A pet issue is that the claim that outsourcing and offshoring lower costs is greatly exaggerated. Offshoring and outsourcing (we’ll just say “outsourcing” for the purposes of this post) do lower direct factor and lower-level worker costs. But they do so at the increase of greater coordination costs of much more highly-paid managers. And they also increase shipping and financings costs, and downside risk. Having people work at a distance, whether managerially or by virtue of being in an outside organization where the relationship is governed by contract, increases rigidity (harder to respond to changes in market demand) and the odds of screw-ups due to communication lapses. And outsourcing also reduces an organization’s skills. Those lower-level people have a lot of product know-how that you lose when you transfer activities to an outside operation. It’s nice to think that you can hollow out your organization and just do all the sexy design and marketing stuff and dump the grunt work on other players. But over time you are breeding future competitors.
Thus offshoring is best understood as a device for transferring income from the rank and file to middle level and senior executives.
Yesterday in commments, reader Clive explained how outsouring over time starts to create its own bureaucracy bloat. It’s the modern corporate version of one of the observations of C. Northcote Parkinson: “Officials make work for each other.” As Clive describes, the first response to the problems resulting from outsourcing is to try to bury them, since outsourcing is a corporate religion and thus cannot be reversed even when the evidence comes in against it. And then when those costs start becoming more visible, the response is to try to manage them, which means more work (more managerial cost!) and/or hiring more outside specialists (another transfer to highly-paid individuals).
I have to laugh (actually, it’s more of a groan; if I didn’t I’d cry) at what has happened quietly and almost imperceptibly at where I “work”. So unobtrusively did it sneak in, it is now impossible to remove its tentacles.
With the fashionable fad for outsourcing and offshoring, labour has become ridiculously cheap (obviously in the offshore locations more so, but real incomes have also fallen onshore so the same effect is present, albeit to a lesser degree).
As someone put it, management can find people to do the same job cheaper. They can’t do it as well, but they can do the job. The snag has been in what precisely constitutes the “not as well”. Put simply, it needs more people to do the same job and the spans of control are narrower. The people are cheaper, so the overall cost seems lower. But hidden, unbidden, in this change to labour sourcing and organisation, is a new cost, the cost of co-ordination.
Management information “proves” that the cost of delivering X- or Y- task is lower. But the overhead costs aren’t the same as the costs allocated to delivering whatever task is supposed to be being delivered so didn’t initially show up (or not quite so blatantly or seemingly risk becoming such a pernicious long term problem).
These overhead costs are now sufficiently large enough to start attracting attention. There’s two basic types: people and systems. People are needed to keep an eye out for the resources who are doing the actual delivery of the task. Often the resources need very detailed explanations of what they are supposed to be doing. Sometimes they get conflicting requests and it is not within their span of control to resolve the conflict themselves. A few have realised that they can do as little work as they want by trying to hide behind the “Permit Raj” which has been created and so overseers are needed to stop that happening (as far as it is possible to stop it happening).
Speaking of the Permit Raj this is of course the other cost. A cottage industry had to be started off by management to try and move the things along the myriad of steps needed to complete a work package that had to be salami sliced into ever thinner tasks. The more outsourcing and offshoring, the more need emerged for that cottage industry to be industrialised as it didn’t take long for everyone to realise they could game the system by blaming the system. But economies of scale are hard to come by in irregular, beskpoke one off deliverables (each piece of work is different so how it gets broken down and allocated is different every time). So the workflow sausage machine has more and more complexity built in, in an attempt to cope with the underlying complexity.
The solution is of course obvious, but impossible to implement under current management orthodoxy: What is needed are fewer but more flexible / skilled / knowledgeable / “good” i.e. expensive people. The kind of people who, once you have them, you know you have them and you don’t really want them to leave if you can help it. The kind of people who you need to treat in a not completely shabby way. So that’s never going to happen.
Okay, eventually something will have to give and the bureaucracy will become unmanageable. But just because something will have to end sometime does not, of course, mean it is going to end soon. Conversely, the pressure to lower wages still further (on the now vastly increased headcount) increases.