Outsourcing is a Load of Crap

Outsourcing is a Load of Crap

In a much earlier post, I mentioned I’d had the unique opportunity to work on outsourcing projects both from the buy side, and from the sell side. Today I want to talk a bit about that, and explain why I feel outsourcing is just an awful idea, and hurts more than it helps.

Image courtesy of Lyle Lahey on Flickr.

Once upon a time, the idea behind outsourcing was, if your company was doing work outside of its core competency, it made sense to farm that work out to a company who did it better. That way, the company you gave the work to would not only have better skills than you, but could also deal with the capital costs associated with that work (specialized staff, equipment, training) and the risks associated with shortfalls in work (unused overhead). Mostly, this type of outsourcing was for work you weren’t already doing, or were only dabbling in.

With increasing technology pressures, however, more companies are choosing to enter massive outsourcing deals where a few new things happen:

  • the client company “sells” some of their existing staff to their vendor–one morning these people wake up and find themselves working for a different company (with no loyalty to them)
  • the vendor offers cheaper staff from a country “offshore” (India, the Philippines, the Ukraine and Brazil are all popular choices, among others) where labour laws are less restrictive and tax incentives are plentiful
  • the client organization pays a monthly fee for their vendor to “just handle it” and take the work off their hands

With this style of outsourcing, the original notion that an organization should farm out work it’s poor at is gone. If a company deliberately sells away or culls all the history, learning, customer relationships and expertise held by the staff of outsourced departments, they are not motivated by a desire to do better work. That just doesn’t make sense.

No, often these deals are financially motivated, with the desired end being a substantial reduction of overhead, and significantly higher profit margins. Most company executives aren’t naive. They understand what they’re giving up by eliminating large portions of human capital. So these deals need to carry a substantial cost benefit. And so they appear to…initially.

What they find, however, are numerous issues they hadn’t counted on, that ultimately hurt not just their bottom line, but the very fabric of their organization. In this article, I’m going to outline some of the observations I’ve had of outsourcing deals from working on both sides, and explain why I believe the title of this article.

As you’re reading this, remember the following: The client (allegedly) wants happy customers; the vendor (definitely) wants their invoice paid every month. These two objectives are unrelated.
 

Observations on Behavioural Impacts

The most significant impacts I saw were changes to individual behaviour. The first time I was involved with an outsourcing engagement, I was shocked. Gone was any sense of camaraderie…people turned into monsters almost overnight. This change in behaviour was not a flash in the pan, either…people were seriously hurt, and became tremendously untrusting of their executive management. As I’ve written before, when trust is broken, there are long term effects. Despite my efforts towing the line, “it’s a brand new day” and genuinely trying to make the deals work, getting cooperation was an uphill struggle. Here are some of the behaviours I saw on both sides:

From the Buy Side From the Sell Side
  • remaining staff were largely jaded, fearful
  • higher than expected proportion of work-to-rule behaviour among remaining staff
  • culture of finger pointing developed as each side tried to justify their existence
  • deliberate attempts to derail the vendor, either actively or passively
  • sense of futility among remaining staff, averse to accepting new work in case it might be taken away
  • unreasonable, unrealistic demands
  • deliberate vendor deception
  • sneaky behaviour, deliberate attempts to confuse satisfaction measurements
  • exhausted staff, tired of fighting the client
  • high turnover of vendor resources in an attempt to suggest outsourcing troubles were the results of individuals’ poor work (rather than a larger problem)
  • “out of sight, out of mind”–because they’re not visible, and don’t work in the same time zone, the client assumes offshore vendor resources aren’t working hard
  • salespeople making galactically stupid (and ultimately impossible) deals
  • deliberate client deception
  • anger, recrimination, dissent, acrimony, frustration, blame and resentment on both sides

 

Observations on Efficiency Impacts

Individual behaviour wasn’t the only place I saw problems. In every case, the efficiency of the client organization was substantially impaired. Here are some of the impacts to efficiency I saw first hand. Each of these items carried with it a tangible cost to the client over and above their payments to the outsourced vendor.

From the Buy Side From the Sell Side
  • live connection to vital data was severed by corporate firewalls
  • accuracy of data fell into question as live connection was lost, and maintained by third parties
  • transborder data transfer created legal hassles that required the client to purchase additional infrastructure (and increase the size of the outsourcing fees to add staff to maintain the new infrastructure)
  • depending on time zone, the client couldn’t readily contact offshore resources to discuss work
  • client had to pay for additional layers of management and quality control, to ensure outsourced work proceeded properly…in some cases this meant opening an offshore office and transitioning personnel to the new location to keep an eye on things
  • vendor would share information only at the highest levels; lower level client staff would hear first about a problem from their management
  • depending on time zone, onshore overnight batch jobs cut into prime productivity hours offshore
  • vendor resources unable to meet the level of efficiency of client resources who had been doing the work for ten or more years
  • to win a sale, vendor offered fixed bid agreements with the client that could not both be profitable for the vendor and meet the quality standards of the client–SLAs were never achieved, measurement periods were protracted, sometimes for years
  • extreme disorganization on both sides, long past the initial outsourcing action
  • uncertainty on both sides, in the details, of who was responsible for what…and a joint unwillingness to take on work that had fallen through the cracks of the initial agreement

I realize my exposure is to a finite number of deals (although I don’t believe for a moment what I’ve seen is unique or rare). However, with the ever-increasing amount of evidence that suggests these kinds of deals aren’t what they appear to be on the surface, you’d think we’d start to see a downward trend in the sheer number of these deals being put together each year. Such does not appear to be the case as this graph from Dun and Bradstreet India demonstrates. (ITeS/BPO stands for “IT Enabled Services / Business Process Outsourcing”.)

There always seems to be excuses as to why these deals run into trouble. Often individuals are blamed…the salesperson, the executive signatories, the line workers. The desire to make these deals work is extraordinarily high. In light of high pressure sales pitches, literature extolling the virtues of outsourcing (for everybody else but you, apparently) and the exchange of massive amounts of money, failure requires a scapegoat. So here’s my question: When outsourcing deals consistently seem to create problems, do we keep saying “so-and-so just didn’t do it right” or might it make sense for someone to put their hand up and say, “HEY, YOU KNOW WHAT? THIS IS A BAD IDEA!”

Call me crazy.

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I’m a professor of project management at the college where I work. My students continually amaze me with their insights, passion and all-around awesomeness. I figure they deserve access to more answers than I can give them by myself. This site is for them.
  • YES! Completely agree. The supplier and the customer have utterly different objectives in outsourcing game and these are opposing. Why did anyone ever think this would work?

    I have in-sourced two IT depts in the last 5 years. Its the way forward 🙂

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  • I agree and I don’t agree. Ideally in-sourceing would be the cal, but what if you simply don’t have the skills, resource or time?

    I think a lot of this come down to contracts, KPI’s, reporting etc as well as both sides understanding each other, and the key day-to-day folk who manage the contracts and work having a good working relationship – this takes time, but does work. I have outsourced GIS developemnt work, primarily because we did not have the in-house skills, nor the time and effort to upskill people – our deadlines would not be met.

    In my experience we managed the contract closely and worked well as a team – both sides working as a single team with common onbjectives. Yes, we wanted to deliver our programme and ascociated projects, and yes the vendor wanted to make money, but we had developed common objectives and understanding, and this worked very well.

  • Sounds to me like your outsourcing engagement harkened back to the original purpose of outsourcing, which was the desire to keep core competencies where they belong, and do better work overall.

    I believe there is a place for outsourcing…on occasion…but it can’t be a purely financial exercise as so many appear to make it. Lacking skills and resources is a valid reason to outsource, as I described at the top of the article…as long as it doesn’t mean carving out swaths of your organization and dumping history, customer relationships and expertise in the process. Your project doesn’t seem to have to done that, so, hooray! 🙂

  • I SO completely agree!! Insourcing is the way to go. Bring it home, people.

  • I would add a consideration of cultural gaps.

    Some of the countries listed as economically feasible have outdated gender relations. I’ve heard a number of stories from friends who have been asked to put their husband on the line when using technical support outsourced help centers. Not a great reflection on the company.

  • I’m very sorry, Perry, as I almost spit soda out my nose when I read this comment. I was envisioning my mother, my sister or any of the women I know in the workplace reacting to a request like that from a support call worker. Their responses would be less than serene.

    It’s an excellent point, though. I’ve not encountered that type of issue personally, but I’ve seen other cultural gaffes, on both sides of the outsourcing arrangement. There needs to be cultural training as part of any deal of this nature to avoid these types of problems. Even then someone’s going to put their foot in it.

  • eddieosh

    Having been on both the receiving and giving ends of outsourcing I feel that the two biggest issues are upper management’s blunt short-termism (e.g. moving costs from the staff budget to procurement to make the books look good) and others’ naivety about how the whole process will work. I’ll skip the former because I think we all understand that, and focus on the latter because that’s where there’s a chance of making a positive difference. Why is it that people believe that taking a large chunk of work and moving it thousands of miles away and then managing it via a legal contract and irregular communications is going to work more effectively and efficiently than in-house practices? It’s just insane! You can only really make outsourcing work for commodity services and products; anything requiring true creative team work is on a hiding to nothing. I would only consider outsourcing in the project environments where I work for (sorry) drudge work (like manual software testing) or if I can ring-fence the whole damn thing with a very tight fixed-price contract with a solid, tangible, measurable deliverable. Where I needed to bring on additional staff without recruiting I’d only consider in-sourcing people to be an integral part of the team and put my energies into building and maintaining the on-going relationships across the whole team.

  • What a great insight, Eddie, thanks so much for commenting (and welcome!)

    Management’s short-termism is a sore point with me, even though we all know it’s true. It’s the same on both sides of the fence and it makes me see red. I’ll grant, however, that it’s not a constructive debate point.

    There’s no need to apologize for mentioning drudge work. Things like manual software testing are actually good candidates for outsourcing because the work is scripted and easy to measure. Quality problems can be quickly identified, and course corrections made relatively simply.

    Outsourcing any kind of original development, especially development that requires subject matter expertise unique to the organization is foolish. It’s just foolish. No two companies are run exactly the same way. No company follows a methodology straight out of the box. Companies have history, memories, and cultural idiosyncrasies that a vendor cannot know of during the signing of an outsourcing deal, because these things are largely undocumented.

    I like your thoughts on ring-fencing the entire engagement with a very tight contract. However, before going into something like that, those measurements need to be documented, AND the way you’ll track those measurements needs to be established. I’ve seen a lot of slippery vendors weasel out of their obligations because tracking mechanisms weren’t robust prior to beginning the engagement.

    I quite liked the Forbes article linked above, “Getting Back to Outsourcing Basics“. It speaks to your points about keeping outsourcing arrangements small and tight.

    Thanks again, Eddie for chiming in! 🙂

  • Anonymous

    Ok Geoff, you are crazy… ;>)

    There are as many ways to outsource work as there are to manage projects. I think we can all agree that there are numerous paths to failure on both fronts, and typically for the same reasons: lack of proper communication, lack of clear expectations, and most of all, lack of respect for the value of the human element.

    I’ve seen large companies sell off whole departments to another company, only to buy it back when it failed. The money wasted in these endeavors is amazing. That said, I have to believe the software industry’s tremendous growth is fueled by leveraging the less expensive, but not less educated or creative, resources found in other areas of the world.

    Is outsourcing for purely budget reasons a bad idea and pile of manure, yep. But those piles of manure can also become the growth medium for some good things. Big companies constantly provide the fertilizer, but this creates an environment for small ones to come in and take advantage of it……