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Is Insourcing the New In Thing?

Photography: Paul Keller

For businesses, it seems to be all the rage. Identify your core competencies and outsource everything else to a company far away, ideally in India. Customer service units are famous for it but outsourcing has also come to include production units as well as backroom accountancy departments.

Even individuals can do it. Tim Ferriss has built himself a career teaching people how they can outsource their lives until there’s little left to do but eat and sleep — and there are plenty of people in Mumbai who would be willing to do to both of those for you too.

The result is that anyone watching CNN could be forgiven for thinking that the entire US economy is now located somewhere south of the Himalayas.

Of course, it’s not quite as simple as that. Even as call centers are filling up with South Asians learning to talk like Canadians, jobs are flowing back to source countries. In November 2007, InformationWeek reported that 20 percent of its top 500 companies had taken back offshored tasks in the previous year.

America – Europe’s India
Much of that trend is likely to be a result of dissatisfaction with the quality of the work but just as jobs flow out of the United States and into the sub-continent then back again, so new work is pouting into America from foreign companies. A report by Prof. Matthew Slaughter for the Organization for International Investment notes that the number of jobs at US subsidiaries of foreign — usually European — companies had risen from 2.6 million in 1987 to 5.4 million in 2002. And many of those jobs came with pleasant European standards such as four-week vacations.

That sort of insourcing though is really another form of outsourcing. It would certainly look that way to a European. The same could be said of the type of insourcing described by Thomas Friedman in “The World Is Flat.” Explaining how UPS has moved from basic parcel delivery services to a general logistics company that makes international business easier to manage, Friedman reveals that UPS doesn’t just bring broken computers back to the company for repair. It repairs them itself under Toshiba’s supervision and ships them back to the computer firm’s customers.

Again, for Toshiba, that would be a simple form of outsourcing. For UPS though it’s precisely the opposite. Fixing silicon isn’t the company’s forte but it does it because it can and because it’s in everyone’s interests: Toshiba’s customers get their machines back faster; Toshiba can focus on production and design rather than repair; and UPS gets to supply an extra service.

Insource or Outsource?
For entrepreneurs and small business owners though, this mixture of inward and outward job flows, of insourcing within the business and outsourcing to other firms, is fairly confusing. When should you outsource and when should you keep the work close to home?

The criteria usually quoted for a job that can be outsourced include significant wage differences between the source company and the outsourced firm; work that is easy to set up; and perhaps more importantly, work that is repeatable so that once the system is in operation it doesn’t need constant supervision and re-training.

There are other factors to consider as well though.

Logistics, for example, could be one reason either to pass the work to someone else or keep it to yourself. The workers at UPS’s Louisville hub tasked with resoldering chips are unlikely to be cheaper than those anywhere else. But by allowing UPS to do work that was essentially mundane, Toshiba was able to cut out some of its logistics, speeding up repairs.

That could only work though because the outsourcing cuts effort rather than adding to it. It also works because customers don’t really care who fixes their computer as long as it comes back like new. (Similarly customers do care if the customer service person has an accent so impenetrable they can’t understand a word they say.) While Toshiba will get the blame if UPS doesn’t do the job properly, it’s not the sort of work that the company has to do.

But customers might feel differently about buying a Toshiba computer that was actually designed and manufactured by Lenovo. Or watching a Tom Cruise film in which the star had outsourced the acting — but not the stunts — to a stand-in (although then again, maybe not.) There are some tasks — in particular, those tied closely to the company’s core field — that the firm has to do itself. Tim Ferriss might be an expert on outsourcing, but even he does he insources his own interviews… to himself.

One general rule then will be to understand not just what you consider to be your core competencies but what your customers consider them to be too.

And finally, outsourcing has to be cost-effective. Wage differentials might be attractive but if the productivity levels are significantly lower or the time and expenses involved in managing the outsourced work much higher then you would still be better off following InformationWeek’s top 500 companies, and follow the new trend of bringing the work back home.

[tags] insourcing [/tags]

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