Outsourcing is Stupid. Discuss.

OK, I admit I’m pretty much an anti-outsourcing bigot, but I’m not totally blinkered. There are many situations where outsourcing makes sense and it would be stupid not to, so let’s get that out of the way before I launch into my polemic.

Take this blog. I needed to host it, but did I go out and buy a server to keep under the stairs in my house, load up the operating system, configure security, load blogging software and so on? Of course not, that would be crazy. There are many companies who can host a blog for a very reasonable price, so I signed up with one of them and had my site ready in a few hours at far lower cost and effort than hosting it myself. The key here is scale. Hosting companies provide a service for many web sites, so they can share servers, internet connections and skilled staff across those sites. The other crucial factor is a simple and clearly defined service offer. I look at the hoster’s web site and I can see easily what they will do for me and what it will cost. So, for a small company requiring a simple, well-defined service outsourcing makes a lot of sense. At the other end of the scale, do Google and Amazon outsource their hosting? Certainly not, because they have massive scale and complex requirements; there is no existing service offer that will meet their requirements.

In between the two extremes above we have multinational companies with high scale and complex requirements. They require enough computing power that they do not achieve economies of scale by sharing with other companies, and they can keep the technical staff they need fully employed. Yet they still outsource, and this is the area I think is idiotic. Here’s why …

Outsourcer’s profit margin

This is straightforward. The outsourcer is in business to make a profit so is making a margin on top of the underlying costs. If you have the scale to do the work yourself, you are simply increasing your costs, even before you add in the cost of the increased complexity (more ladder shakers) that outsourcing brings. If the outsourcer is more skilled at negotiating than you, as they generally are, then that margin may be quite fat.

Divergent objectives

You and the outsourcer have different objectives. You want a good enough service at the minimum cost. The outsourcer wants to maximise their profit, so will do as little as possible and bill you as much as possible. You put a contract in place that attempts to align the objectives. If the service you are procuring can be simply defined this can work, but if the requirements are complex then you have no chance. A complex outsourcing contract cannot provide for every eventuality. The outsourcer will exploit this to avoid work or bill you for “extras” that are not covered by the contract.

Service Level Agreements (SLAs).

I really, really hate SLAs because they do nothing to support the business in selling, delivering, collecting cash and so on. Ladder shakers love them of course because SLAs enable them to expend huge effort generating a load of statistics to bore people with every month and take them away from doing productive work. Because they are not involved in real work, the ladder shakers only know what is going on by making technicians produce reports and statistics to present to management. If you outsource, then of course you have to have an SLA to hold the outsourcer to account. So don’t outsource, and this is another area of waste and complexity you can cut out. People say “You can’t manage what you don’t measure”, but that does not mean you need an SLA. If you have a close-knit team of skilled individuals who monitor for failures and conditions that may lead to failure, your systems will run smoothly.

Twinning

Very often, the client does not fully trust the outsourcer, particularly if they are not performing as expected. The client then starts to introduce new roles to oversee the outsourcer. It starts with relationship managers and contract managers, but over time the client will have their own problem managers, change managers, release managers and so on. The more people the client puts in place, the more the outsourcer steps back and lets them do the work, reducing their own costs and increasing the profit on the contract. These jobs are added after the calculations were done to justify the outsourcing contract, and are never factored into to any comparison because everyone has a vested interest in declaring the contract a success.

Loss of Entry-Level Jobs

Outsourcing typically involves the more junior roles, management never outsources itself. Once these roles are removed, slicing off the bottom of the pyramid, there is no longer a source of expertise growing through the organisation, which then lacks the expertise to negotiate future deals.

What’s your experience? I’d love to hear experiences through the comments.

Next week: Outsourcing is Wonderful. Don’t worry, I’m not going soft. I will set out the typical arguments in favour of outsourcing and why they are wrong in the context of a large corporation. Sign up to get notified for future posts.