emphasizes the likelihood that the outsourcing vendor will be better at the function than you will.
Ignore for a moment that this will only sometimes be true, and less often as the company doing the outsourcing increases in size and scale. Pretend it’s a universal truth. Let’s think for a moment about what “better” means.
When a company outsources a function, it has to define the responsibilities of the outsourcer contractually. This means defining specific responsibilities, and service levels for those responsibilities have to be negotiated. How are you going to do that in a way that’s fair?
Most companies do so by insisting on industry best practices and applying industry benchmarks. Industry best practices are generally defined in the context of running the business function in question as a separate, efficient business. As we saw last week, benchmarks are one-size-fits-all measures predicated on the assumption that your goal is to optimize this business function as a separate entity. It took awhile, but we’ve arrived: Outsourcing is predicated on the hidden assumption that you want to optimize the particular part being outsourced.
But to optimize the whole, you often have to suboptimize the parts. How are you going to write that requirement into an outsourcing contract?
Let’s imagine you do. After all, you can certainly treat any business function as a black box and start the outsourcing process by characterizing its inputs and outputs, required resources and constraints. All you need is a formal process model that establishes in quantitative fashion exactly how the parts fit together to make the enterprise function. Every enterprise has one of these, doesn’t it?
Okay, let’s imagine yours does, or at least close enough so you can define in realistic terms what the outsourcer is supposed to do for you and at what cost. It should work, shouldn’t it?
Yes, it should. For awhile. Many of the big, high-profile outsourcing arrangements are ten year contracts. Last I looked, there’s little in the world of business anyone expects to last longer than three. So what should we expect to happen in year four of an average ten-year outsource?
I’d expect it to be time to renegotiate, because what you need is likely to have changed, in numerous, subtle, hard-to define ways.
You have to suboptimize the parts to optimize the whole. Most outsourcing arrangements violate this premise, and they do so with the best of intentions: To perform a particular piece of work as well as possible.
Oddly, sometimes doing it worse is better.