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OM in the News: Rethinking Outsourcing

August 7, 2011

“Outsourcing has transformed global business”, writes The Economist (July 30-Aug 5,2011), with $100 billion in new contracts signed every year. In Britain alone, 10% of all workers are in “outsourced jobs”, to the tune of $200 billion/year. Even war is being outsourced: the US now has more “contract employees”  in Afghanistan than soldiers. This is not a new phenomenon, of course. When I was toiling away 40 years ago as a college student scrubbing floors as a janitor at Sears, I never really worked for the retailer. I was on the staff of the company that Sears hired to do all its cleaning. As we note in Supp.11, Outsourcing as a Supply Chain Strategy, tasks  like cleaning, and many other back-office jobs, are peripheral to a company’s core business and can be done better/cheaper by specialists.

But The Economist goes on to point out that outsourcing may have reached maturity in economies such as the US and Britain. It suspects that much of what can be outsourced already has been. A recent quarterly index of outsourcing shows an 18% drop globally.

Why? Perhaps : (1) an uptick in legal disputes over outsourcing marking a well of discontent over badly written/handled contracts; (2) vendors who overpromise to get contracts, then fail to deliver; (3) companies undermining their overall customer service by contracting to foreign call centers, then wondering why their customers hate them; (4) a move towards shorter-term , smaller, and less-rigid deals (indeed “mega” outsourcing contracts, over $100 million, dropped by 62% this year).

The nightmare story of Boeing’s decision to outsource the bulk of the 787 some 8 years ago may also be a reason why companies are rethinking the strategy. If the Dreamliner rolls off the assembly line later this year, it will have been billions over budget and 3 years behind schedule. This is  largely because of sub-contractors who failed to deliver on time or who made parts that did not fit together.

Discussion questions:

1.Will outsourcing continue to be a good strategy for most firms? Why?

2. Where, globally, does outsourcing continue to grow?

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