Outsourcing

Over 6000 years ago, a crude old farmer from the Ancient Chinese province of Quiansang and took a portion of his Spring’s harvest of rice, and met with a gentleman in the neighboring hills to exchange them for a dried bag of his finest tea leaves. Thus, the idea of outsourcing was born.

If you are wondering where Quiansang is. . .  I don’t know. I made it up, as well as the story. But the point is, the ideas behind outsourcing and the ancient act of trade are basically the same. If multiple producers focus on one or few products, they can create more due of expertise, standardization and so on. Then, by trading, a community of producers can create wealth. Currency was adopted to make this trade easier, and we eventually arrived to where we are now.

As ancient as the concept of outsourcing may be, it had not been formally recognized as a business strategy until the late 1980′s (see “Managing the Outsourced Enterprise” by Rick Mullin). The study of outsourcing is focused on answering the question of what a given company should do themselves, and what they should have someone else do. Like most questions in business, there is no one right answer.

To decide if one should outsource a business area, the first two questions should be if is it a strategically important area, and does it contribute to organizational success. If the answers are no and yes, respectively, outsourcing is likely necessary.

When choosing an organization to outsource to, much consideration needs to be done. Areas to consider include:
Price, congruence of the two companies, and hidden costs and risks.

Price is one of the first and last thing to consider in outsourcing decisions. An organization can quickly eliminate potential providers by deciding what they simply can’t afford. However, the broader area of cost must be firmly assessed before price is considered, or one may well find out they can’t afford not to pay a high price. For example, if a computer network stops working, costing $100 each hour its down, you should be willing to pay the technician who can fix it faster a little more.

When an organization confronts the idea of outsourcing, they need to understand just as well who they are, as well as who the outside organization/individual they are considering handing over responsibility to. To do this, an organization needs to take a look back at their mission and vision statement, and choose organizations that share the same goals, and fit specific business needs.  For instance, if you’re a lawyer, you probably have access to sensitive information, and would not want to outsource your IT to a company with a poor security reputation. Likewise, if you are a military with a mission of fighting terrorism, it is perhaps not the best idea to outsource retaliation to rebel groups with links to terrorist organizations. . . For instance.

Another area to look at includes hidden costs, which can come fairly obvious areas like fees or price fluctuations, as well as less obvious areas such as  delivery delays, market instability, trouble adjusting to capacity changes, and so on. An organization must do their due diligence in assessing an outsourcing company, and a risk premium should be included into the price of the good or service. For instance, a 10 euro product in Greece is not worth the same as a 10 euro product in Germany, regardless how similar those products might be in quality and all other areas.

Outsourcing is a relatively new study, and is growing extremely significant. While no definitive guide can be made with all the right answers as to how to outsource correctly, it can be said that it has certainly become a lot more complicated than bartering rice and tea leaves.

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