Platt Perspective on Business and Technology

Outsourcing as a business paradigm – 1

Posted in outsourcing and globalization by Timothy Platt on July 12, 2011

One of my earliest postings to this blog, added in on September 19, 2009, was in significant part about outsourcing (see Outsourcing and Globalization – some thoughts re three questions shared from the LinkedIn community.) That was also my first entry in a directory page I have rarely posted to since then: Outsourcing and Globalization.

I have been doing a lot of thinking about outsourcing as a business model and as a paradigm for international business and commerce, but I have not been posting on it and for a reason. I see outsourcing as important in the later years of the 20th century, and I see it as still having real impact, but I also see it as fundamentally self-limiting, and I see it as a paradigm that will not be of current significance as we move further into the 21st century, and certainly not as it is traditionally conceived.

I have been focusing more on where I see business and technology going, and for the individual business and the overall marketplace, and also for individuals as they seek out jobs and careers. And just short of my 700th posting on Platt Perspective I turn more explicitly to outsourcing, and in a way primarily to put into clearer perspective where I see the world moving.

I will start this series with a brief and selective discussion of what might be considered the classic, traditional outsourcing model and then move on from there.

• Traditionally, outsourcing per se is all about cost-effectiveness and the search for savings in production, and it is all about reduction of operating expenses by reduction of labor costs. So manufacturers of some labor-intensive product or service in country A with a higher standard of living, and higher wage and compensation expectations and norms, ship production of that to country B with a large pool of potential employees, who would do the same work for less, and even a lot less.

But this is always a time-limited opportunity at best, as outsourcing essentially always means transfer of technology and employee skills into the country B economy and workforce. And as those lower income employees in B develop and use new skills and start building careers in this industry, collectively they form a new and higher level, higher value workforce. And both individually and collectively they develop increased expectations for themselves and their families too. They want to be compensated more, for doing more and for doing higher level work, and they want to advance still further in their professional skills in doing so.

Outsourcing, and particularly where a significant volume of some specific type of work is involved, creates local opportunity for more completely endogenous business and industry in the country taking on this work. This outsourcing-driven process simply complements the ongoing and always growing pressures that our increasingly global, ubiquitous computing and communications capabilities bring with them for the countries B to advance. And outsourcing per se simply becomes a part of the increasingly interconnected global supply chain and value network systems.

But to turn explicitly back to traditional outsourcing again, country A by and large comes to outsource some particular endogenous industry’s work in a particularly hands-on labor intensive area to the lower paid workforce of country B. The skills needed here do not create too much of an entrance barrier for workers in B to participate, gaining employment for themselves in the process. And factories and related support systems are developed in B where this work can take place. And as stated above, B starts to lift up, and both for what its workforce as a whole can do, and for what its workers expect in return, and with development of infrastructure that has made this outsourcing possible. With time, this particular work no longer becomes feasible as an A to B outsourcing per se so one of three things happen. B simply takes over this work with their new infrastructure and their now experienced workforce for it, in effect cutting out A as an unnecessary partner. This saves them money and affords them greater local control in the process. Or this work moves on to be outsourced to country C and the cycle repeats there. Or this type of work may simply become automated out of the workforce entirely – a process I will discuss in more detail later in this series.

• Outsourcing systems can never become truly stable, long term. Their very success makes them inherently unstable and self-limiting.

I am going to pick up on this topic with a next installment in this series, looking at the impact of outsourcing on employment. But my focus there will not simply be about factory closings in A (and perhaps in time in B too). And it will not be on factory openings in B (and with time in C.) Instead, I will start my discussion from some of the issues I have been touching on in my supplemental postings at the end of my Guide to Effective Job Search and Career Development. I will discuss this from the perspective of what it means to be employed and to build a career.

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