Out-source-in

Labor cost differentials have been the primary motivation for the phenomena of outsourcing – the practice of sending certain aspects of work to another country. Although such tactical cost advantages may be beneficial in dressing up income statements for some companies, it may have long run deleterious effects for both – the outsourcer and the outsourcee. Service companies in the modern era continue to view themselves as similar to the manufacturing enterprises of yesteryear and manage themselves the same way. Accelerating economic growth in the 90s, forced many companies to accept such management fads as business process outsourcing, that continues to be a moneymaker for many consulting companies. The idea was (and still is) to disaggregate a "business process," and take components of it to low cost countries. This, many argue, is similar to steel being manufactured in a low cost country for raws, shipped to another where nuts and bolts are made and ultimately to yet an another where the ultimate manufactured good is made – perhaps an automobile. It is elegantly simple – make the parts of a process where cost advantages exist.

What is forgotten in this process is that we have moved on from the industrial revolution. Components of business processes are not like nuts and bolts. We live in a modern economy in which products are based on information and not on steel and petrol. In this economy, the "processes," cannot be disintegrated the same way as before. In the information economy, knowledge holds sway and that cannot be transported to another country easily. More importantly, value in the products come from integration and not by substitution. Those pushing "outsourcing," account for costs but they do not understand value. Value emanates from the benefits delivered – the top line - and it is not correlated with costs.

Once again, business schools are locked into a time warp, in which they teach their graduates how to measure costs but do not train them on how to innovate and cultivate ideas. The advantage, the US held for many decades in graduate education – where significant innovations of the last century were initiated and nourished, is under a serious threat. We have succumbed into a word of accountants and engineers, trained to measure and not prompted to think. Equally important is the problem that low cost countries are going to face, not too distant into the future. Blinded by cheap work pouring into the country – aided by artificially low currency rates and underemployment – most low cost countries have been pursuing unsustainable policies. Their engineers clam into call centers and their doctors do medical transcriptions – sub-optimizing their talents and skills.

Outsourcing is bad for those pursuing it and those accepting it.

Ref: Flexibility: Flexible Companies for the Uncertain World

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