Thinking About Outsourcing? Beware!ByRaymond D. Matkowsky
The reality of outsourcing doesn’t match many prevailing assumptions. If you plan to outsource don’t take anything for granted or the consequences for your company can be catastrophic!
Under certain conditions, I am sure that outsourcing could save money and add flexibility during times of peak loads. But at what true cost and under what conditions? The costs may be a lot more and the savings may be less than you first assumed. I am not convinced that outsourcing is the best way to increase productivity, spur innovation and reduce your business risk. Three of several reasons cited in support of the trend. On the contrary, there can be many hidden traps in every outsourcing contract. Outsourcing may be a dangerous strategy to pursue. Any agreements should be well thought out before proceeding. However, only you can decide if your benefits and rewards outweigh the potential risks.
Are Your Expectations Realistic?
In a 2002 survey, DiamondCluster International Management Consultants reported many companies expected 50% efficiency gains from outsourcing. In a similar 2004 survey, those expectations were down to 10% to 20%. While you may be able to reduce production costs, much of that gain may be lost due to a greater interaction required between your people and the vendor. Increased communications, especially if the vendor is offshore, and the expense of unforeseen business needs can rapidly add costs beyond your expectations.
In an April 2004 Los Angeles Times newspaper column by Alex Pham entitled "Sending Jobs Overseas Isn't Always Worth It, U.S. Companies Find", Pham outlines difficulties companies have had using offshore outsourcing, and notes that more than 25% have saved nothing or actually spent more in the process.
Productivity levels vary among countries. For example, McKinsey & Company in an April 2004 report entitled The Power of Productivity, pointed out that on average India’s labor force achieves only about 15% of the productivity levels of their U.S. counterparts. There is a point at which it is no longer cost effective to outsource. You need to know what that point is in order to make an intelligent assessment.
As supervisors, you will also need to be concerned with the effects outsourcing will have on your employees. Employee moral has a significant impact on your bottom line. If your employees perceive that they are being short-changed, their loyalty and productivity will suffer.
Don’t Count On Outsourcing To Fund Innovation!
Linking outsourcing savings to innovation advances is just short of being irresponsible. The first place savings are not assured or guaranteed not to vary during the life of the contract. Furthermore, small businesses do not fund innovations. In most cases they do not have the expertise or resources for such projects. I am not talking about entrepreneurs, but about established businesses. I am not talking about the rapid adoption of innovations, which they do in great numbers. I am talking about research and development.
The funding of innovation requires government backing. Today, most scientific research is funded by government grants (e.g., from the National Science Foundation, the National Institutes of Health, etc.), companies doing research and development, and non-profit foundations (e.g., the Breast Cancer Research Foundation). This is more than what all for profit U.S. industries spent combined in 2013.
The Federal Advanced Research Project Agency funded what ultimately became the Internet. NASA funded the space program. A quick check indicates that presently the Small Business Administration, the National Science Foundation, the U.S. Army, the National Institute of Health and the National Oceanic and Atmospheric Administration are funding a large share of research under the Small Business Innovation Research Program the U.S. Congress setup in 1982.
Positive government actions spur innovation, not outsourcing!
The Risks of Entrusting Your Data to Third Parties Can Be Enormous!
San Francisco Chronicle columnist David Lazarus reported on an October 2003 incident, in which a Pakistani transcriptionist threatened to release University of California San Francisco (UCSF) Hospital doctors’ recordings and transcriptions of patient records onto the Internet if she wasn’t paid by the transcription contractor that hired her. Unknown to the hospital, the Pakistani provider was actually a subcontractor of the hospital’s American transcription service partner.
In 2006 and 2007, the news was full of stories of giant recalls of outsourced goods that I unbeknown to American and Canadian contractors were produced in violation of both government and internal safety regulations. Several small businesses have been destroyed because of these recalls.
A security breach, such as that which occurred at UCSF, could severely damage your company's reputation. Using a service provider doesn’t reduce your obligations. Furthermore, in case of a breach you may find that any legal recourse is nonexistent or too costly to pursue.
Outsourcing presents a very wide variety of risks from the security of intellectual property to
financial losses.
Ok, Outsourcing Is A Possibility. What Steps Do I Need To Take To Make Sure?
You want to be sure that any agreements you enter in will benefit you. To do that, you need to carefully analyze the pros and cons. Determine what in your opinion will make a good and fair agreement. Among other actions, I would recommend you do the following:
Define the problem to be outsourced and your goals in writing, before you pick a vendor. Putting things down on paper seems to carry more weight, than mental notes.
When you pick a vendor, ask that vendor why he or she feels qualified to handle the task.
Ask yourself, Is my problem appropriate for outsourcing? Outsource only standards based applications. Those are applications that do not vary from day to day or are not subject to a person’s interpretation, such as payroll services. What is inappropriate for outsourcing? Any function that requires customer interactions or includes proprietary / intellectual data. These are best kept in-house for both security and quality control reasons. Also any job that you find hard to define or one in which performance metrics are difficult to evaluate.
Look towards your customers as potential providers. They already have an interest in your success.
Ask if the vendor subcontracts to any third parties and what security procedures are in place to safe guard your data?
Ask your vendor if they “reuse” the knowledge gained from your contract to other clients? There is money to be gained by applying the elements of one project to another. Unfortunately, the second project may be for a contract from your competitor.
Pay special attention to contract termination conditions and procedures. Ignoring termination issues can cause you trouble later. During termination, the provider will not be talking to you much and certainly will less be interested in helping you out.
Finally, get every detail in writing. Remember the old saying, “If it is not in writing, it never happened!"
Do these things even for minor agreements!
Do you share my opinion? Do you have a differing view? This is a very heatedly debated topic. Tell us what you think and what the facts are as you see it. Email me at rdm@datastats.com.
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