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Outsourcing

  • To stay competitive, the recent trend has been to outsource whole processes or functions because:
    • Others, whether at home or abroad, can complete them better or cheaper
    • They’re only needed occasionally
    • They’re supportive, not core, and only the latter must be controlled closely
  • Over the last two decades, many UK organisations have resorted to outsourcing abroad viz:
    • Production and assembly work to China and its neighbours because of lower labour and land costs – although this may not last
    • Computer software design and call-centre operations to India because of lower costs coupled with an educated English-speaking labour force


  • Outsourcing has led to many well-known majors becoming but a shell of their former selves – they keep their core processes in-house and outsource the rest viz:
    • Dell, Nokia, Ikea, Glaxo and Apple specialise in the creative side of their businesses, the production of concepts and ideas, the scalable parts of products – they increasingly export jobs paid by the hour
    • They say there’s more money in designing a shoe than in actually making it – Nike, Dell and Boeing get paid just for thinking, organising and leveraging their knowhow and ideas while subcontracted factories in developing countries do the grunt work
    • Walmart has become an information network, bringing tens of thousands of its foreign and home suppliers together into one profitable collaboration
  • McKinsey estimate 10% of USA jobs, such as accountancy and computer programming, will be lost to outsourcing – at least it’s only 10% and not more – and computer programmers reluctant to reduce their wages will lose their jobs and become computer repairmen or barbers instead
  • James Dyson moved all his production processes to Malaysia to make drastic and essential reductions in unit costs – the overall result was:
    • The company not only survived but thrived afterwards
    • Product design, marketing, selling and HQ processes remained in the UK
    • More staff than before were employed in the UK, and most of them were more skilled and better paid than before the move
    • To succeed in future Dyson says his eponymous company needs “to design and innovate better than others” – they have to produce products that have better features and work better than others on top of being price competitive
  • Essex County Council, with the help of IBM, was recently considering outsourcing schools management, social care, highways and libraries
  • Many high labour and low knowledge content white collar jobs have also been outsourced to lower labour cost countries
  • For instance, call-centre and accountancy work, both made possible with the rapid advances in ICT and cheap telecommunications
  • Higher knowledge content work is also being outsourced
  • Microsoft, for example, employ many computer programmers living in India
  • Sainsbury’s outsourced their IT systems plus some 800 IT staff:
    • This was and is a pivotal part of their business – it’s vital that they monitor changes in customer preferences as well as schedule deliveries to keep shelves full
    • They outsourced not only the input of routine data but also its analysis
    • They later regretted doing so, especially the latter
    • Tesco’s analyses were much better, and this helped them become the UK’s number one retailer
  • In future, outsourcing will be a much greater threat to UK service jobs than to manufacturing – manufacturing, at only 14% of GDP has already done most of what it could do – service sectors have done little to date
  • The likes of India and China already have well educated work forces – they also produce many more graduates than any Western nation, including the USA
  • So, as long as they restrain their natural desire to earn as much as we do in the West, we will continue to lose service jobs to them
  • Cautionary notes:
    • Some foreign ‘suppliers’ have been found to make more mistakes, take longer to sort out queries or need more support than their UK-based equivalents -overall costs thus can end up greater than if no outsourcing had been used
    • For example, London based financial institutions are now experiencing such unforeseen ‘failure costs’ because of their foreign call-centres
    • The NHS should also beware outsourcing to India – as The Times noted “what could be nicer than phoning a Delhi call centre to book your intimate swab”
    • And remember when eight London hospitals outsourced to India thousands of letters to be typed from dictaphones – and it didn’t go too well:
      • ‘Eustachian tube malfunction’ became ‘Euston Station Tube malfunction’
      • ‘Below-knee amputation’ became ‘baloney amputation’
      • ‘Phlebitis, left leg’ became ‘flea bite his left leg’

 

 

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