THE BLOG

Is Outsourcing Still About Finding the Cheapest Place to do Business?

16/01/2014 13:06 GMT | Updated 18/03/2014 09:59 GMT

I had dinner last night with a group of company executives who asked me about the best place in the world to locate the finance department of their company. This is a global organisation with thousands of people employed across the world and a finance function presently located in Western Europe.

The executives were considering a number of countries in Asia, partly for the reduced cost of operation, but also because they are struggling to keep growing the team in their present location - it's hard to be a fast-growing global player when essential functions like finance are located in places where there just aren't enough good people to do the work.

This struck me as interesting because outsourcing as a strategy has moved far beyond the image of vast call centres in Asia that you might have imagined when talking about this subject a few years ago. There were too many mistakes made in the offshoring gold rush of a decade ago - companies were shocked to find that reducing their customer service cost by answering calls in Asia really could lead to a flight of customers. Saving on the cost of serving customers could actually cost the company money by losing many of those customers.

It's a subject I have talked about to many executives recently. The outsourcing of many corporate functions has become an orthodox business strategy. IT, human resources, finance, marketing... it's normal to find expert partners now for any of these functions and it no longer appears to be a radical choice for the management team to consider outsourcing.

This maturity has grown because the suppliers are better at what they do and because the clients exploring an outsourced service arrangement have learned that it's no good slashing costs if that means the function no longer works. Imagine telling the CEO that you have reduced the HR and IT cost of your company by partnering up with a couple of suppliers halfway across the world only to find that your employees are not paid on time and the email system fails every week. How much is that service worth if it doesn't work?

Outsourcing is not procurement and never has been, but in years gone by this is how it was viewed - just a purchasing decision. Consider the difference between these two problems. You need a steady supply of 10,000 Post-it note blocks a month to your office. You consider some suppliers and base your choice on price and reliability of delivery - there are not many other variables in a decision like that.

Now consider the decision to let a supplier manage your payroll, so the salaries of your employees, their tax payments, their pension and benefits are all managed by a third party. Would you just go for the cheapest option? Of course not - in this scenario what is really happening is that you are bringing a partner inside your company - they become a critical part of your own supply chain so they must first be good - and then competitive - when compared to others offering a similar service.

IT outsourcing has matured beyond all recognition in the past five years. We are no longer operating in a world where technology is always developed locally and the very process of technology development has changed beyond recognition because everyone is now a user of IT systems, it's no longer just for the geeks.

Accepted consumer processes such as the concept of an App Store, Cloud Computing and Big Data have all been transferred into the enterprise because it has now become quite normal for consumer technologies to be far better than those on offer in the office environment. People have been using gmail for years, but how long has it taken enterprises to explore similar email solutions?

Can you imagine how long it would take to install a new application on your iPhone if you had to wait for the IT department to authorise and manage the change? This is the point.

Consumers don't care that the traffic app Waze was developed in Israel, that Angry Birds was developed in Finland, and the language learning app Duolingo, that was Apple's app of the year 2013, was developed in the USA by an entrepreneur/academic from Guatemala.

But enterprises are still conscious of where they work. Not only because they need to guarantee they can find the right skills, but also with one eye on locating a back office somewhere they might be able to develop as a future market for their own sales.

Attitudes in offshore outsourcing have yet to reach the location agnosticism of the consumer technology market, but we have moved a long way from the old attitudes that technology or back office work can be lifted and dropped into another part of the world just because it's cheaper to do business there.