Tuesday, October 03, 2006

Once You've Outsourced Everything, What's Left?

Many of us have witnessed the rise of outsourcing across numerous business sectors. IT outsourcing was big in the post-Y2K days. Outsource everything and cut your costs was the utopian's, I mean consultant's cry. Many companies did just that. I know of one organization that has since repatriated core strategic functions like Enterprise Architecture, Project Management, and Business Analysis from their outsourcer. Why? Architecture will determine your organizations flexibility and ability to adapt to new demands. It will also determine the cost burden you bear for the maintenance of your infrastructure. In the wrong hands (which are any that aren't directly attached to the organization), this can spell disaster, albeit stretched over a 5-10 year period. Similar things can be said for the Project Management and Analysis disciplines.

Since the early days of outsourcing and offshoring the focus has shifted from technology services to business services. Outsource your call/contact centre. Outsource HR, manufacturing, payroll, even your business strategy (many companies do this by bringing in management consultants to do what their own managers should be doing).

Some of these make a lot of sense. Payroll is largely a low value-add and commodity business process that can easily be outsourced without risking a loss in cost-effectiveness or strategic leverage. What about manufacturing?

We do not need to name the number of manufacturers that are moving their operations oversees. Goodyear is moving a portion of its manufacturing to China. IBM, Intel, and Cisco and others have or are building R&D centres in India. Offshore your knowledge! Hey, that's smart! Or is it? How will they even be able to answer these questions when they've offshored their brains?

When you remove manufacturing from North America, you remove the skills required to build plants, and develop factory automation from the society. People go where the job demands are high. How many MBA students with a focus on manufacturing are there in Canada and the US today? How about the rest of the world? Although I'm interested in knowing what the hard numbers are and what the last decade's trends show I don't really need to - it's clear. Read the newspaper and management journals and then go back to history. MIT's Sloan Management Review has an excellent article on what management 'gurus' did to (accidentally) shift the power over product pricing from the manufacturer to the distributor and mega-retailer (say Wal-Mart). These experts taught that to compete head-on with higher-quality manufacturers in Japan, companies had to divest themselves of activities that were not part of their core competencies. They did. They got rid of sales and distribution among other functions. From the article:
"Although Goodyear started using alternate distribution channels in the 1970s, the shift away from its dealer network accelerated dramatically in the early 1990s when the company introduced its tires to Sears and Wal-Mart stores. As a direct result, the company went from having a global network of loyal and faithful dealers and strong brand loyalty to becoming the manufacturer of a commodity that could be purchased at an ever-growing number of outlets for a lower price...The prices of Goodyear tires to consumers fell precipitously...A slow degeneration of the company began...unable to raise its prices ...Goodyear was faced with the inevitable: the removal of costly manufacturing centres from within the United States."
What some managers fail to account for when making major structural changes to their organizations is their systemic impact. Major changes, made within an isolated framework - such as only thinking about cost-cutting or improving quality (as in Goodyear's case)- can have significant negative impacts on an organization.

Government and policymakers need to start attacking this problem today. Again, it is systemic. Labor costs are only part of the problem. Education is another as is the relative complacency of today's 'Western' workforce. Is protectionism the answer? I don't think it is that simple but countries like Canada and the US are in the process of losing control over their economies, a fair extrapolation of the final outcome of offshoring, have to make some tough and likely radical decisions.

1 comment:

Anonymous said...

Valid points.

However, most of what gets outsourced isn't the best of jobs.