November 29th, 2007
Journalism schools teach novice reporters that news stories must provide answers to five W’s: who, what, where, when and why. Corporate officials involved in outsourcing should study those five Ws because the answers to those questions can help minimize costly mistakes.
Outsourcing is now an estimated $386 billion-a-year global phenomenon. It’s not just Western companies outsourcing to Asia and the Pacific, Central and Eastern Europe, and Latin America and the Caribbean anymore. Everybody’s doing it. Last month, for example, India’s Oil and Natural Gas Corporation (ONGC) announced plans “to completely outsource its onshore drilling rig requirements.”
Also in October, Korea’s LG Electronics announced that it had contracted with a Taiwanese company to produce 500,000 LCD TVs per year for the U.S. market, to be “sold in the U.S. under the name Zenith, an American brand LG bought a few years ago.”
Yes, everybody is doing it. And there are advantages to be had: lower costs and, presumably, higher profit margins.
But that’s only when everything goes right, which doesn’t always happen. Negotiating an outsourcing contract is relatively easy; managing it is not. Two years ago, for example, during the peak year-end holiday season, congestion at many of America’s major West Coast ports led to significant delivery delays, causing lost sales when manufacturers and retailers couldn’t get products off the ships and onto the shelves.
With Chinese manufacturing and assembly plants ready to meet their every demand, they had put all their eggs in one
basket. Their own economic fortunes became hostage to conditions they couldn’t control because they had failed to make necessary plans for dealing with the unexpected. While the circumstances were unique, the pattern is not.
Research shows that many companies cancel or renegotiate outsourcing contacts prior to the original expiration date because results don’t match expectations.
According to one study, more than 60 percent of corporate outsourcing “buyers admitted to placing more emphasis on setting up their contract than on managing it,” almost guaranteeing the resulting dissatisfaction. Just because “everybody’s doing it” doesn’t mean outsourcing is right for every company under all circumstances.
The decision to outsource involves a complex set of questions: not only, “What’s in it for us,” but, “Is it right for us, and under what circumstances?” For some companies, the best answer to “Who?” may very well be: somebody else.
What do you hope to accomplish? What are the likely benefits and known risks? What obstacles stand in your way? And
finally, what business functions does it make the most sense to outsource? In theory, everything can be outsourced, from research and development, manufacturing, financing and IT to sales, supply chain management and customer service.
But all outsourcing is not equal. It’s one thing when you’re contracting with a local company — quite another when you’re sourcing from a company halfway around the world, where your management flexibility, options and day-to-day control are limited. What you choose to outsource — and what you choose to keep at home — becomes critically important. Consider call centers.
While English is spoken by Indian call-center employees, they don’t always understand the American vernacular. Talk to Americans about “the Tigers,” and they might think of the Louisiana State University football team or Detroit baseball team. Ask an employee of an Indian call center about the Tigers, and she might tell you how her government needs to do more to protect the “big cat.”
This is just a minor cultural difference. But project this onto a business setting: You’ve outsourced customer services. For various reasons, language and culture among them, your customers see service levels dropping. Some of your best customers look elsewhere. You’ve saved money, but shrunk your business.
While we all know about the huge role China and India play in the outsourcing equation, they are not alone. A recent study by Global Services magazine also places cities in Argentina, Brazil, Egypt, the Philippines, Sri Lanka and Vietnam among the world’s top outsourcing locations. Every distant country poses potential problems: quality control, language differences, shortages of experienced management talent, supply chain uncertainties, inadequate infrastructure. Saving money can have huge costs.
Imagine a computer center where the electricity goes out every two hours. Imagine a call center without enough phone lines. Imagine an efficient new factory whose only link to the nearest port is a deteriorating two-lane roadway crowded with bicycles and jitneys. These are real problems our customers have encountered. You’d better be aware of such possibilities when you’re deciding where.
Many companies, eyeing the widely advertised savings they can realize by sourcing from low-cost countries, are in a rush to get started. Slow down. Outsourcing should never be an all-or-nothing proposition. Start slowly — ideally with a pilot program. Consider multiple vendors in multiple locations. See what works, and discard everything that doesn’t. Expand, but only when you’re confident you’re getting it right.
Every business executive knows exactly why. And we don’t disagree. But we also want them to understand why not in some cases. And why due diligence is needed throughout the process.
Entry Filed under: Why Outsource?