Outsourcing – A Daft Idea?

I have never been a big fan of all the Outsourcing fashion that came into vogue around 2000-01 with untold savings promised by getting non-core-parts of a company’s business managed and conducted by outside personnel and structures.

Now I am starting to think there is something potentially quite daft about the whole idea. Let’s say there are three types of Outsourcing:

(a) One-to-many: for example the relationship between a company and courier services;

(b) Many-to-one: for example all the clients of news- and data-gathering enterprises such as Reuters;

(c) One-to-one: the modern way of Outsourcing, when for example part or the whole of the IT functions are managed by a single external company.

Now, in case (a) the client has the upper hand, as it can shift business from one courier company to another in an instant and for whatever reason. Service has to be pretty good to prevent that.

Also in case (b) the clients are reasonably safe: even if costs can go high in a situation of quasi-monopoly, any problem on the Reuters or Bloomberg side would cause a massive uproar. Once again, service has to be as good as needed.

Unfortunately, that does not necessarily happen in case (c): the external company, in fact, does know its contract is large and complex and it covers many aspects without which the outsourcing company’s business will fail. And the latter has to invest much money and time just to start the process, whilst exiting from the contract is almost just as expensive and long an endeavour.

The end result then is that in (c) it’s the service provider that obtains the power to make expensive decisions for its client, for example justifying an incredibly complex hardware or data processing arrangement on the basis of unverified risk scenarios.

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Of course nothing is fixed, nothing is preordained. The opposite strategy may in fact be just as bad, when Insourcing means creating a self-sustaining internal apparatus of un-necessary costs and complexity, also called “the IT Department”.

Still it would be great news the day when companies, especially the largest ones including the public sector, will consider the downsides properly and protect themselves (i.e., their shareholders’ interests) against being taken advantage of by their Outsourcing Partner…

Perhaps it is time for a new business field: independent outsourcing auditors.