Friday, April 08, 2005

Outsourcing

The Advantages of Outsourcing

Lots of material on the internet with this point of view. "Outsourcing reduces cost and risk, stress and anxiety. Increases flexibility and strategic focus."

There are many companies that do much of their business from outsourcing, so we might expect them to promote this point of view. See for example Vertex's Reading Room, which is a significant collection of pro-outsourcing material.

The Challenges of Outsourcing

Meanwhile, there are lots of companies (such as law firms, risk management consultants and so on) that make their money from their supposed expertise in the outsourcing process. So they want to make people aware of some difficulty and risk. Not too much, obviously, because they don't want to put people off the idea of outsourcing altogether.

The Struggles of Outsourcing

A third category of internet sites provides support to small subcontractors and freelancers, who may be experiencing some difficulties is dealing with very large, powerful (and sometimes fickle) customers.

How the Social interacts with the Economic

Tony DiRomualdo, Outsourcing: Net gain or shifting the pain? Wisconsin Technology Network, April 2004.
"Outsourcing can reduce costs or solve a problem in one area only to increase them or create new difficulties in another area, leaving the business less well off overall. A classic example of this phenomenon is when internal technical support is outsourced to drive down the costs in IT only to have business units create their own shadow IT organizations to deliver the personalized services they no longer receive. If you measure the success based just on the cost of the outsourced service, it appears that the company has saved money. But if you add back the costs of the shadow IT people, the overall costs have actually risen. Critics may point out that this is an organizational problem, not a weakness of the outsourcing solution and I would agree. I would also add that this is precisely the problem with how companies use outsourcing – it is often pursued in response to weaknesses in strategy and failures of leadership that would be better addressed directly through other means. Rather than helping in these situations, outsourcing often makes them worse."

A common pattern of outsourcing is that employees are transferred onto the contractor's payroll. This raises social/organizational issues - especially when public sector employees are being asked to move into the private sector. See for example High Anxiety - a story of public sector IT outsourcing from San Diego.

The Systems Dynamics of Outsourcing

Edward and Mary Anderson, Are your decisions today creating your future competitors? Avoiding the outsourcing trap. Good clear article. There are several more academic papers on outsourcing by Edward Anderson.

Bob Powell, Why Offshoring is Economically Unsustainable (html abstract, pdf). Discusses outsourcing as an example of the "Fallacy of Composition". Useful appendix in which several simple systems diagrams are put together to produce a more complex picture.

Interesting presentation (pdf) using system diagrams to show the possible effect of outsourcing on market dynamics.

Update: See Off-Shore Debate

No comments: