Outsourcing May Backfire

[MolaKule]

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Surprise Costs Mean Outsourcing May Not Pay Off, Survey Finds
The Wall Street Journal 05/04/05
author: Rebecca Christie / Dow Jones
(Copyright (c) 2005, Dow Jones & Company, Inc.)


WASHINGTON -- Unwary companies that outsource technology services or other core functions may be losing money instead of reaping expected savings, according to new research and industry professionals.

In a new survey, Deloitte Consulting found that outsourcing experiences haven't measured up to expectations. Cost savings and efficiency were the top goals of hiring outside help, but about a third of companies that tried these strategies said they ran into hidden costs and vendors that became complacent once contracts were in place.

"Instead of simplifying operations, outsourcing often introduces complexity, increased value and friction into the value chain," the Deloitte study said.

The study surveyed 25 major organizations, which the researchers didn't name in the report.

Using outside companies often required more senior management attention and deeper managing skills than expected, the study said. It recommended that big companies look to keep more functions in-house, even though smaller companies might benefit from hiring outside help.

Northrop Grumman Corp.'s, Jim O'Neill, president of Northrop Grumman Information Technology, said businesses often don't factor in the "soft costs" of outsourcing, like software licensing, office space and other overhead. Cheaper wages don't automatically translate into cheaper services, he said in comments to reporters.

Mr. O'Neill says his unit faces the issue from both sides, as it sells to other companies and also provides services in-house. Experience in selling technology internally helps his team market its offerings better. "We walk them through apples for apples," he said. "We believe we have a good business model to do that."

The Deloitte study warns companies that they could lose their edge if they turn to contractors to perform core elements of their business.

"Companies should outsource only commodity functions to guard against a loss of knowledge and should plan for short-term outsourcing to prevent vendor dependency," the Deloitte study said.

Other recent research echoes these concerns. For example, Boeing Co. could find unintended consequences from its decision to produce wings for its new 787 passenger jet in Japan.

"The motives for Boeing's commercial outsourcing to Japan are to access the market, spread risk, gain access to capital, and lower U.S. spending on research and development," said David Pritchard and Alan MacPherson, researchers at the State University of New York at Buffalo, in a March paper.

"This has clear implications for U.S. trade and employment, in that Japanese subcontracting boosts foreign imports and reduces the need for domestic production workers and U.S. suppliers," they said, adding that Boeing could encounter future pressure from a newly competitive Japanese aviation industry.

Boeing says it has made a point of keeping critical skills at home, even as it looks to outside companies for components. Jeff Hawk, Boeing's director of government, certification and environment, said Boeing continues to design and integrate its airplanes in-house, while looking to outside companies to provide parts cost-effectively.

"We need to make an aircraft that provides amazing values to the airlines , especially in their ongoing wounded state," Mr. Hawk said in an interview. "The obvious necessity and the sales response have indicated that we apparently made absolutely the right choice."

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[Pablo]

Thanks Mola - I RAN the flaappin' numbers....sure sometimes a few CENTS are saved....but most of the time it's not even a savings and FOR WHAT? Exposing your core competencies and products and even your values (if any) to be used/defrauded/copied/hacked around the world......

I am NOT against being international - I am NOT against having some products made in a place where labor is a bit less expensive.......but get REAL - don't gloss the details......

Rant mode off.

 

[novadude]

Yeah, Pablo, you are correct. However, the shareholders and CEOs just want to see numbers that look good on the balance sheet TODAY, so they can get their big bonus/dividend.

How many businesses are being managed with the future in mind? Not very many from what I have seen at various places I have worked (Mechanical Engineer). All the emphasis is on cost savings and cutting people / spending. "R&D budget? Bahhh.... who needs it?!" seems to be the way of the world these days at many manufacturing firms.

 

[Shannow]

We're outsouricng a lot of engineering these days, a job that we used to be able to do in house.

It was described to me by one our (former) engineers...A consultant comes in, and you ask him the tim. He borrows your watch (i.e. information that you already had), tells you the time (i.e. a single data point), and then walks out with your watch.

 

[andrews]

Boeing outsources loads of critical tech jobs. The entire wings of the triple seven are made in Japan. Many other of their other aircraft have major assemblies built overseas (I know because I used to unload them). This includes all the skills and ultra-modern tech/machinery to build them. I've got to laugh when Boeing says it "keeps critical skills at home". The only "critical" skills Boeing see's as important is assembly. I used to work at the Renton, Washington plant and I can tell you that Boeing ONLY wants to assemble the aircraft....not manufacture them. In the past ten years Boeing has off-loaded huge amounts of manufacturing jobs (and the people with it).
Don't get me wrong, Boeing has the best commercial aircraft in the world, but a goose is still a goose.

 

[Mystic]

I have never been able to figure out how any businessman (or businesswoman for that matter) can figure that outsourcing employment out of this country is going to benefit this country in the long run. This makes me think back to the days long ago when I worked for a steel fabrication company. All the talk back in those days was the 'Zero Manpower Concept.' They figured they could replace workers with machines.

Anybody capable of understanding Economics 101 should be able to realize that if nobody in this country is working (or if nobody has a decent paying job) then nobody will be able to buy the products. Mabe you can outsource th jobs to India or wherever but can you then sell your products to those Indians making very small sums of money? If most people either are not working or have low paying jobs then most people will not be able to buy those Fod or GM high priced cars and trucks.

In Californa it is estimated that this one state loses something like $10 billion dollars a year due to illegal aliens. But then everybody calls the governor a racist for suggesting that maybe they should do something about the problem.

Those businessmen who put people out of work in this country either hiring illegal aliens at low pay or outsourcing jobs to other countries can figure out in the future how they ae going to sell their high priced products to the illegal aliens working at low pay and the foreign workers working for low pay by American standards. Good luck businessmen.

 

[brianl703]

Nobody seems to understand that you've got to spend money to make money.

 

[robbobster]

There you guys go again...making sense and thinking logically.

 

[obbop]

Read a good article a few years back about America's steel industry and how it allowed us to win WW 2 (among other things, of course).

Picture a future with minimal manufacturing within the USA. If a major war occurs, requiring us to build a large war machine, we will be unable to do so. The factories will be closed, rusted. The skilled machinists etc. will be few.

We will have to resort to nukes, inviting retaliation in kind.

Of course, the wealthy elite, politicians, and others with the funds will be able to flee to Switzerland or whatever while we, the commoners, will vaporize along with the millions of illegals.

I do not envision a bright future for this country. I just wish the vermin allowing events to occur as they are would fall along with us rather than being able to relocate and live in luxury.

 

[Mystic]

I don't have much hope for the future. I am kind of glad that I am just an old man nearing the end of the trail. I don't know how young people today will be able to make it. For every one of them that has a decent paying job there are a lot lucky to work at a handburger joint. Too many greedy wealthy people in this country who care only for themselves and who don't worry about the future of the country.

I had hail damage to my roof and the front of my house. The insurance company paid for the house being re-roofed. A crew of six guys came and did the roof. Only two of them could speak English. I feel sorry not only for the young men in this country who lost jobs to the illegals but I also feel sorry for the illegals who probably don't get paid much of anything and can't complain about it. It is almost like slave labor if you stop to think about it. Of course, a lot of young guys in this country do not want to roof houses. I can't blame them much-I did not particularily like roofing houses myself.

With the educational situation in this country today I don't know how many young people will be able to get jobs at all. Kind of hard to get a job if you are majoring in some goofball field.

I try not to even think about it anymore.

 

[andrews]

Mystic,
Cheer up, things change. This country had it's great days. Do what I do and focus on what you remember when things were different. Sometimes when I'm alone my mind drifts back to when things seemed simple and people more kind. It makes me feel better even if the present kind of stinks. I also find that hanging out with like-minded friends can make things more pleasant.
I'm not good at change....especially my culture and how it's evolved into what it is today. Sometimes when I venture out to a mall or something, I feel like I've entered an alien world (both meanings of "alien").
Oh well, adapt or die, right?

 

[Mystic]

Yeah, all empires rise and fall. It has been like that throughout history. The Roman Empire was one of the greatest empires in the history of the world and it fell.

I think however that America is too young of an empire to be ready to fall just yet. And I think America is too advanced (compared to many countries in the world) to be ready quite yet to crumple into dust.

 

[brianl703]

quote:

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Originally posted by Mystic:
And I think America is too advanced (compared to many countries in the world) to be ready quite yet to crumple into dust.

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When there are people--born in this country--who believe that the reason we are an advanced country is because we stole something from, or screwed, some other country--those people are evidence of the decline of something.

 

[wander2039]

I agree with Mystic. Also got to thinking. In beginning most products was made here and relatively cheap. People got greedy and wanted more money to make those products here, and the higher execs got greedy and moved plants else where to help there pocket books and help Americans buy products. Unfornately went to far. But think in 200 yrs will China and other countries (example only) be in the same scenario? Example the US being the cheap country for labor, or will it even out? I guess only time will tell and it won't be in my lifetime. Only thoughts and I know theres a few holes in my logic.

 

[Pablo]

We've been bamboozled. China was too easy.

Why is Mexico so difficult?

And what's so bad about other countries with low labor rates?

Human labor is not as huge of a cost factor in many products as folks believe, studies will show.

Thoughts to ponder and it is time to wake up.

 

[loudist]

We are becoming the British, making their same mistakes.
"Those who do not learn from history are doomed to repeat it"

 

[JohnnyO]

Again, much of U.S. business thinks only short-term, but that's the kind of gun they're under regardless. Eventually, effectively laying off your customers will come back to haunt. Seen it locally here, first the steel mills closed, then the car dealers and furniture stores weren't far behind.

As I recall, Henry Ford was one of the first to realize that his employees could also be his customers so he started paying them that big $5 a day or whatever it was.

quote:

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Originally posted by Mystic:
A crew of six guys came and did the roof. Only two of them could speak English....Of course, a lot of young guys in this country do not want to roof houses.

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One of my customers is a heavy construction contractor and was telling me the other day that they could hire 5 cement finishers right now at $20 an hour but they can't find anyone who knows how to do it...or wants to work that hard. If I was 20 years younger, I'd do it.

Where I live the local economy has basically sucked for the last 25 years. Everybody speaks English because the immigrants, both legal and ill, are not stupid and go where the jobs are. Point being that if outsourcing keeps up then the whole nation will turn into Pittsburgh.

 

[Ugly3]

Interesting Article On the Cause Of Job Loss

 

[Ugly3]

Outsourcing Creates Jobs

 

[Ugly3]

Adam Smith Institute