December 2010
By Richard Cook

Richard Cook is founder and director of Global Excellence Ltd, a UK based global provider of intercultural and diversity training and consultancy services for corporate clients. He has worked with international clients for twenty-two years and lived in North and South America, Japan, Africa, the Middle East and Europe.


richardcook(at)global-excellence.com
www.global-excellence.com

To outsource or not: The pros and cons of outsourcing

Should we or should we not? This is what many organizations are asking themselves today. It is a hard decision for most whilst for others it is an obvious solution to reducing spiraling costs.

What gets outsourced?

Some of the most frequently outsourced functions included processing services such as payroll, claims and credit card processing, IT services from classic data center through cutting-edge ASP applications, and finally increasingly, customer services.

The drivers behind outsourcing

In the past, organizations would have been uncomfortable with an outside party handling day-to-day tasks, but as outsourcing becomes more common the acceptance level increases. Many organizations have found that by outsourcing they can better concentrate on strategic core business initiatives rather than on the day-to-day operations of their business. However, this is usually not the most common reason for outsourcing. Cost management has been at the forefront of the outsourcing movement. This is now augmented by higher levels of quality - particularly in customer services operations.

Many CEOs realize that in today's business world their roles are changing. But they don't seem to agree to outsourcing as the "answer" to all of their financial and strategic business needs. Outsourcing is viewed by some CEOs as  'necessary evil' in the fight to keep costs down, while others view it as a "taboo" where they will lose control and be the "victim" of an outside vendor, which negatively impact on the core business. Unfortunately, there is no easy answer to the questions that nag CEOs as they ponder the decision to outsource or not.

Everything is negotiable

Many organizations may not feel comfortable with outsourcing, but in today's tight labor market it is a way of getting the job done. Some CEOs are choosing a different approach: Rather than to avoid outsourcing, they are developing stronger negotiation skills to better communicate and contract with external resources such as outsourcing firms. As a result some training companies have seen an upsurge in requests for negotiation training - a skill that last saw strong demand in the eighties and nineties, when organizations were beginning the globalization process and new markets were opening up.

Certainly a 'traditional' negotiation training course will be of great help to those managing the process and detail of sourcing quality vendors. However, it will by no means be enough to guarantee success.

Power shift

In the past the power balance between Western companies and potential outsourcing providers in other countries was clear: they needed us more than we needed them. That power balance has recently shifted somewhat as a result of changes in the market both at home and abroad. Outsourcing companies can now negotiate from a stronger position within a competitive market. It is not yet a seller's market but it is also not so easy to impose your own demands and walk away if they are not accepted in full. Therefore, the question arises how one can maximize leverage to ensure the best deal?

The cultural factor

The answer is: get the inside knowledge. Optimal business intelligence in this case should include understanding as much as possible about what 'makes the vendor organization tick'. It is an undisputed fact that how people and organizations negotiate is very much 'culture bound'. According to Richard R. Gestland of the Copenhagen Business School, there are four cultural variables to be taken into consideration when negotiating across cultures. Is the culture you are outsourcing to a:

  • deal-focused or relationship-focused culture?
  • informal or formal culture?
  • rigid-time or fluid-time culture?
  • expressive or reserved culture?

All of these variables can impact and influence the negotiation process, both before, during and after the contract has been signed.

Disaster in the making

Let's take a scenario of an American negotiator dealing with an Indian vendor. This would pitch a deal-focused, informal, rigid-timed and variably expressive individual against a relationship-focused, formal, fluid-timed and reserved counterpart. In simple terms, they could not be more different if they tried.

Stereotypes and reality

I can hear you say: Of course this is a hypothetical, stereotypical perspective – we would never send an inflexible individual to manage such an important deal. And anyway, people are never the sum of their national stereotypes are they?

Quite so. However, it is well documented that 'typical' people do get sent to work across cultures, time and again. They can even be relatively successful, up to a certain point. However, they can also lose deals or start things that very quickly go downhill. Many international ventures fail but the reasons why they failed are falsely labeled as a result of 'a downturn in the market', or 'a change of global priorities'. These phrases and others of a similar nature often hide an unsuccessful attempt that failed due to 'people' rather than 'market' factors.

Simple business sense

The often repeated business phrase, "Do your homework", is the key here. This means, "Do your cultural due diligence". On the question of who is the 'right person' to send over to set up the deal, the answer may not be an obvious one. Is it the person who has been successful in this in the home culture, or is it simply the head of the department that is being outsourced? Neither scenario makes business sense in and of itself.

The future

Outsourcing is here to stay. As Jagdish N. Bhagwati, a professor at Columbia University, said in a report on the subject of outsourcing and job losses in the US recently, "You really can't outlaw outsourcing, Outsourcing is just trade." So let's do it right the first time, we may not get a second chance.

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#1 runag wrote at Thu, Apr 25 answer homepage

This article is a lot of hot air, based on real world outsourcing in the engineering world, I can tell you that there are Decades of common sense that is not yet available outside of the USA, sure it is cheaper to go outside, but what do you really get when it is all said and done, basic drawings are easy, they are based on common knowledge of the practice and available online if there are any questions regarding font, size, what is typical practice etc.

But when it comes to real Detail design of structural steel, concrete, pipes, drains and equipment, there is no comparring the USA to any outsourcing company, I can tell you first hand after over 10 years of dealing with the folks doing the work outside of the USA, there is a lot of common sense that is still missing, so what happens when this route is taken, the folks that are down in the trenches really dont know how a company can survive, they must get a government kick-back of monies, and they must be able to hide some of the funds spent on the projects, but really, I have seen 100% rework of every single drawing and document, coutless times, it either can't work in the real world or the design component will not work for that process, meaning basic maintenance and yearly outages may not be able to function, so 100% rework, after multiple engineering reviews, then it comes back where everyone in the USA works tons of overtime and gets it done to match the companies standards as well as industry standards, so where are all those funds hidden? where is the company saving for paying for multiple designs and all the rework plus all the overtime, this is not just my view, in 10 years I can tell you 100's of people in my discipline alone that share my thoughts and can also attest to 100's of others that experience the same incompetence of the folks doing the outsourcing, they just don't get it, the folks trying to do the work that is, and I know there will be all kinds of people that can say I am wrong, but again, the ones who are doing this work wonder how the system will be able to take this major fallacy of our current crop of CEO's that are only concerned with one thing, lining their own pockets and making money, they are gone in a few years with a huge separation bonus and some other young no-nothing young gun comes in with a different way to outsource that the other one missed, but in the end, it all gets redone here in the USA, that is a guarantee, there are some areas that have excelled in the outsourcing part, mexico for one, building aoutmobile engines and parts, this is done from their hard work but also a sound direction and standards with no waivering, meaning there are always consistant parts, this is not so with other outsoucing countries, there are no standards there why would they know what a standard actually is, again, harsh, but you can't make up the things I have experienced, and of the thousands of similar stories by the hundreds of co-workers that have seen the same, yes we are going down a very treaturous path, not sure what any company will ever gain from doing this practice except eventual out of business.

This is such a political topic and taboo, I can see and hear both sides, but the basic final word is, there is not one shred of evidence that can support keeping this practice going, even companies that have sent their computer support to outsourced contries are bringing them back to the USA, press 5 on your phone to speak to a representative based in the USA, one that can speak english, and understand you, even if you have to pay extra, what does that tell you?