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Uncommon Sense: Outsourcing—Yeah or Nay?

Outsourcing is the business theme du jour. Contracting with someone else to do the work is tempting, and it can make good business sense when:

You need work like equipment and controls maintenance infrequently and randomly. It’s prohibitively expensive to keep skilled technicians on the payroll if you can go outside and get them when you need them.
Your market swings a lot and you’re in a capital-intensive industry.
You don’t have the capital assets in place, and the capital equipment purchasing cycle is longer than your product life cycle.
Someone else already has the process capability, does the work efficiently and economically, and everyone else already uses it.
You want to focus on a new process or product.

There are also Arial when the decision is not so obvious. For example, if the task is fundamental to your business, and you really should be pretty good at it, the decision requires critical appraisal. Demanding substantive answers to these questions can help you decide whether outsourcing is likely to yield real benefits.

Why can’t we do it better? Why can another firm carry out a task more cost-effectively than yours? Presuming the task doesn’t involve some arcane technology, you must be doing something wrong. If you fix it, you can compete favorably with the supplier candidate. The solution is not outsourcing; it is making your shop more efficient and cost-competitive.

Will outsourcing really reduce costs? The most significant benefit cited for outsourcing is usually reduced labor cost. Unfortunately, payroll is often unchanged after outsourcing, because incumbents are assigned to other jobs. So operating costs are increased by the purchase order value, not reduced by the proposed labor savings! Overhead costs are often a significant part of the anticipated cost reduction. Equally often, the overhead line item on the income statement doesn’t change because the costs are allocated elsewhere!

Could we make better use of our management skills? Some think so. One of our clients decided to outsource a process because the plant doing it was judged no better than the supplier candidate and overseeing the activities to be outsourced took up valuable management attention. The anticipated benefit was that management attention would be better applied to other concerns. That may not be a bad reasonalbeit noneconomicfor outsourcing, presuming the attention really is going to be better applied after the fact. Unfortunately, it’s always a tough task to quantify the real benefits of redirecting management attention. In this case, there was no discernable evidence that outsourcing improved the firm’s operations by freeing managers to attend to other issues.

Will we lose competitive advantage in the market? It is gospel in industry that manufacturers should do at least some manufacturing. Otherwise, they become manufacturing philosophers (like most consulting firms offering expertise in manufacturing) rather than real practitioners. Proprietary product knowledge is a real asset in the marketplace, and it can be lost through too much outsourcing. There’s also the possibility that helping another firm gain expertise and presence in the marketplace will create another competitor!

You can, at least in principle, do anything. But you can’t usually, in practice, do everything. So it makes good business sense to examine outside sources for products and services that traditionally have been sourced internally. Realistic and rational outsourcing decisions must be based on whether the alleged benefits are real and achievable. Unfortunately, most outsourcing decisions are made emotionally and for the wrong reasons.

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