Two particularly contentious topics in these economically challenging times are outsourcing and offshoring. There has been a boom in these areas over the past decade but there are signs of significant problems. I am sure we can all think of factories and services which have been moved to countries far away. Most of the outsourcing (subcontracting out the work) and offshoring (to foreign countries) occurs due to the perceived massive savings. As we know, this is a simplistic view and it is not how it generally pans out.
Outsourcing has had an enormous impact on engineering production throughout the world. Over the past three decades everything from cleaning the factory floor, to guarding the premises and monitoring the IT security of your plant has been outsourced. It is estimated that over $100bn of new contracts are signed annually (according to TPI). Even the war in Afghanistan is outsourced with more contractors being employed than regular troops. Offshoring is another associated term; generally meaning sending jobs to other countries; such as IT jobs from the USA or Australia to India.
However, some of the worse business disasters have been caused by outsourcing. One only need to look at Boeing's Dreamliner (787) where parts wouldn't fit together and subcontractors (and presumably their sub-sub-sub contractors) failed to deliver on time and to the required level of quality. I can think of numerous examples of colleagues who had mistakenly outsourced (and offshored) large IT jobs with a resultant enormous problem in terms of quality of work and delivery on time. I also think of a few recent classics in the instrumentation business of outsourcing and offshoring development of oil and gas P & ID drawings to save millions; but which ended up as an unmitigated disaster with errors in the drawings and inability to handle the rapid changes requested by the client.
And don't think outsourcing is only about multinational mega corporations. I see outsourcing occurring with a small electrical business looking to cut costs and getting some ‘subbies’ in to help with a project and then uncovering all sorts of problems as a result.
Statistics are not that encouraging of outsourcing
Research from the Aberdeen Group (focussing mainly on IT projects) revealed startling statistics:
- Nearly 50% of outsourced projects fail outright, or fail to meet expectations
- 76% of companies said that vendor management effort and costs were much higher than expected
- 30% reported ongoing issues
- 51% reported that the outsourcer was not performing to expectations
In the end, the average cost savings for projects was a mere 26%’.
When outsourcing goes wrong; all hell breaks loose. Contractors can be squeezed so that they start cutting corners (esp. with safety – which is difficult to measure until someone gets hurt or killed). Or contractor’s overpromise to win the contract and then can’t deliver. And we all know of the one insidious outsourcing problem - when your favourite (well, yes) telephone company outsources to foreign call centres who can’t understand you and service goes down the gurgler; with a massive impact on the telco’s reputation and revenues.
Recent statistics and acecdotal evidence shows that there has been a definite cooling of interest in outsourcing with large relationships falling by over 60% in the past year in the US alone (from TPI - although this statistic is probably less truthful because of the current murky US economy).
So what can we do about outsourcing?
As with every engineering and business decision; if done right and for the right reasons, it can work out. But simply outsourcing to save money is a dangerous strategy. One needs to carefully consider what the core functions of the business one is good at; and the other not-so-core functions which are peripheral to the business. I always regard it as very similar to when you are running an engineering firm. You are unlikely to build a machining shop for the odd bit of work in this area; you would sub contract this function out. Conversely, if you are an industrial automation systems house; it would be dangerous to outsource the critical software development (a core activity) to some foreign company because you can sack all your programmers and save a bundle.
A few (humble) suggestions:
- First of all - make sure you are doing the right thing outsourcing. It is not only about the money but about getting someone else competent to do the non-core functions (preferably considerably better than you could ever do)
- Figure in the (considerably) lower productivity and additional problems (e.g. time zones and delays) you will encounter with outsourcing
- Outsourcing is highly risky when commencing development of a new product. Here tight control and understanding of everything is critical to making it a success. Only when all problems have been ironed out and you have clear fix on where you are going, is it likely to be less risky to outsource portions
- Form tight relationships with those firms and people you outsource to
- Check your oursourcing firm out and their bona fides
- Don’t squeeze the company you are outsourcing too hard; you may end up bleeding them dry and destroying them (and your source of products and services)
- Ensure you put in significant resources to manage the outsourcing contract and team doing the work to keep everything ticking along smoothly. You may need to train your new supplier and perform internal QA checks
- Make sure the outsourcing deals are smaller, shorter and less rigid than otherwise
- Put effort into understanding your subcontractors and writing a usable good quality contract
- Don’t underestimate the amount of ongoing collaboration required between you and your outsourced firm
- Finally; don’t compromise on the price, quality and consistency of the final product or service. Expect and demand the best. It is a key reason for outsourcing
Remember - whatever we do in engineering - as Franklin D. Roosevelt remarked:
'Men and women are not prisoners of fate, but only prisoners of their own minds.'
Thanks to the Economist, The Aberdeen Group and TPI for some interesting reading on the subject of outsourcing.
Yours in engineering learning