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Outsourcing: Net gain or shifting the pain?

This weekend I attended a talk at my local elementary school given by Peter Senge, author of “The Fifth Discipline” and a prominent proponent of systems thinking. Systems thinking is a conceptual framework, body of knowledge and tool set developed over the past fifty years, to train people to see the big picture – to make patterns and interrelationships clearer, and to help see how to make systematic change successfully. The essence of systems thinking lies in a shift of mindset: in seeing interrelationships rather than linear cause-effect chains, and seeing processes of change rather than snapshots. My family and I are fortunate to live in a community that has incorporated these principles and skills into our children’s learning curriculum with great success.

Listening to Dr. Senge brought home an insight that many business executives seem to miss in their relentless use of tactics like outsourcing. They often seek to fix a problem or take advantage of what they perceive to be an opportunity to save money or improve service in one area of their business at the expense of creating greater problems in another part of the system. In my own research with hundreds of managers in companies that have outsourced various pieces of IT and business processes such as HR and finance, I’ve learned some interesting things about outsourcing. First, the benefits are never automatic. Outsourcing relationships take an enormous amount of effort and attention to succeed – in every case of success, the companies invested substantial resources on a continuous basis to make it work.

Second, the benefits of outsourcing are often exaggerated. Savings can be achieved but they usually are far less than claimed. Often they come from accepting mediocrity in return for guaranteed cost reductions. New models of outsourcing are emerging such as offshore and transformational outsourcing that promise to change this dynamic, but they are not yet proven to work on a large scale.

Third and most significant, no one really seems to understand the systems effects of outsourcing within companies. I am not aware of any convincing research that has been done to measure the impact of outsourcing on broader company performance. All the data looks at the effects on a single activity or process outsourced but not the impact on the broader business. It is assumed that if costs are reduced in IT or HR for example, the business gains overall as well.

But there is much evidence to suggest that this is not always the result. Outsourcing can reduce costs or solve a problem in one area only to increase them or create new difficulties in another area, leaving the business less well off overall. A classic example of this phenomenon is when internal technical support is outsourced to drive down the costs in IT only to have business units create their own shadow IT organizations to deliver the personalized services they no longer receive. If you measure the success based just on the cost of the outsourced service, it appears that the company has saved money. But if you add back the costs of the shadow IT people, the overall costs have actually risen. Critics may point out that this is an organizational problem, not a weakness of the outsourcing solution and I would agree. I would also add that this is precisely the problem with how companies use outsourcing – it is often pursued in response to weaknesses in strategy and failures of leadership that would be better addressed directly through other means. Rather than helping in these situations, outsourcing often makes them worse.
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I am skeptical therefore, when economists look purely at macro-economic data and make, as we have been hearing lately, blanket assertions that outsourcing is good for companies and the economy. It makes me wonder whether they may be measuring only part of the picture – the parts that are explicit and easy to gauge. Business organizations are unique and interdependent systems of people, processes, knowledge and IT. These are not as easy to disassemble and reassemble as many consultants and academics seem to think. Managers enamored with outsourcing should think twice about whether they are simply shifting problems from one area to another rather than solving them.

For more information on best practices in outsourcing see, “The Ten Deadly Mistakes of Outsourcing and How to Avoid Them,” that can be downloaded at http://www.hotjobs-coolcommunities.com/news/white_papers/article.cfm?ArticleID=127.

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Tony DiRomualdo is a business researcher, writer, and advisor with Next Generation Consulting. He works at the intersection of people, business strategy, and information technology to help companies create a committed and high performance workforce. Tony can be reached at td@nextgenerationconsulting.com.

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The opinions expressed herein or statements made in the above column are solely those of the author, & do not necessarily reflect the views of Wisconsin Technology Network, LLC. (WTN). WTN, LLC accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Comments

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