The future of outsourcing
Dave Rodenbaugh, from How to buy a website, was one of my kickstarter supporters for my latest book Mindfire, a collection of my best essays. He had this request for a blog post: Where do I see outsourcing heading in the U.S. and the world for the next 5 years?
I avoid thinking about macro-trends. Even if on average all corporations are doing 10% more outsourcing, there can be many specific industries where the trend is exactly the opposite. The macro-trend matters less than what’s going on inside the particular industry, or company, you care about.
The short answer is outsourcing will continue to grow. And to shrink. I don’t see anything in the next 5 years that dramatically changes anything.
Outsourcing will grow because there are always businesses looking to reduce costs. By moving a job from inside to outside a company, the price paid for the work drops. Any large established company will eventually see slower growth, and will look for ways to make up the difference by saving money. There will always be companies looking to outsource and technology makes it easier every day.
Outsourcing will shrink because as soon as you outsource a job, you limit that worker’s ability to bring you new ideas. By making the job a commodity, the worker can no longer easily suggest ways to improve how the work is done. They will never, ever, offer a proposal that is better for the overall business but that eliminates the specific tasks they are being hired to do. For example, when you hire someone to mow your lawn, they are never going to suggest you get rid of your lawn. Whereas if you have a landscaper on staff, they will continually look for ways to improve your yard, including designs that have no grass at all. For companies or projects aimed at the equivalent of rethinking the yard, it’s natural to do as much work in-house as possible.
The rub is this: the more you outsource, the more compartmentalized and specialized your organization becomes. This can make you less flexible and less likely to develop new ways of working. Optimization demands inflexibility. A heavily outsourced company will have a hard time competing against a smaller, younger company that has found a new way to work. That younger company can afford to be inefficient since they are small, and inefficiencies can lead to discoveries. If they successfully take market share from the market leader, the market leader may never recover, as they’ve become less than the sum of their parts.
In larger organizations, the move to outsource or not swings on a pendulum. At times when competition wanes, or the economy stalls, there is a push to save costs and simplify, and more work moves outside. At other times when competition increases, or the market expands, more work moves inside to accelerate growth and take advantage of new opportunities. But as a rule, you never want to outsource work that is strategic. Your core business and core roles should always be done inside your company. Only a fool would outsource their heart or lungs by choice.