Platt Perspective on Business and Technology

Outsourcing as a business paradigm – 4

Posted in outsourcing and globalization by Timothy Platt on July 28, 2011

This is my 4th installment in a series on what can perhaps best be viewed as the traditional business model of outsourcing, and I have developed and presented it with an overall goal of at least determining the basic parameters of a more effective and less disruptive alternative to it (see Outsourcing and Globalization, postings 4-6 for Parts 1-3). I started out by outlining what traditional outsourcing entails, and some of its consequences. My goal in this series installment is to start formulating a set of criteria for building an alternative to, or variation on outsourcing that will be less disruptive to the communities that jobs would move from.

I start this by repeating that the basic decision to outsource can best be seen as a short term policy-based response to competition in the marketplace. And that any business efficiency or cost savings decision to take this approach should be made in terms of overall impact on the organization and not just on the single issue of payroll and other personnel expenses, as taken in isolation. This means considering the impact of dislocation and disruption on the complete business cycle, and on products and services offered. And for products and services, this mean preserving quality of what is offered in the marketplace, and capacity to innovate, and to retain control over the production cycle.

I add in this context that outsourcing is done in both customer-facing parts of businesses, with customer support as well as product production. Here and throughout this series my focus is on outsourcing of core capabilities, but that potentially includes a wide range of functional areas for most businesses, and even where they provide a single relatively consistent, one-size-fits-all product or service.

To further clarify that point, I am not writing here about bringing in third party support to manage functional areas and business requirements that may in fact be real, but that fall outside of the business’ core competency and requirements for sustaining that – areas of support or functionality that a business needs, but that it really should consider having taken care of by a third party provider (e.g. third party web site and online presence hosing, and external auditing.) I have already written several times about that type of business process decision, where in fact businesses seeking to be leaner and more effective may connect into supply and value chains so they can focus on core competency issues and requirements in-house – and I admit I have probably caused some confusion because I sometimes refer to that as outsourcing too (e.g. see Business Strategy and Operations, postings 127 and following.) And I will add that that form of “outsourcing” does not generate the political friction that the traditional, core competency outsourcing does. It does not, after all, lead to plant closings and mass layoffs. So this is not simply my personal point of distinction.

To return from that clarifying digression to consideration of traditional outsourcing per se, several approaches are being taken in attempts to lesson its political fallout. A current favorite is outsourcing to within the same country as a means of reducing political pressure on the business, and to demonstrate its social responsibility through support of more impoverished communities. Consider, for example, Rural Sourcing, Inc. and their outsourcing services for reducing labor and related costs and still maintain production and support within the United States. I add here though that much of what they do is to facilitate third party support of non-core capability services too. For purposes of this discussion, it does not matter where core competency productivity is outsourced to when it is being outsourced – only that it is being outsourced out of a business and in general out of its usual supply and value chains as well.

I am going to take a fairly direct, if not necessarily obvious approach to outlining what an alternative to this traditional outsourcing model would entail, by focusing up front on the decision points and business weaknesses that would lead a business to so outsource in the first place. Any alternative business model should either reduce the pressures that these factors would otherwise cause on a business, or cleanly resolve them when they do arise.

• Businesses do not outsource core competency when they have real strength and offer a unique value proposition there that would be difficult for others to match. Traditional outsourcing is a strategy of weakness, which businesses resort to when caught in the tightening noose of a highly competitive but stable or shrinking marketplace, and with products or services that offer nothing unique to the customer.
• Keep production lines and productivity processes up to date and competitive.
• Keep products up to date and competitive, and not just as a matter of maintaining hold in a static technology that is becoming another day more obsolete every single day.
• Keep your personnel up to date with up to date skills, and encourage your employees to learn to do better, and on an ongoing basis. Make that a part of your corporate culture.
• Look throughout your organization and processes for ways to be more flexible and responsive in the face of unexpected challenges and opportunities and make that a part of both your ongoing operational processes and your corporate culture as well.
• Here, outsourcing is a delaying tactic that can at best simply squeeze out an extension in the effective life span of a business approach that is heading into a dead end.
• The best alternative to traditional outsourcing, in follow up to this line of reasoning is to find ways to avoid ever having to even consider it.

But what should you do when even with the most vigorous, proactively considered strategic and operational policies and plans, you still need to rebalance or reallocate, or relocate some part of your core competency? I am going to turn to that set of issues in part 5 of this series.

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