While outsourcing may seem attractive there are plenty of hidden costs associated with it. Business / Governance / The Guardian Podcast

Four Reasons Why Outsourcing Works & Five More Why It Might Not

Say the word ‘outsourcing’ and there are plenty of reactions, some that are favorable and others that are not. On her weekly podcast entitled, “The Guardian” Ryn Melberg takes an unemotional/rational look at a phenomena that is part of the business landscape in the USA and in other western countries. The Guardian Podcast is the only weekly program of its kind focusing on issues of governance, ethics, Agile, Scrum and SAFe. It can be heard on iTunes, Soundcloud and here on www.rynmelberg.com.

While outsourcing may seem attractive there are plenty of hidden costs associated with it.

While outsourcing may seem attractive there are plenty of hidden costs associated with it.

Four Reasons Why Outsourcing Works

  1. Specialized expertise is not always available in-house. To have access to people with a skill set that falls outside the norm at any business or enterprise, hiring an expert in the field to work on a short term basis makes sense. This type of help could be anything from a metallurgist to a computer programmer to a plumber.
  2. When a new part or product prototype needs manufacturing. Before launching into full production of anything new it is often wise to make one first to see if it works, if it needs any fine tuning, and most importantly does anyone want to buy it. Contract or outsourced manufacturing prevents the cash outlay needed to ramp up only to make a single new product for review. This is a great way to work all the bugs out in advance of a full-scale investment.
  3. When time is short, hire a consultant. There are plenty of times that consultants are asked to take on a project because the people in-house are not able to deliver it in the time needed. This is also a good way to leverage limited resources. This is referred to as contracting for staff augmentation. Maybe the company does not have the knowledge or has a short term need. Augment the staff with a short time employee.
  4. Outsource big expenses like machinery. The best examples are major factory costs or finance of big expenses like machinery. No one wants to buy expensive machines that require a full time staff to maintain, so why not outsource them?

Five Reasons Why Outsourcing Might Not Work

  1. Loss of intellectual property risk. Or a loss of any kind of specialized knowledge residing in the heads of people who do not work for the company could mean that by outsourcing you are really training your next competitor.
  2. The same types of challenge of intellectual property loss exist with the possibility losing technical skills in the workforce. Because people who work inside the business will no longer know how to do the work that was outsourced or because they were let go in the wake of outsourcing. Either way, skills and experience walk out the door.
  3. More potential overhead. While outsourcing advocates will cite cost savings as a reason to send work elsewhere, it’s a good idea to do the math first. For example, a salaried programmer in the USA is paid for 40 hours work though he/she may in fact work 48 hours. Outsourced workers will expect to be paid for all the hours they work, which will force the company to pay for all 48 hours. This can blow the model for outsourcing and actually drive the cost up. Outsourcers may find that the work done by domestic employees is a better value.
  4. Regulatory and reputation risks. Outsourced companies may not have the same amount of risk or exposure with stakeholder audiences or have visibility with regulatory groups as the parent company. If the outsourced company makes a mistake, they will likely recover. All mistakes were not created equal and the court of public opinion is likely to blame the parent company and not their supplier, especially if injury, death or some other unfortunate circumstance occurs.
  5. Rules of governance may not apply. Prohibitions against child labor and other regulations that are common in the USA may not apply with outsourced companies. The example of Apple workers in China or child labor used to make shoes and clothing come to mind. Is the risk to a company’s reputation worth the savings? If aroused and informed, consumers will rebel and boycott against those who transgress. Just ask Kathy Lee Gifford about how successful her clothing line was once knowledge of the child labor used in factories to make her clothes was revealed.

The issue of outsourcing is not as straightforward or clear as most people think. There are serious risks and trade-offs to be made. For the issue of outsourcing, many of the costs associated with it are not in plain view. For those considering outsourcing get the best information available on which to base a decision.

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