Why This Blog Post Was Not Outsourced to China

Posted on Jan 11, 2013 | 11 Comments

After years of outsourcing much of their work, more and more American companies now appear to be insourcing it.

The latest exhibit is the new Atlanta Innovation Center of General Motors, which, according to The Wall Street Journal, is hiring 1,000 employees, including “software developers, project managers, database experts, business analysts and other computer professionals.” The company intends to bring 90% of its IT work back in-house. GM Chief Executive Dan Akerson made clear in an interview that this marks a change in mindset: “I think one of the worst things this company did in its post World War II era was outsourcing and letting others manage all of our IT.”

GM’s story is just one more example of a trend toward bringing more operations back home—either in-house or in-country or both. A recent article by Charles Fishman in The Atlantic told of a “boom” in insourcing, noting the reopening by General Electric of appliance assembly lines in Kentucky. “Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn’t manufacture much besides a fast-food hamburger in the United States,” Fishman declared. “Now the CEO of America’s leading industrial manufacturing company says it’s not Appliance Park that’s obsolete—it’s offshoring that is.”

Maybe. In any case, something seems to be changing. And it’s taking people by surprise. Perhaps it even would have taken Peter Drucker by surprise, albeit slightly.

That’s because when Drucker was starting as a management consultant, the bias was toward bigness. If you could perform a piece of work under your own roof, you did so.

Photo credit: Gerhard Suster

Photo credit: Gerhard Suster

Drucker, for his part, always encouraged businesses to consider the opposite. “Outsourcing is necessary not just because of the economics involved,” he explained in Post-Capitalist Society. “It is necessary because it provides opportunities, income and dignity for service workers.” After all, many service workers, whether programmers or floor sweepers, will be relegated to the low-ranking fringes of a big company. But if you’re a cleaner in a cleaning company, you have a career ladder.

That said, Drucker wrote time and again that there was “no one right” approach to most things—in business or in life. And, as we’ve noted elsewhere, he would be the first to take issue with any assertion of one right approach to outsourcing.

Instead, said Drucker, the key is to ask yourself where any given function belongs and come up with the right mix. Drucker cited, for instance, an Irish company that found profitability in reversing the common model of outsourcing parts and insourcing assembly. “The company is insourcing the basic compounds to achieve quality control, but it is outsourcing the final” production Drucker wrote. “It is looking at the entire value chain and deciding where to place various activities.”

What do you think: Are we seeing a real pendulum swing away from outsourcing—or is this just a blip? Why?


11 Comments

  1. Mike Grayson
    January 12, 2013

    There have been many significant changes in outsourcing over the past 5 years, not to mention the cultural barriers that have been difficult, if not impossible to overcome.

    First, the economics have changed. If you hire a freelance programmer or company from India, Europe or China it will cost almost four times as much as it did 5 years ago. So, the economic incentive is rapidly on the decline. The inflation and growth in those countries have set them on an economic course that will not likely be reversed and I doubt if costs are going to decline any time soon. So, from an economic perspective it is not as great a deal as it once was.

    Second is the cultural issue, which is no small issue. My company had a team of programmers in India for quite some time. While Drucker may have referred to programmers as “service” workers and put them in the breath with floor sweepers, I can assure you that they are not. The programming tools used today require highly skilled knowledge workers who can be creative and make decisions.

    Our team in India was full of bright, hard working people, but it was immensely frustrating in dealing with them, and after quite a long while we understood why. It was a cultural problem. In India the class system is ingrained and the workers will only do exactly what they are told. If you have been frustrated over call to support person in India, here is the reason why – they will only follow the decision tree put in front them, if it is not on the decision tree, they will not deviate. So, if your problem falls outside of that decision tree, you are out of luck, they are most likely to try to go back to the tree, rather than making a decision to escalate your problem or know when to pull in outside expertise. To them it is dangerous to do so and they feel like they could lose their job – and that is no exaggeration.

    In the case of our team, we would give them the requirements and they would work through them, and if there was something that was obviously lacking or incorrect with the requirements – they would never take the initiative to fix it – never. We would ask them to feel free to take the initiative and would encourage them to do so. But they never did. Finally we shut down the operation after a long and painful experience.

    We finally realized that the reason they never took initiative was because their culture did not like people taking initiative and they were often punished by the “boss” for doing so. It was part of their class structure – a lack of freedom to fail. If you want to be safe, only do exactly what the boss says and don’t deviate from it, except at your own peril. It applied to our programmers and to the many call support people who confront many frustrated Americans.

    I do believe there will be a cultural shift, and that not all people in India have the same problem, but I’m not willing to experiment with it again any time soon, especially since the economics are going in the wrong direction to do so.

    As a caveat to what I said about the cultural issues – there are companies that have been successful in India, but in most cases they have sent their own people to India so that they could have a direct influence on those working for them. And… there are some Indian companies that have recognized the problem and have actively tried to resolve it.

    The final issue is one of common sense. Why would you trust a mission critical aspect of your business to a third party? Let alone one in a different country? And IT is definitely a mission critical component of the business. As Drucker said, “We are in the information society”.

    Reply
  2. Richard Straub
    January 12, 2013

    Hi Mike, I like your comment. The cultural aspect have often been underestimated.

    I would like to add a couple more aspects to this discussion. First – I would tend to differentiate between outsourcing and offshoring. Outsourcing means to contract part of your operations to an outside supplier – e.g. your IT is performed by IBM and IBM takes over your workforce. Offshoring means transferring work that you perform in a given country to another country – but leaving it within your company. Companies like IBM, Capgemini, SAP and others have massively offshored SW and Services Support and development work to India. Sam Palmisano, then CEO of IBM has provided the logic in his famous article in Foreign Affairs (June 2006) “The Globally Integrated Enterprise”. He makes the point that due to information technology companies can choose where to establish functions. I way they can take a part an integrated country organization and move HR to Hungary, procurement to China and SW maintenance to India and it will all be stitched together by ICT. You jut chose the location where you find the skills you need and where prices are competitive. It was along the lines of Tom Friedman’s The World is Flat, first released in 2009.

    What followed was a gold rush to India of sorts – after a couple of years a number of companies had more employees in India (or other offshoring destination) than in their home country. However, wage inflation, infrastructure issues, cultural barriers and coordination cost changed the picture in a number of situations. For manufacturing industries Black Swans like the shale gaz bonanza in the US have changed the picture over night. Hence there are a couple of interesting management questions to be asked – which would go beyond of the scope of my comment on a Saturday evening…..

    Reply
  3. Alba Patricia Valencia
    January 12, 2013

    Given the economic conditions caused by a globalizing economy, in the new centers of power and decision of global consortia (Daimler-Chrysler, Wal-Mart, Sony, among others) takes place a paradoxical and ironic return to economic planning as a pendulum motion to lift the nightmare of the “American Dream.”

    Because these networks are more or less hierarchically organized, with power in the center and with a few connections through ingenious techniques of information and command structures reach the last and narrow places where the production cost is lower.

    Thus, is removed or less integrates is eliminated or at least integrates productively to the contradiction of produce, coordinate and control decentralized and locally, and central and globally.

    Dadas las condiciones económicas provocadas por una economía en vías de globalización, en los nuevos centros de poder y decisión de los consorcios mundiales (Daimler-Chrysler, Wal-Mart, Sony, entre otros) tiene lugar un paradójico e irónico retorno a la planificación económica como un movimiento pendular para levantar de la pesadilla al “sueño americano”.

    Porque estas redes se organizan más o menos jerárquicamente, con el poder en el centro y con unas conexiones que mediante ingeniosas técnicas de información y estructuras de mando llegan hasta los últimos y estrechos lugares donde el costo de producción es el más bajo.

    Así, se elimina o al menos se integra de una manera productiva la contradicción que supone producir, coordinar y controlar descentralizada y localmente, y central y globalmente.

    Reply
    • Alba Patricia Valencia
      January 12, 2013

      I am sorry! Paragraph number 3: Thus, it is eliminated or at least productively integrates the contradiction of produce, coordinate and control decentralized and locally, and central and globally.

      Reply
  4. Bhushan Shah
    January 13, 2013

    Adani Port is the largest private Port in Indian with No.2 position in container cargo. Adani Port’s market share in all India cargo.Based on the SOTP valuation method the value APSEZ comes at Rs. 165 per share, implying an upside of 25.28 % from current levels. The value of Mundra Port (core operating asset of APSEZ) comes at Rs. 119 per share, constituting 72 % of total value of APSEZ At the current market price of Rs. 131.70, the stock is trading at a PE of 29.26 x FY13E and 18.41 x FY14E respectively. The company can post Earnings per share (EPS) of Rs. 4.50 in FY13E and Rs. 7.30 in FY14E. The SOTP (sum‐of‐the‐parts) valuation of Adani Port & Sez comes at Rs. 165. One can buy APSEZ with medium term target of Rs.145 & a Long term target price of Rs. 165.00
    http://bhavikkshah.blogspot.in/2013/01/adani-port-sez-grab-great-business-at.html

    Reply
  5. Santosh Gopinathan
    January 13, 2013

    While it is heartening to observe the in-sourcing trends, we need t go deeper than that. I would be curious to see an analysis to understand the reasons that led to the concept of outsourcing in the first place. There perhaps are some lessons to be learned here.

    In Organizational Behavior analysis, we look at every organization from three lenses, strategic, political & cultural lenses. In the same sense the reasons that led to outsourcing too can be viewed from the same three lenses.

    The easiest of the three to understand of course would be the strategic intent. About the financial benefits and easy access to talent etc. Did the political system have any contribution to make? Did the changing societal and cultural system contribute to outsourcing? I would be very curious to hear findings and opinion about this.

    Reply
  6. Carnival of Quality Management Articles and Blogs – January 2013 « The world is too small? or Is it?
    January 19, 2013

    [...] value chain and deciding where to place various activities.” In a satirically titled article Why This Blog Post Was Not Outsourced to China.  No doubt, the circle of outsourcing seems to have turned a full cycle. To those professionals [...]

    Reply
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    February 25, 2013

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  8. researching virtual receptionists
    July 24, 2013

    Do you have any really great websites or sources I could contact about outsourcing to China?

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    October 28, 2013

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