Friday, April 14, 2006

Framing Outsourcing

According to a recent study (reported in this article), outsourcing reduces costs by an average of 15%, with a range from as low as 10% to as high as 48%.

By any reasonable standard, those numbers are huge. Tell any business owner that he could cut costs by 15%, and he’ll likely bite your hand off jumping at the chance. Even if these are just savings on the outsourced division, rather than overall costs, a 15% saving is nothing to sneeze at. But for some reason, the article frames the numbers as a disappointment. “Outsourcing savings are ‘unrealistic,’” says the title, “Cost savings actually average just 15%, study finds...” The first paragraph says, “Outsourcing cost savings have been massively over-hyped with the actual cost reduction averaging just 15 per cent, according to new figures from sourcing advisors TPI.”

Maybe the savings from outsourcing have been overstated in the past -- but the article gives no indication as to what the previous, over-hyped figures were.

I actually wouldn’t be surprised to hear the newly released figures are too large, given the source (a firm that clearly benefits from other firms choosing to outsource). But the defense of outsourcing hardly depends on the savings being massive. Effective businesses in a competitive environment must constantly seek out ways to eke out a little more. Outsourcing would make sense even if the savings were only 5%, or even 1%, so long as there aren't significant reductions in service quality. Note also that the figures reported in the article are savings after accounting for “professional fees, severance pay and governance costs,” so at least some effort has been made to assure that the savings aren’t illusory.

1 comment:

bbtongue said...

Be skeptical of statistics like these. By way of illustration, Americans love cheap toys and tennis shoes manufactured in China. To fuel the industries that produce these things, however, China consumes a lot of oil, and Chinese demand for it is growing fast. In a few years Chinese oil consumption will probably exceed ours. Higher demand results in higher prices, other things being equal. (Please spare me the argument that in a free market, growing demand spurs development of more supply. Although that is true, we do not have a free market, and it should be pretty obvious to everybody that supply development is not keeping up with demand -- and probably wouldn't be, even in a free market, given that oil is a finite resource.) In the future, your increased cost of gasoline and electricity may exceed your savings on Chinese-manufactured toys and shoes (and other such things). The potential net result: America loses jobs and in the bargain we make less and pay more for what we get.