Does outsourcing create financial value?

Sometime early next month, I plan to start a series of posts where I'll compare the overall financial value of companies that have outsourced a critical business process or function with a similar firm (in terms of market size) in its industry that has retained core functions in-house. Much like my post on Boeing and Airbus. A pattern should speak fairly conclusively about the financial value of outsourcing.

Oh, I promise not to be biased.

A carload of irony

Inspired by the success of the Chinese LaCrosse, General Motors has stated that the Chinese design team for the company will design the next Buick LaCrosse, due at the end of the decade, for the entire world. The Chinese team will have complete control over the interior design and partial control of the exterior design and overall logistics.

This is a discernible shift from the times when American tastes and preferences defined those around the globe. Now, with 50% of organizational sales coming from outside the United States and the Chinese market growing the fastest, it's only reasonable that Chinese sensibilities inform product design and development for the American consumers.

Now, that's a carload of irony!

All in the family

"Don't ever take sides with anyone against the family again. Ever."
Michael Corleone to Fredo

Last week, I was chatting with a friend of mine, who recently relocated to India as the human resources head of a leading US-based technology firm. In the first few months of her new job, she found that acquiring talented human resources in India did not just involve making a pitch to the pertinent candidate - it often involved wooing the entire candidate's family. “Helicopter parent,” a tag coined in the early 1990s in the U.S. and made popular by the media, refers to a parent who hovers over a child of any age, and “Blackhawks” are extreme examples of this. However, "helopats" are ubiquitous in India and are in fact, the order of parenting. Parents and children live under a single roof in many Indian families, and often engage in cooperative decision making in both social and economic matters. Consequently, individuals well into their twenties and thirties typically defer to the authority of their parents who, in turn, take on significantly influential roles in directing individuals' careers.

My friend went on to say that what seems a mere cultural difference is now institutionalized in her firm as a recruiting strategy that addresses concerns of employee churn and attrition. Employee perks such as health insurance or club memberships extend to family members, the latter are flown in for company tours and events, and candidates are encouraged to bring along with their résumé, a family member who might well be the audience for the organizational pitch about culture, benefits and career potential. Since the company actively started wooing employee families in early 2006, its annual attrition rate has dropped to below 10%, significantly lower than the 15% industry average for software programmers in India (Source: Hewitt Annual India Salary Increase survey 2005).

Cool!

An article in FastCompany provides examples of companies outsourcing brand invention and management - a truly core organizational function - to keep up with changing customer needs and preferences, manage the risk of staying cool and stay nimble and flexible.

Ronald Coase sought an answer to the question, "Why do firms exist?" more than thirty years and answered it in Noble-prize-winning terms of costs of transacting and internal organization. The examples in the article are evidence that as advances in technology diminish costs of transacting and firm boundaries become increasingly fluid, firms in future may well be viewed as clusters of temporary interdependencies that come together to achieve a shared economic objective.

India bears the brunt of selling

The Indian sensex dove 453 points today. All stock markets are volatile but some are more volatile than others.

A book after my own heart

Are you serious about your bullshit?

Market meltdown

The Indian stock market was hit particularly hard in the recent Asian stock market slam. The benchmark Sensex tumbled over 471 points on the Bombay Stock Exchange on Monday, a fall of over 3.67%. Eddy Elfenbein submits that although the index has now lost 2,400 points in the last two weeks, the worst may be yet to come.

Cutting through the outsourcing hype

Gartner's hype cycle is a graphical representation of the maturity, adoption and business application of specific technologies. It depicts how and when technologies move beyond the hype, offer practical benefits and become widely accepted.

In 2005, it seemed that outsourcing initiatives were largely in the "trough of disillusionment". For example, 70% of the participants in a survey by Deloitte Consulting ("Calling for a Change in the Outsourcing Market", April 2005) cited significant negative experiences with outsourcing projects. The firms stated that although outsourcing is largely driven by cost-related objectives, they experience hidden costs related to contract administration, profit margins, and in-house management. Therefore, the management of outsourcing relationships was discerned more complex, expensive and time-consuming than anticipated.

However, recent reports such as this IMF working paper on offshoring, productivity and employment or the recent survey results of Duke's Offshoring Research Network suggest that outsourcing is traversing the "slope of enlightenment" toward the "plateau of productivity" (!!). Of course, I am not sure how Gartner defines productivity, but let's just say that we're seeing more evidence that several firms across diverse industries are increasingly learning how best to leverage outsourcing to create strategic value.