Having it All without Doing it All-The Dark Side

E-mail Ed Ramsden

In a previous blog I shared some thoughts about outsourcing, and how I believe it to be a valuable tool for improving the effectiveness and productivity of your business. Like the Force, however, outsourcing can be used for both good and evil. Today I'll discuss some of its less savory aspects.

Loss of Control
Perhaps one of the most common complaints about outsourcing is the supposed loss of control that occurs when processes are moved out of your immediate supervision. Of course, sometimes it can be argued that because of company organizational issues and politics, you might not really have as much control as you think over your in-house processes. In many organizations, trying to get someone in a different department to do something for you can often be a challenge.

Getting vendors to do it, however, is usually a lot simpler because they realize they might not get any more business from you unless their work meets your expectations. This naturally assumes you have good vendors. There seem to be few people out there who consistently deliver what they promise, when they promise it, and at the price they promise. Far more can be politely described as "flakey,"

Vendor Headaches
The biggest problem I have personally experienced is when a vendor commits to a delivery date and then fails to meet it, typically with little or no advance warning. Next on the list are vendors who deliver product that does not meet your specifications, from either a functional or quality standpoint. I believe this is so to some degree because in many organizations commitments are routinely made by the sales front end, without regard for the organization's actual performance capabilities—promise them anything to get the sale! Unfortunately, a critical supplier does not need to screw up very often to have a serious impact on your organization's performance. Or in extreme cases, on your organization's continued existence.

Unless you are very careful about selecting quality vendors, and establishing good relationships with them, it can be very easy to lose control over your outsourced functions. Maintaining control is largely a function of selecting good vendors and working with them. When you find good vendors, treat them well!

Accidental Technology Transfer
One of the most frightening prospects of outsourcing is the accidental transfer of critical technology and business information. For example, with many types of assembly-level sensor devices, a big part of the value-add is the ability to test or calibrate the product. While it may be OK to farm out the assembly to a subcontractor, farming out the final test operations could put him in a position to become a subcontractor for your competitors—or even to become a direct competitor himself.

Similarly, for many products containing microcontrollers or FPGAs, the code programmed into the device may constitute a large percentage of the product's total value. In countries that have functional legal systems, your subcontractor might be discouraged by copyrights, patents, confidentiality agreements and the like from "liberating" your proprietary content. In many of the low-cost areas of the world that are currently popular for outsourcing, some of which may have less-than-completely functional legal systems, a competitor may come to view your intellectual property as one of his major assets.

And don't limit your thinking to technology. Information about your business and customers can also prove very useful to a potential competitor. In short, you should very carefully scrutinize the information that is transferred when outsourcing any business process. If you can't hand off a business process without transferring crucial information, you might have to "sanitize" that process to make it suitable for outsourcing, or even keep it in house. These considerations become even more important when outsourcing to places where there may be no effective legal recourse should your outsourcing partner unilaterally decide to change the game rules.

Hollowing Out Your Business
I have read numerous times that the ideal business is a post office box in which cash (or, alternatively, cashier's checks) miraculously materializes each day. The danger inherent in this notion is that it some people may take it seriously and go overboard in outsourcing. After all, who needs in-house sales, marketing, design, operations, or manufacturing? All you need is a CEO with a broadband connection and a Website with a few "Buy Now!" buttons and you can have the ultimate outsourced company!

Well, what's wrong with this? If you can build a viable business on this model—nothing. This is the business model for many internet Web merchants. They put up a site (often outsourced to Web design and hosting companies), do marketing (also possibly outsourced) to promote their products (designed and manufactured by somebody else), and take online orders. Their vendors then drop-ship merchandise to the customers. Maybe they have an in-house department to deal with returns and complaints. Maybe that is outsourced too.

While this model may work well for an online retailer, it could present some big problems if implemented by a typical sensor company. Our customers have this nasty habit of expecting a lot of technical support and at least a little innovation now and then. One seldom mentioned effect of outsourcing is that when you stop performing a process, you tend to lose expertise in it. And it becomes increasingly unlikely that you will be in a position to be able to make any advances in that process.

For example, if you outsource too much of the manufacturing, you may lose sight of the distinction between what can and what cannot really be manufactured. Similarly, if you outsource too much technology and design, you may lose touch with the state of the art and what is technologically feasible. If you outsource too much of your marketing, you may find yourself piloting your business completely without a compass. As you "hollow out" your company and shed your capabilities, your vendors acquire more. At some point your vendors may decide that you are simply an unnecessary middleman, and kick you to the curb. After all, it's a lot easier to kick an empty can than a brick.

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