September 12, 2009

Jumping on the Outsourcing Bandwagon

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Xerox’s recent agreement to spend $6.0B to buy Affiliated Computer Services, an outsourcing services business, reminded me of waves of outsourcing that have taken place in the past. I like to wisecrack that it all started when Columbus found America while getting lost looking for sources.

In recent times, the Japanese were early adopters of this strategy. I think one could argue that Japanese multi-nationals’ drive to seek lower labor cost locations was instrumental in fueling the exceptional growth of the Four Tigers (Hong Kong, Singapore, South Korea and Taiwan) as well as other Asian venues. This approach was not lost on other nations’ big businesses. As I remember, GE was the largest private employer in Singapore at one time after that country’s independence from the U.K. This bandwagon accelerated briskly and made many countries and businesses profitable.

Most of this early global outsourcing was manufacturing oriented. And, much of the manufacturing was electronics. At times there were substantial labor cost advantages from going offshore as well as substantial materials advantages due to flatter distribution channels and local component production.

However, as with most things in this business, change happens. The advent of highly mechanized SMT, lower volumes, shorter life cycles and the need to be more responsive to customers has moved some of that production away from Asia and back to home countries. Still, there are huge amounts of product, often consumer durables, originating in these venues that are shipped worldwide. So the bandwagon continues, perhaps a bit slower.

The success of these efforts led to other kinds of outsourcing. You may remember a time shortly after the PC revolution when it was common to have in-house help desks. A friend of mine who was in charge of one used to argue they were counter productive. Institutionalizing help prevented people from learning how to diagnose problems themselves. But that didn’t stop many companies from investing heavily in the process. After some years, they discovered the demand for the service declined to the point of making in-house help desks unaffordable.

What was the solution? You guessed it: outsourcing. At first, the service was handled by non-employees co-located at the business. Then it shifted to non-employees at a distant location. Finally, it shifted to large organizations set up overseas, often in Asia, that handled the function via phone, e-mail, and more recently, online chats.

Now some of the major computer houses have thousands of people doing this job in call centers offshore. One can argue pros and cons, but these decisions were based on economics and the availability of sufficient numbers of capable people to handle the job. I doubt we’ll see many of these coming back to home countries.

So did Xerox make a good decision, or did they miss the bandwagon? The International Association of Outsourcing Professionals (IAOP) predicted that 2009 would be a year of outsourcing closer to home and that global uncertainties would create outsourcing volatility. We’ll see if that’s true for Xerox.

My own view is that as long as the underlying service offers customers favorable economies, the business itself is sound. Whether it’s worth $6.0B will depend on how it is managed going forward. Only time will tell.

--Jeff Cosman