Where Outsourcing Fails and Why You Don't Hear About It

Rob Enderle

Last week I was part of a get together of technology managers, analysts and influencers. One of the topics was outsourcing failures. What was interesting was that the consensus opinion was that it was generally failing miserably and that much of this failure was currently being covered up by managers who didn't want investors to know they had screwed up. However, if you were to look at the companies from the outside, you would see that they were increasingly bringing out late products of lower and lower quality, their valuations were dropping, and their financial performance had been dropping even before the downturn. I can't divulge the companies we were talking about as it would get too many of these people in trouble, but the belief is that since we were seeing it in all the companies, we were touching it may be a universal problem. Let's talk about why this isn't being reported and the cause of the problem.


Concealing Problems


With the financial collapse, there should be no doubt in anyone's mind that things that should be disclosed about companies' performance aren't being disclosed in a timely manner. And if this is a problem in one of the most heavily controlled industries, banking and finance, it is likely a bigger problem in industries that don't have these controls.


Outsourcing is a high-profile action. It shifts jobs from the local economy overseas and is really not very popular with politicians. If it actually doesn't work, the effort is likely a career ender for the folks who made the decision. And, because there is a widely held, possibly false, belief that it actually works, individual failures look unique, thus increasing dramatically the personal exposure. In addition, the problems that show up aren't financial, they are operational. These problems can generally be blamed on a lot of things and without people who are independent doing detailed analysis of the problems, the cause can be blamed almost indefinitely on a lot of things. That protects the decision maker but leaves the company at risk. So there is substantial risk to reporting the problem accurately, to properly associate the problem with outsourcing requires deep analysis, and the people who are most at risk generally have to approve this analysis so it doesn't get done. That is why we don't see these failures reported very often.


Why Outsourcing Fails


This isn't to say that all outsourcing does fail, but from the limited sample we had, the vast majority we could see were failing. The reason why has less to do with the cultural differences and physical distances involved and more to do with the dependencies that firms take for granted and don't realize are critical to the successful operation of the company.


When a function is internal, multiple official and unofficial communications channels drive work through a particular function. The agility of the firm is generally tied not so much to the official communications channels but the unofficial relationships that exist around an effort. As most of us learned in school, people don't communicate very well and this existence of a matrix of unofficial communications channels helps assure that the requirements for a task are accurately conveyed. But, generally, when something is outsourced, be it locally or overseas, all of these unofficial relationships are severed. Now all communication has to flow through relatively few authorized channels and, in some cases, that may be the one executive who is running the outsourced unit. The end result is that instead of having people constantly interfacing with others who better understand them, directions are passed down a chain of people who increasingly don't have the skills to understand them. The result is costly mistakes. The more complex the web of unofficial communications is, the bigger the adverse impact of outsourcing the related unit will be. Given how critical IT is to so much of what is actually done in a company, outsourcing it would seem to be suicidal.


Wrapping Up


Outsourcing has a very obvious benefit of saving costs, but the downsides aren't as obvious. That typically results in bad decisions where the benefits aren't properly weighed against the very real risks. In addition, with the benefits coming quickly and the problems developing over time, there is the very real issue that these bad decisions won't be reversed, crippling the related companies. Before outsourcing, take stock of what the impact will be if the function becomes vastly less responsive and requires more effort. You may find, as we evidently did, that the vast majority of times you'll decide that the short-term benefits simply don't come close to overcoming the long-term risks.

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Apr 23, 2009 10:11 AM Nicholas Rao Nicholas Rao  says:

This is too simplistic a view of failings to outsourcing.  Too often the failures are due to a failure of companies to clearly state user requirements for support, the current stability of the application and infrastructure, and a lack of critical measurements of performance.  The compliant of the author regarding the informal networking is valid.  The real cause behind this is the desire to outsource jobs that provide the detail business knowledge and skills that should be located in the home location.

Apr 27, 2009 2:39 AM Marc Nolan Marc Nolan  says:

I would have all the non-outsourcing opponents look at what is going on in our OWN country first, before putting the blame on anything that leaves the US shore. Mr. Enderle's statement of "It shifts jobs from the local economy overseas is really not popular with politicians, is just not correct.

For instance, I wish Mr. Enderle would have written about a company RIGHT HERE IN THE GOOD OL US- called UNICOR (or FPI) who is screwing small business owners out of contracts, using- yes you might have guessed- PRISON LABOR! And even mores, they are using these convicted felons in call center work and data scrubbing (next they'll be doing BI work and no doubt Java)

Secondly, policitians LOVE UNICOR and others, since they have lobbyist screwing us all ove the place.

I get sick and tired of the same ol blame game- about outsourcing companies (no I do do outsourcing) when right under our noses, the friggin convicts who are getting MBA's and three meals a day at taxpayers expense are NOW becoming cheap employees!

Mr. Enderle, I would encourage you to look into this "outsourcing company" and see how they are hurting the US small business owner!

Apr 27, 2009 11:39 AM Myroslava Trotsyuk Myroslava Trotsyuk  says:

Outsourcing is generally supposed to save you money. This is especially true when it comes to outsourcing mission critical work like software development, typically done offshore, with companies who enjoy very low labor rates. But saving money isn't worth it if you cut your own throat in the process; outsourcing for the pure sake of saving money may lead to a very dangerous financial mistake, and that's one of the reasons why many outsourcing deals indeed fail. Only outsourcing with the right partner will be effective and save you money in the long run. Pick the wrong one and you'll pay dearly for that decision. Here are some interesting thoughts about this: http://www.executivebrief.com/article/the-incredibly-high-cost-of-saving-money-on-outsourcing/.


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