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Dr Simon Ashby: Outsourcing comes with its own problems, but don’t rule it out entirely

When I was a student studying industrial economics at the University of Nottingham two questions fascinated me: why do we need large firms to produce goods and services (instead of relying on smaller enterprises and markets)? And if we do need large firms, why do they not keep in house every aspect of their supply chain and associated production process?

I admit that, during my first and second years of study I needed to get out more, though deciding to make up lost time and party hard in my final year probably wasn’t the best idea. Nevertheless I still spent many happy hours reading dusty tomes on the optimal size and structure of firms.

Of course the reasons why large firms keep certain processes in-house, while outsourcing for others, are to save costs and increase operational efficiency. In the case of outsourcing, a service provider may be able to conduct a particular activity or process at a lower cost, due to economies of scale or cheap labour. In terms of efficiency an outsource service provider may have the specialist skills and experience needed to conduct certain activities/processes more quickly and reliably, increasing output and customer satisfaction.

But there are also significant negatives to using outsourcing. A firm effectively loses control over the delivery of the activities and processes that it outsources which can lead to inefficiencies elsewhere and possibly poor customer service. There is also the possibility of service disruption, contractual disputes and even bankruptcy.

Given the potential problems with outsourcing it is no surprise that some firms have taken the decision to bring activities and processes back in house. In areas like IT services and call centres, for example, firms such as General Motors (IT) and Lloyds Bank (call centres) have taken back control. But that does not mean that such a decision is right for all firms. Indeed, other large firms such as Apple have built their success on outsourcing large parts of their production processes, including the manufacture of hardware such as iPhones.

For firms struggling to decide whether to keep certain activities in-house or to outsource, automation may be a substitute to traditional in-house production, or outsourcing. Automation – whether via a virtual IT system or physical robots (in the case of manufacturing) – can enable firms to achieve significant cost and efficiency savings.

After all, people are expensive and can be unreliable, while automated systems do not require industrial relations experts, rest breaks, and rarely make mistakes (although on the rare occasions they do go wrong, the consequences can be disastrous).

Given the benefits of automation, firms might also feel that outsourcing, especially when overseas to exploit cheap labour, is no longer necessary – better to retain the control of the automation yourself than to pass over that control to an outsourcer.

Yet I cannot help but wonder whether firms that make such a decision are missing a couple of key issues. Firstly automation is expensive and can require significant capital outlay. Workers may also be expensive, but they can be made redundant. Specialist automation solutions will be hard to sell on if they prove ineffective, or if business volumes decline.

Secondly, a high level of expertise is needed to get the best from any automated solution. It is unlikely that a firm will have this in-house, at least initially. GM, for example had to recruit 8,000 specialist software engineers to take its IT systems back in house. Few firms will have the resources for that kind of investment.

So do not cancel your outsourcing contracts just yet. Computers and robots may be able to do far more than they did in the past, but the chances are that your outsourcing partners will be better able to exploit these advantages. In part this is because outsourcers can develop automated systems that serve multiple clients (thus achieving major cost savings) and because of their access to the highly skilled experts that are needed to make these systems work effectively.

Article source: http://business-reporter.co.uk/2016/09/05/dr-simon-ashby-outsourcing-comes-problems-dont-rule-entirely/

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