All Posts in Outsourcing

|In: Industry Commentary|Last Updated:

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.

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|In: Business Ethics|Last Updated:

Reader Paul Davis writes: “You’re right, it is all about the money. I used to be a die-hard conservative, but people like you and those making the ‘morally neutral’ decision have pushed me to the left, hard left … Since it is all about the money … raise taxes on offshoring firms by 50%.”

Many readers mistook my description of the strategic logic behind offshoring for a public policy prescription.

For the record: I don’t like the trend toward offshoring any more than most IT professionals. I see few alternatives, though, for companies that compete on price, given the potential cost reduction that offshoring provides. (The good news about the bad news: For the time being, at least, offshoring isn’t a complete solution to IT service delivery. Thus far it’s best-suited to legacy systems maintenance.)

Mr. Davis’ “hard turn to the left” is, I think, less a change in political orientation than a recognition that good public policy isn’t a matter of the government always doing whatever big companies want it to do. Especially in an age when large corporations are global concerns, governments … which aren’t … have an obligation to protect the best interests of their electorates from those corporations which, by definition, have no motivation to look after the interests of the citizens of any country.

Should the U.S. tax the income of offshore IT services providers? Just taxing them, or imposing a tax penalty on companies that engage them, is simple protectionism. I think we’ve found that protectionism doesn’t work — in the long run its net impact is to reduce the incentive for U.S. providers to be globally competitive.

Here’s what might work: Charge a trade tariff on offshore services pegged to the import tariffs their governments charge on our exports. Companies located in nations that create no barriers to selling U.S. goods and services within their borders would find no barriers to their selling labor in ours. Countries that make it artificially expensive for their citizens to buy our products would find their offshoring companies suddenly uncompetitive in the U.S. marketplace.

It’s good economics. It’s also a win for the citizens of both countries. Increasing exports of our goods and services creates employment here; increased employment of citizens in less-wealthy nations increases their wealth, thereby increasing the size of the market able to buy our goods and services.

This isn’t a particularly subtle, brilliant, or original idea. In fact, it’s pretty obvious. Which brings up the question of why nobody has proposed it yet.

Sadly, the answer to that question is almost as obvious as the idea itself. But what the heck — if you like it, write your senators and congressional representatives, even if doing so is like giving chicken soup to a corpse.

You might argue that doing so won’t revive the dead. They are, after all, demised. No matter how efficacious chicken soup might be for a wide variety of ills (which brings up the question of why we don’t find chicken soup in stores purveying less-tried-and-true herbal remedies … but that’s another subject for another time) … no matter how many diseases chicken soup cures, death isn’t one of them. Why waste your time feeding it to a corpse?

Why write the Senate and Congress?

It can’t hurt.

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