The Other Side of Outsourcing: Dangers Offshore
If you are going to outsource, define the tasks broadly and make the result a flat fee. Don't provide incentives for buying new anything. And, should they actually come in under budget, share the savings with them. That way they have incentive to save money.
02/24/04 8:28 AM PT
When I first moved into management, I was a big fan of outsourcing. It has huge advantages if your eye is on the next higher job. It removes -- almost immediately -- the vast complexities of managing lots of people, and in most countries that includes racial issues, sexual issues, benefits, unions, taxes and moods. It also seems to make budgeting much easier, and it frees up massive amounts of your time -- at least initially.
After I had passed my problems -- I was a chief operating officer -- on to a series of subcontractors, life was good. If I had a problem with an employee, I called the outsourced firm and it became their problem. If I needed more help, I called and they got me some. I didn't have to hire or fire anyone, and I stopped having to write employee reviews.
The only problem is, there was no employee loyalty. The folks who came to work were paid hourly and varied widely in quality. They often did a minimum amount of work, and the overall quality of the work dropped sharply.
The Grass Isn't Always Greener
One night, while I was trying to sleep, I got a call from one of the sites that a security guard -- one of the functions outsourced -- had shot and killed a transformer. Evidently, the guard in question had been in the bathroom when his gun had gone off. I don't want to even think what he was doing with it. The bullet penetrated four walls, blowing apart the poor, innocent transformer.
If it had been during the day, given that it was a .357 magnum, it would have taken out several employees and customers. That was the last day the guards were armed -- and the beginning of my lesson in the downside of outsourcing.
Later that year, we started to have a lot of electrical problems. The electrical subcontractor had been wining and dining me for some time, with boat trips and food and drink. It turned out the guy had lost almost all of his customers, except me. He was also going bankrupt, and for the next few months -- because his maintenance services were prepaid -- I had to juggle my limited funds to keep failing air conditioners and heaters running. I found myself doing meter and fuse replacement, at one point bridging two leads in the meter box accidentally with what became known as the exploding screwdriver.
In short, all I had done was trade a series of problems I knew for a whole bunch of others I had not anticipated. And all of my vendors were both domestic and local; I sure as heck hadn't outsourced anything overseas.
The Known Problems
Now that I've watched outsourcing for some time, most of it has been with vendors like EDS, HP and IBM. The benefits have been similar to the ones I experienced, and they seem to lack my quality problems. Those issues that are reported have to do with excessive costs.
Most large contracts I've seen were set up on a cost-plus basis. This means you get charged what the vendor pays, plus some markup. This provides a direct incentive to the vendor to be inefficient. The more resources it uses, the more you pay, and the more revenue flows to the vendor. When this happens, that isn't their fault but yours. You should never allow a situation in which the incentives are in direct opposition to your general goals. It is this mistake that seems to result in the greatest number of complaints against domestic outsourcing companies.
If you are going to outsource, define the tasks broadly and make the result a flat fee. Don't provide incentives for buying anything new. And, should the vendor actually come in under budget, share the savings with them. That way they have incentive to save money. You do have to be more careful in the budget-setting process, though, as they will tend to inflate the initial budget to ensure the "bonus."
Although this approach might inflate some budgets, remembering that you can generally get in more trouble for underbudgeting than overbudgeting should get you over the hump.
On top of this, to make outsourcing work, you need to think not only over the term of the contract, but also what will happen during renewal, and make sure the other side doesn't have all of the bargaining power. This is where offshore outsourcing is getting crazy.
What You Don't Know Can Kill You
This is what scares the hell out of me in terms of offshore outsourcing. While I can see some pain in switching domestic vendors, the stories surrounding offshore activity have been frightening.
I believe the reason is that people are making the same mistake I made, looking at the wonderful benefits -- mostly financial -- and not thinking through what it means to ship your critical functions to the other side of the globe, where the rules may be substantially different than what you are used to.
Of course, it depends what you are outsourcing, but any IT outsourcer gains access to your systems, your IP and your employees and executives. Like my own experience, their loyalty, at an employee level, will not be to you or your company but to the firm that employs them. And in places like India, that loyalty might be minimal. Even worse, some of the employees might actually hate you for your beliefs or the country you reside in.
A few years back, while working for IBM, we had a technician who was upset that a client had not renewed its services contract. He, acting on his own, decided to teach the client a lesson and went into their systems and shut them down in a way that only he -- or we -- could correct. I have only once seen someone fired more quickly at IBM, and that was the guy who decided to test the zero tolerance sexual harassment policy at the IBM University during sexual harassment training.
Were a vendor employee to act this way in your own country, you would certainly understand your recourse, but what about in the country you are outsourcing to? What would happen if you switched vendors or decided to go back to being in-house? Or even if your government decided to declare war?
Understanding the Risks
India, which is only one of a number of locations now being used for offshore outsourcing, has different laws and, as a result of the influx of business, is experiencing a rather rapid inflation rate. This is, according to what I'm told, being led by practices that charge firms not located in India up to five times more than a domestic firm for property and services. Those fees are going up dramatically over time.
This means good employees can quickly be bought off early contracts and moved to more expensive ones. There was one incident where a company had actually set up a subsidiary in India, only to find that the entire thing, including their intellectual property, had moved to a competing firm, bankrupting them.
It is a common mistake to assume that the rules you know are universal. Before shifting IT -- any part of it -- offshore, you had better be extremely sure you fully understand the risks associated with that geography, have anticipated the problems and have fully covered your backside. Your biggest exposure will likely come when you renew the contract and, to a certain degree, are at the mercy of the outsourcer. How well you planned for that will have a great deal to do with whether you deeply regret this move in the first place.
One thing to remember, in many parts of the world, is that what you don't know can, in fact, kill you. Thinking tactically about the money you save while forgetting the other parts is a quick way to reach an outcome you might regret, like I did, for the rest of your life.
Rob Enderle, a TechNewsWorld columnist, is the Principal Analyst for the Enderle Group, a company founded on the concept of providing a unique perspective on personal technology products and trends.