"To be, or not to be, that is the question." This may be the opening line of a famous soliloquy in Shakespeare's Hamlet, but it could easily be rewritten for modern business as "To outsource, or not outsource, that is the question." And the final outcome could mimic Hamlet's death.
The simplistic view is that management will choose the lowest-cost method of achieving the goal. This has given rise to the job flight that's seen by many industrialized countries. But how a specific company (yours) will prosper in the long haul needs to be considered more carefully.
In the second half of the 20th century, a vocal group of economists began promoting an absolute measure of economic efficiency irrespective of the long-term implications. The theory is that, by generating more cash for shareholders, companies will improve the general economy, along with their own financial health. But the short-term nature of US business measures fed a natural tendency among those steeped in the financial side of business to ruthlessly and blindly cut costs. After all, their job was to maximize shareholder value, wasn't it? The financial benefits of cutting costs drop directly to the bottom line and result in stronger earnings reports. This drives corporate valuation higher, which is reflected in higher stock prices. As a nice bonus, executive bonuses go up, because they are usually tied to financial performance.
Let's look at the premise of maximizing shareholder value. The first question to ask is "Value over what period of time?" Clearly, if value is to be measured only over the next 30 days, the answer is simple: Fire everyone except the people who fulfill orders and collect payment. Operating costs plummet, and sales continue for the next 30 days. But what happens in the following 30 days -- and the 30 days after that? You don't need a big degree to intuit that the business will die as promotional effects dry up, product development halts, and the word gets around that the company has effectively shut its doors.
Many companies have outsourced to a lower-cost country in their bid to bolster earnings. Executives strive to create strong near-term value while preserving product development. Some companies have shipped all development to foreign countries, while others have taken partial steps in this direction.
Some advocate shipping all research and development (R&D) to countries like China, because they are building up capacity and capability to achieve R&D at a lower cost. Could there be a middle ground for outsourcing? Outsourcing in general requires a more complex corporate structure to manage the geographically dispersed and legally separate organization. In a 2013 paper on offshoring, a team of German researchers write:
Our findings hence imply a trade-off between global knowledge sourcing and a firm's ability to use this knowledge effectively. The empirical results suggest that off-shoring more than 15 to 30% (depending on the type of innovation) of a firm's innovation activities becomes challenging for maintaining the effectiveness of the organization.
Innovation activities more closely related to the company's core functions (R&D and marketing of innovation) are more sensitive to outsourcing, regardless of the source. If a substantial part of these activities take place in foreign countries, hidden coordination costs increase, and organizations become more complex.
The researchers give some startlingly simple advice in the conclusion: "Keeping most R&D activities at the home base is beneficial in a world where innovation cycles become shorter and developing new technologies more challenging."
Outsourcing, regardless of how much is outsourced, has some unintended consequences. For example, outsourcing some engineering jobs to offshore contractors depressed job availability for US engineers from the early 1990s until recently. As a consequence, there is a dearth of engineers with 10-20 years of experience in embedded systems development. Some would say that you have to expand the gap significantly between the humps of the bimodal distribution. In recent hiring, I've seen applicants with fewer than 10 years of experience and even more with more than 30 years.
These experience gaps can be largely attributed to the overly aggressive outsourcing of the past. Corporate management in all countries must become more global in their strategy while maintaining local workforce viability. Missteps in managing workforce globalization put both a company and its employees on the wrong end of the power curve. For individual employees, being caught in the middle of poorly planned and executed outsourcing can spell disaster for their chosen profession and drive them to shift to a more viable discipline.
Last but not least, in my previous column, I posed the following trivia question: "What was produced when sewing machines were first set up in a French factory in 1841?" The answer is French army uniforms. As a result, tailors rioted. They feared the machines would put them out of work, and they took their revenge by destroying the machines.
Here's another trivia question for you: What was Henry Ford's first mass-produced car?