Another Variation on Outsourcing, and Security/Reliability

I've mentioned the concept of insourcing - when outsourcers outsource back to the country of the client company. But the web of what outsourcing means has become more complicated, according to this story in the New York Times:

In May, Tata Consultancy Service, Infosys’s Indian rival, announced a new back office in Guadalajara, Mexico; Tata already has 5,000 workers in Brazil, Chile and Uruguay. Cognizant Technology Solutions, with most of its operations in India, has now opened back offices in Phoenix and Shanghai.

Wipro, another Indian technology services company, has outsourcing offices in Canada, China, Portugal, Romania and Saudi Arabia, among other locations.

And last month, Wipro said it was opening a software development center in Atlanta that would hire 500 programmers in three years.

It had to happen. You can't keep piling work up in one corner of the world because of inexpensive labor and expect those costs to remain low. Demand has kicked up, and supply will follow. So the outsourcers try to find cheaper labor, or workers with specific skills not available at home.

However, this should create some additional concerns for the corporations that are outsourcing the functions. Every layer of removal, particularly to a different time zone, complicates management of the process. Every additional stage opens another security front to prevent loss or attack. Additional complication means greater chance that the function will falter or fail.

Of course the outsource vendors will say that there is no difference and that they are in complete control. But that would be like trusting a food ingredient provider that outsourced its own manufacturing to China, in light of the problems that have appeared in that sector. It may be that things are fine, but the company will need to spend the time, money, and attention to be sure that is true - and all that has to get factored into the costs of "saving" the money.

US Outsources to India, Which Outsources to US

This is just too peculiar for words. According to a story in Fortune, an Indian outsourcing company has set up a call center in Ohio

The phenomenon has a name: "insourcing," the term experts are starting to use when foreign multinationals open offices on U.S. soil and hire Americans, at a higher price, to do the very jobs they once lured overseas. In this case the center in Reno is targeted toward companies willing to pay a premium - its workers there cost up to 40 percent more than their counterparts in India - to give their U.S. customers a more culturally fluent, less frustrating 1-800 experience. (No more hearing someone read from a script ten time zones away.)

So, let me get this straight. A US company's management trumpets to shareholders how it has a Bright Idea: outsource because, well, hey, everyone is doing it so it must save money, right? And then you can keep your core competencies and outsource the unimportant ones, like maintaining good relationships with your customers.

The US firm contracts with an Indian firm that immediately gets beaten up over the difficulty Americans have in understanding non-native speakers reading off scripts and maybe providing technical support for things they don't really know, like the US company's products. Now the outsourcing firm has a Bright Idea - pay more to Americans to do the same work (it's apparently called insourcing). They trumpet this to the Americans as a benefit (even though they'll obviously charge more for the service) and American management goes to shareholders with the latest Bight Idea. The final irony would be if it were the same group of Americans who got laid off to outsource the jobs in the first place. (Did Joseph Heller write modern management textbooks?)

So, we've got the base costs of American employees (because their time is controlled, so you're talking fully loaded with benefits as well) that then get the mark-up of the Indian firm's infrastructure costs and then profit percentage, then add the management costs in the US of making sure everything happens ... and you're telling me that this is actually cheaper than hiring people in the States? Given that the true savings overall of outsourcing a function, if done intelligently, is about 20%, and that the big expense here is the staffing, and I'm wondering if the US comapny isn't now paying more to outsource than it would to have staff. Oh, wait, I forgot a cost - the bonus to management for coming up with this hare-brained scheme in the first place.

Big Toy Recall Underscores Business Danger of Outsourcing

As the New York Times and other outlets have reported, Mattel is recalling something like a million toys because a Chinese contract manufacturer had used lead-based paints. That follows other companies' recalls of products made in China: food, toothpaste, tires, and another set of toys. What is particularly disturbing for business, as well as for consumers, is that Mattel had a supposedly sophisticated set of safety checks and was dealing with a vendor it had used for 15 years.

For years experts have said to outsource non-core processes and functions because that way companies could focus on where they could make the most difference to their businesses. However, how do you define a core competency? If you can't ensure that suppliers will do what you need, perhaps manufacturing is something that should be core. If you can't operate without certain types of information technology, maybe keeping at least the capability of doing that work should be core. I can understand wanting to save money, but the savings aren't as astronomical as many think when the risk is something like this.

Chinese Tires Show Outsourcing Bounce-Back

According to a New York Times story:

Federal officials have told a small New Jersey importer to recall 450,000 radial tires for pickup trucks, sport utility vehicles and vans after the company disclosed that its Chinese manufacturer had stopped including a safety feature that prevented the tires from separating.

This is a prime example of the dangers of outsourcing, with importing often being another face on the same situation. I'm not suggesting that it never makes sense, but too many companies are short-sighted in considering the business trade-offs. They look at the unit price and forget little things like quality control that can cause government agencies like the National Highway Traffic Safety Administration to force them into a full recall. Management of Foreign Tire Sales of Union, NJ apparently suspected a problem for two years before telling anyone. People have been killed in accidents allegedly caused by the tires. Anyone want to guess whether corporate management and board will become defendants?

Lots of Labor That's Cheap - So Far

No matter what industries you find interesting, if you are remotely connected to manufacturing - professionally, economically, or politically - you should read this article at ExtremeTech.com. Mark Hachman opens his piece as follows:

About ten years ago, I was given a tour of a Visioneer scanner factory in San Jose. Even though I knew that only global companies like Toyota could essentially afford to build a car through an almost entirely automated process, I was nevertheless amazed at how many people were required to actually assemble a scanner. And I'm not talking about management, but hands-on "put this widget there" assembly.

That's the intellectual setting. The physical location, though, is Gigabyte Technology, one of the big Taiwanese manufacturers of motherboards, a key component in PCs. Although there is enormous room for consolidation in the industry, the company claims about 10 percent market share, with $1.41 billion revenue and 1,249 patent applications on file. It also builds PC power supplies (a fiercely competitive market), complete computer systems, and cell phones. And it does a whole lot of work by hand, as you can see in the pictures that Hachman took.

What makes this so important for business is that manufacturing, on which all of business ultimately rests, for years has seen a tug of war between automation and cheap labor to keep expenses down. Either a company would use computers and robotic approaches to building and assembly, or they'd try to find ways to drop the cost of having people do tasks. In the U.S., automation has, I think, been the predominant force because it's difficult to get people to work ever more cheaply. But in Asia, in one of the most high-tech endeavors you could possible imagine, at one of the globally key companies making a foundation product from PCs, the work is often manual. In other words, the slight savings (because labor, at least in high tech, is typically 5 percent of the total cost of goods) that companies see relies on incredibly low costs of labor. Not slightly lower, but monumentally so.

What happens when people get tired of having their hours subsidize corporations, particularly when they're making the very products that are symbols of economic success? China is already seeing an increase in the visibility of organized labor - look at this BusinessWeek interview with China's 80-year-old All-China Federation of Trade Unions with 137 million members that wants to unionize ... Wal-Mart.

If groups in China can start pushing like this, it could happen elsewhere in Asia. Add the increasing pressure for Beijing to allow it's currency to trade at more realistic values (an increase up ward of 40 percent), and there could be problems for companies outsourcing their manufacturing.

With so much actual work done by hand - and I've heard from a number of sources that China in particular lags by far in factory technology - then that dependence might balloon the impact of increased labor costs. That's already happending with qualified IT help (as I learned in a Computerworld article about two minutes after posting this piece). Finding people is extraordinarily tough and salaries there are climbing 20 percent to 30 percent a year with high turnover. That means you can add additional amounts for recruiting and training that go right out the window with the departing employees.

Companies have jumped on the outsourcing bandwagon without considering the true costs of doing so: inescapable dependency on others for fundamental business processes, increased inventory costs when goods take 50 to 70 days to arrive by boat, affect of leaping fuel prices on shipping expenses, and now extensive sensitivity to labor prices.

I get a sense that there is a disaster in the making that has been building for years, and companies will only become aware of their vulnerabilities when they feel themselves beaten up.