Outsourcing Pros and Cons
Outsourcing has been hailed as of one of the best ways to cut costs and enable a firm to concentrate on its core competencies, however, as many as 25% of outsourcing deals fail within the first year (MacInnis, 2003). With the current logistical and supply chain disruptions, many outsourcing partnering are increasingly under the microscope. The actual numbers of failures are astounding, even though most failures go unreported for quite some time because companies do not want to admit their mistakes. This is unfortunate as contrasting these failures with more successful outsourcing efforts can yield useful best practices (Barthelemy & Adsit, 2003; Smith, 2022a). A classic example of potential success and failure is the microchip shortage that the U.S. and much of the world is currently experiencing. Intel and Apple, to name a few, decided 30+ years ago to export the source of microchip processor manufacture to South Korea and Taiwan, in particular, as part of the lean manufacturing and total quality management (TQM) that Toyota pioneering during that time. It was thought that the advance designing would stay in the U.S., manufacture in Asia, and now, with China the primary consumer of microchips for electronic consumer goods, it has become a strategic concern. Manufacturing of these products are essential for military, as well as domestic production, of electronically sophisticated products and has placed the U.S. and its allies at a disadvantage if control of these products is outside U.S.’ control. Hence, a long-term strategic focus and perspective should be taken to determine the success or failure of outsourcing.
Despite firms’ best efforts to keep outsourcing mishaps under wraps, many have been identified and studied. The first and foremost reason cited for the failures is the lack of realistic expectations. Many times, an activity will be outsourced that has been a problem area for the firm in the past (Smith, 2020b, Van Weele & Van Raaij, 2005; Viswanathan, et al., 2007; Wong & Eyers, 2011). For example, Blake Hanna of Accenture, a Toronto-based outsourcing company, recommended that firms straighten out their messes before outsourcing, as it is important to understand the current level of performance to properly assess another’s management of it (MacInnis, 2003). These unrealistic expectations can be avoided by taking proper steps when thinking of outsourcing. Barthelemy (2003), specified as follows:
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Outsourcing activities that should not be outsourced
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Selecting the wrong vendor
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Writing a poor contract
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Overlooking personnel issues
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Losing control over the outsourced activity
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Overlooking the hidden costs of outsourcing
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Failing to plan an exit strategy
As firms continue to explore outsourcing, the practice of offshore outsourcing has become a focus among global businesses. Firms generally want to take advantage of expertise in matters outside their core competencies; no matter what country this may place them. This idea of placing plants or offices in other countries is especially attractive for firms for both the potential to cut in-house costs as well as the opportunity to ingratiate itself with the local inhabitants (Brito & Botter, 2012). Unfortunately, the failure rate of offshore outsourcing is 50% (Recipe for Offshore, 2004). David Foote, co-founder of Foote Partners and a long-time IT analyst and consultant, purports that the biggest culprit of these failures are the transition challenges; the inability to navigate difficult organizational and cultural barriers (Recipe for Offshore, 2004). Furthermore, Foote also believes that one of the worst mistakes that a company can make is to treat all outsourcing deals alike (Recipe for Offshore, 2004).