March/April 2011

Is outsourcing dangerous?

By Bill Lydon, InTech, Chief Editor

Taken to an extreme, outsourcing can potentially leave a company with no core competitive advantage.

Outsourcing has developed at a fast pace, appearing to be a silver bullet to cut costs. Organizations get caught up in the outsourcing hype and forget it is a complex business strategy. The core premise: A third-party company can more efficiently perform functions at lower cost.

A big question: Does a particular outsourcing proposal support the business objectives and long-term goals of the company? Michael Porter of Harvard Business School notes a primary value chain activity is operations. He defines operations as "the process of transforming inputs into finished products and services." Automation is a major part of operations that can dramatically improve a company's competitiveness.

At first glance, many outsourcing proposals appear to be advantageous. Analyzing outsourcing should be given serious thought since it can have major long-term consequences. Competition in many industries is on very narrow dimensions based on techniques, know-how, and in-house experience that should remain an integral part of the company. Automation is a complex undertaking based on engineering, implementation, and operating systems that have many interdependent pieces to efficiently deliver quality products to customers. Organizations experienced in outsourcing are well aware of the internal overhead cost to properly manage and support outsourcing leading to successful collaboration.

A key issue on the minds of executives today is physical security and protection of intellectual property. People at the outsourcing company acquire knowledge and, in some cases, trade secrets about your business. In any contract, there should be protections that tie the outsource vendor and their people to the same level of confidentiality as employees. How likely is it that an outsource vendor's specialist or expert is going to provide services at a competitor's plant in the next 24 months? This outsourced expert may consult and share trade secrets with people in their own company who are working at a competitor's site. Outsourcing vendor candidates need to have a proven track record of maintaining strong security programs and have procedures to protect intellectual property with protections spelled out in contracts. 

Cybersecurity experts note the biggest threat of virus and other system attacks are from outside contractors that are not subject to the same scrutiny as employees.

Many product vendors today view services as a way to grow and "hold" customers by becoming outsource vendors. They are not familiar with the difficulty in growing service businesses that continually require more knowledgeable people. As they hire more people, it will become increasingly difficult to maintain quality, resulting in poor performance. Sharing experts is a great idea, but your organization is playing the odds that the expert needed in a crisis is going to be available. In this case, production may need to wait. These vendors also note they can leverage technology to be more efficient. In many cases, end users can invest in those same technologies to improve operations. In my opinion, outsourcing to local independent system integrators is a better business decision for reliable outsourcing.

Few organizations consider the expense of ending outsource relationships if it does not work out. What impact does it have on operations? Is there an alternative plan in place?

Every company should have a focused mission and goals for excellence in the areas that build real value. Over time, this builds long-term commercial success. Looking at all these drawbacks, outsourcing really does not seem to be a silver bullet but a tool to be used carefully and with sound judgment. I suggest considering outsourcing the functions that are NOT core to making your company unique and competitive. 

Please share your thoughts at blydon@isa.org.