Fresh doubts about outsourcing

For the second time in just a few months, The Economist gives several column inches to debating the merits of outsourcing: the idea that there are big benefits to be had from passing work, once completed by a firm, to a subcontractor who takes on that role.

According to the article, outsourcing has transformed global business. Over the past few decades companies have contracted out everything from mopping the floors to spotting the flaws in their internet security. One estimate is that $100 billion-worth of new contracts are signed every year. In Britain, 10% of workers toil away in “outsourced” jobs and companies spend $200 billion a year on outsourcing.

But a recent blog a few weeks ago raised a series of questions about the practice. Is it as useful as its fans claim, or is the popular suspicion that it leads to cut corners and dismal service correct? There are signs that outsourcing often goes wrong, and that companies are rethinking their approach to it.

The latest figures suggest that the value of outsourcing contracts is falling steeply. There are lots of possible reasons; perhaps because much of what can sensibly be outsourced already has been. And there has been a recent wave of legal disputes over outsourcing (which is a big extra headache in emerging markets).

The author argues that some of the worst business disasters of recent years have been caused or aggravated by outsourcing. Eight years ago Boeing, America’s biggest aeroplane-maker, decided to follow the example of car firms and hire contractors to do most of the grunt work on its new 787 Dreamliner. The result was a nightmare. Some of the parts did not fit together. Some of the dozens of sub-contractors failed to deliver their components on time, despite having sub-contracted their work to sub-sub-contractors. Boeing had to take over some of the sub-contractors to prevent them from collapsing. If the Dreamliner starts rolling off the production line towards the end of this year, as Boeing promises, it will be billions over budget and three years behind schedule.

Outsourcing can go wrong in a colourful variety of ways. Sometimes companies squeeze their contractors so hard that they are forced to cut corners. (This is a big problem in the car industry, where a handful of global firms can bully the 80,000 parts-makers.) Sometimes vendors overpromise in order to win a contract and then fail to deliver. Sometimes both parties write sloppy contracts. And some companies undermine their overall strategies with injudicious outsourcing. Service companies, for example, contract out customer complaints to foreign call centres and then wonder why their customers hate them.

And when outsourcing goes wrong, it is very hard to put right. When companies outsource a job, they typically eliminate the department that used to do it. They become entwined with their contractors, handing over sensitive material and inviting contractors to work alongside their own staff. Getting out from this tangle can be tough. It is much easier to close a department than to rebuild it. Sacking a contractor can mean that factories grind to a halt, bills remain unpaid and chaos mounts.

Most big business trends ultimately face a backlash, but that doesn’t mean they will disappear. The business logic behind outsourcing remains compelling, so long as it is done right. Many tasks are peripheral to a firm’s core business and can be done better and more cheaply by specialists. Cleaning is an obvious example; many back-office jobs also fit the bill. Companies are rethinking outsourcing, rather than getting rid of it. They are dumping huge long-term deals in favour of smaller, less rigid ones. Companies are forming relationships with several outsourcers, rather than putting all their eggs in few baskets. They are signing shorter contracts, too. They will need to continue to think hard about what is their core business, and what is peripheral.