A Lesson for Outsourcing Lemmings

Last week we discussed some data that was a rude wakeup call for the layoff lemmings, and now we have similar data for the outsourcing lemmings.  The European Management Issues blog describes this in a post titled Exploding the Outsourcing Myth.

Europe's €4bn outsourcing industry is facing a mid-life crisis as organisations find that far from saving them money, outsourcing deals end up costing them far more than they would have done had the work been kept in-house. To make matters worse, research by Compass Management Consulting has also found that as many as two thirds of outsourcing contracts worth more than £20m start to fall apart before the end of their contract terms.

In many cases this is a result of over-zealous pricing by the outsourcing provider, and perhaps a lack of due diligence by the originating company.

The research, based on an analysis of 240 deals worth more than £20m, found that outsourcing providers were winning business by pricing contracts in such a way that they produced savings of up 18 per cent in the first year compared to the cost of doing the work in house. But costs quickly began to climb in subsequent years, reaching 36 per cent above comparable top quartile internal operations by year three.

Ouch!  A 36% negative operational variance sort of blows away perceived labor cost savings, even versus so-called high cost countries.  But think about the fundamentals of the operation being outsourced...

"Outsourcing providers are not that different from an in-house operation," he added. "Indeed, they often use the same people as the in-house operation after the deal is signed and outsourcers cannot perform alchemy on a business process and turn an operation into gold."  [said Simon Scarrott, Head of Business Development and Marketing at Compass.]

We told you about this exact situation earlier this month in a post titled A Missed Opportunity, with Boeing selling one of their divisions to Onex, who proceeded to turn it around and make money selling the subassemblies back to Boeing.  With rare exceptions outsourcing intermediate components, especially when the outsourcing partner uses the original employees and processes, is just a coverup for pathetic leadership.  If some time had been invested to improve those processes and better train the people, that profit and intellectual property could have remined in-house. 

"With those figures, it is easy to see why the claim that all outsourcing will save money is a myth," said Scarrott. "There can be sound strategic reasons for outsourcing but saving money over the long term is not one of them."

And we haven't even touched on long supply chains, information delays, and large WIP inventories floating on the risky high seas.  Was it still a good idea?