The future of outsourcing
Dave Rodenbaugh, from How to buy a website, was one of my kickstarter supporters for my latest book Mindfire, a collection of my best essays. He had this request for a blog post: Where do I see outsourcing heading in the U.S. and the world for the next 5 years?
I avoid thinking about macro-trends. Even if on average all corporations are doing 10% more outsourcing, there can be many specific industries where the trend is exactly the opposite. The macro-trend matters less than what’s going on inside the particular industry, or company, you care about.
The short answer is outsourcing will continue to grow. And to shrink. I don’t see anything in the next 5 years that dramatically changes anything.
Outsourcing will grow because there are always businesses looking to reduce costs. By moving a job from inside to outside a company, the price paid for the work drops. Any large established company will eventually see slower growth, and will look for ways to make up the difference by saving money. There will always be companies looking to outsource and technology makes it easier every day.
Outsourcing will shrink because as soon as you outsource a job, you limit that worker’s ability to bring you new ideas. By making the job a commodity, the worker can no longer easily suggest ways to improve how the work is done. They will never, ever, offer a proposal that is better for the overall business but that eliminates the specific tasks they are being hired to do. For example, when you hire someone to mow your lawn, they are never going to suggest you get rid of your lawn. Whereas if you have a landscaper on staff, they will continually look for ways to improve your yard, including designs that have no grass at all. For companies or projects aimed at the equivalent of rethinking the yard, it’s natural to do as much work in-house as possible.
The rub is this: the more you outsource, the more compartmentalized and specialized your organization becomes. This can make you less flexible and less likely to develop new ways of working. Optimization demands inflexibility. A heavily outsourced company will have a hard time competing against a smaller, younger company that has found a new way to work. That younger company can afford to be inefficient since they are small, and inefficiencies can lead to discoveries. If they successfully take market share from the market leader, the market leader may never recover, as they’ve become less than the sum of their parts.
In larger organizations, the move to outsource or not swings on a pendulum. At times when competition wanes, or the economy stalls, there is a push to save costs and simplify, and more work moves outside. At other times when competition increases, or the market expands, more work moves inside to accelerate growth and take advantage of new opportunities. But as a rule, you never want to outsource work that is strategic. Your core business and core roles should always be done inside your company. Only a fool would outsource their heart or lungs by choice.
I disagree…I often make recommendations to our clients for ways they can save money, often by reducing our workload. They appreciate my honesty and in many cases I get other types of work from them in the future. They also often recommend us to other companies, which helps our business grow. We may be unusual in this manner, but old ways of doing business need to change as companies look for ways to become more efficient.
Paul: If you agree that’s it’s unusual, we can agree that my point is generally true. There is more incentive for an outsourced worker to continue working in the same way they do, than there is for someone salaried working from inside.
I agree that outsourcing doesn’t give vendors incentive to improve company methods, but partnerships do…and Larry’s comment about consulting vs contracting is a good point. I do think that business models for consultants need to focus on delivering added value, or they will just be hourly contractors doing what they are told for less and less $ per hour until the clients they serve realize they no longer need them. Good discussion here! Thanks for getting it started.
Paul’s comment points up another trend: the blurring of the line between outsourcing — asking someone else to do a task that you’ve deemed not strategic — and consulting. Many companies, like mine and I believe like Paul’s, provide traditional outsourcing while also offering help and guidance in streamlining processess, choosing and deploying new tools, and so forth.
Scott, you started out saying “The short answer is outsourcing will continue to grow. And to shrink.” To which I’d add: And to change.
Boeing (re-)learned this the hard way with the 787. They outsourced the wings to Mitsubishi, IIRC, which I am told are the heart AND lungs of an airplane.
And while Mitsubishi didn’t do anything wrong (some avoidable misunderstandings about division of responsibility aside), others absolutely did, and the overall experience was painful enough that they’ve vowed never to do that again.
I think the hard part for most people is that they understand the concept of “keep what’s important and outsource/contract out everything else”, but they don’t understand what’s important.
I once worked for an IT manufacturer who was in the process of outsourcing their IT staff. I was far too small a potato to get anyone’s ear and explain how insane that was. If you have users working for you, you keep them around for the cheap user studies. Asking an IT guy if my new design was a good idea resulted in a significant failure rate, and having one around to talk me down from the ledge before I’d even written the code was invaluable.
Jason, wait–the wings? Wow! According to Michael Crichton’s Airframe, the body is simple, the wings are where all the complex secrets are. And if I might take a nerd/fanboy moment: As I recall, his book was not about aircraft as much as government regulations and the public’s gullibility before irresponsible TV media.
As for “what’s important/core competency,” to me that is the department(s) the CEO should come from.
I partially disagree.
We started as an outsourcing branch for a bigger company but with time we changed to be the main R and D center for the company and we have our position in almost all committees in the company. We even started to manage other branches in other countries. It mainly depend on how the main company treats the outsourcing company and how they invest in them.
Well, the truth is Outsourcing isn’t that complicated or at least it doesn’t have to be. I hear a lot of people say that they don’t have time to hire workers for outsourcing yet they complain that they cannot complete their tasks due to limited time. I did some research of my own at Outsource Made Simple and learned some key points. After applying what I learned I have successfully outsourced my work and haven’t had a problem since. Point is, do some research before making up your mind and you will realize that it actually isn’t that complicated.
This may seem like a start of a trend. GM is moving away from outsourcing and wants to perform 90% of the work with employees in 3 years –
http://www.informationweek.com/news/global-cio/interviews/240002892?printer_friendly=this-page
Work is often brought back in-house once people figure out that:
1) They can’t outsource their problems.
2) The vendor is actually going to hold them to the statement of work, or charge them extra.
3) They didn’t understand the work well enough to create an accurate statement of work.
4) They didn’t save as much as they were wishing for, and don’t have any better results than they did with their in-house staff.
At least until the next budget crunch or new CXO, then it will get outsourced again until the outsourcing arragement becomes too painful.
With all due respect, here is the future of outsourcing: http://www.ideachampions.com/weblogs/archives/2012/02/outsourcing_bes.shtml
I was skeptical, but yes, you are correct.
may i know the areas of software work that can be outsourced to the individuals.
The few areas of software work that can be outsourced are
Data entry
SEO
Tanning
Accounts
Scanning
Printing
Programming
Outsourcing will grow because there are always businesses looking to reduce costs.
Software Outsourcing also reduces the need to hire and train specialized staff, brings in fresh engineering expertise, and reduces capital and operating expenses.
nice post.
It’s great that you talked about how outsourcing services it’s a growing activity. From my point of view, any business could benefit from working with an outsourced company. If I were to manage a business, I’d like to outsource less-critical tasks to help me get quality results at low prices, so I’d say I agree with you on that. Thanks for the information on outsourcing services and how to do it the right way.