Outsourcing Analysis Part I: How Far Out Do You Outsource?

Everyone talks about Outsourcing, but much of the time the talk seems to treat all Outsourcing as the same, with teh assumption that all projects end up with everyone working in a call center in India. Outsourcing predates India and predates “offshoring”. In fact, on of the things that has dropped out of the discussion is that “sourcing” is usually not just a one-sided process. Over time sourcing decision have oscillated between outsourcing and insourcing, where services that were once performed by outside groups are moved back into the firm. If you look at any large IT department, you’ll see that some functions have been moved in, then out, and then back again. A few services have gone through this cycle several times. Look at corporate websites. Today every major firm has an extensive web site, but just a couple of decades ago it was rare. A decade earlier, websites were a rarity. Early websites relied fully or partially on outside services, but as corporate websites became part of normal business practices, development of the website moved in-house. Today, the trend is to look for Cloud services to handle this work.

Despite appearances, outsourcing isn’t driven by cost savings. Savings are just a result of properly executed outsourcing. Instead, outsourcing is driven by: advances in technology, changes in the business environment, shifts in regulations, and individual preference. The technology part is fairly obvious; without cheap computers and communications, knowledge work could not be outsourced. You couldn’t get the work to where it needs to go. Reliable and inexpensive technology is necessary, but it was changes in the HR business model that moved recruiting processes to the web, then Monster.Com and currently… Twitter. In the last decade, corporate documents morphed from paper into emails and PDF’s, creating the necesary conditions for the outsourcing of legal discovery; but it tool optinoin from the court  on the validity of legal outsourcing to fuel the recent boom in outsourcing. But that final variable, individual preference, is much nore difficult to understand. So, lets focus on how preference works.

We take it for granted that almost anything could be sent offshore,and probably will be… soon. But which functions are at the greatest risk of outsourcing? Which have a much lower risk? The answer to this question is often driven by individual preference. Some firms follow a specific philosophy, that may not follow simple cost analysis. For example, JP Morgan Chase’s CEO (Jamie Dimon) is famous for promoting offshoring while discouraging outsourcing. Most firms have less coherent philosophies, or have multiple  philosophies that differ from department to department. Older examples of outsourcing are generally less consistent. Independent procurement departments are a recent event. Before they were created, any “deep reasoning” or analysis of the cost and benefits were not widely cirrculated or simply unknown.

Not surpisingly, if re-examined today some of these decisions may be very difficult to justify or just plain wrong. Part of today’s outsourcing wave is a long overdue correction. But with your world filled with overdue “corrections”, new technology driven opportunities, changes in business models and new regulations… how do you sort out which services should or shouldn’t be outsourced? If you can quantitatively answer this question, you are in a better position to deal with the groups in your firm that make or influence sourcing decisions.

For you to understand how to do this analysis, you need to understand all of your sourcing options (how/where you can get the work done) and the advantages/disadvantages of each location. When you bring these two variables together you have a powerful tool  for determining outsourcing options. Let’s take a closer look at locations:

  1. In-House:This means physically within the walls of a facility that belongs to your firm (owed, leased, etc.). There may be additional nuances, such as your headquarters vs. other offices (in the same city, in different states, or countries) that may be part of your decision making process.
    1. Core Functions – Like they say, never outsource the core! In tomorrow’s Blog we’ll go how you identify your core in more detail.
    2. Temp or Contract – While it’s not quite outsourcing, you should have a specific justification as to why a temp or a perm is the right worker for a specific function.
    3. Externally Managed – An external manager on site (managing oursourced staff, temp staff, etc.).
    4. Outside Legal Counsel: Many Corporate legal departments rely almost exclusively on outside litigators, with the internal legal staff dealing with more administration and policy matters. How much work should go here and why?
    5. Local Outsourcing: Since the local  economics are the same… pay, benefits, electric, taxes, equipment, etc. … when does your organization use this option… and why?
    6. Near Shore: You may have a general near shore, or tiered near shore. Your tier 1 may be locations that are no more than a two hour flight or one plane ride away, and tier 2 is more than a two hour flight or a connecting flight away. The former might be easier to manage and the latter might have better cost factors.    
    7. Offshore: Here too you might have different tiers (locations), based on labor availability and cost.

Check out this information. See what your options are, pull it all together, and tomorrow we’ll go over the next steps. But for now, that’s my Niccolls worth!

This entry was posted in Best Practices, Common Sense Contracting, Decision Making, Delivering Services, Uncategorized, Unique Ideas and tagged , , , , , , . Bookmark the permalink.

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