A Case Against Outsourcing

A Case Against Outsourcing

As a matter of fact, I knew the guy that invented the term “Outsourcing”.  He was a mentor, a friend even though we disagreed on this topic all the time.  God rest his soul.

The reason I disagreed with him was because of an experience I had with a company that I did quite a bit of work for in the 90s.  The company was owned by two people, one who ran the manufacturing, and the other that sold the products to retailers around the country.

I worked closely with one owner on the manufacturing and over the course of 10-12 months we had honed his manufacturing into a fine-tuned, just-in-time, quality-oriented, and highly automated operation.  And for the first time in the company’s history, it was really making big money!

Over the next few years both owners were able to buy nice homes and vehicles, and everything was going well, that is until they decided that they could make the products in Thailand a little cheaper and increase their profit margins. They had several different products they were making and always in the process of developing new ones.  It was no small task to find a manufacturer halfway around the world, and even more work and trips back and forth to bring the manufacturer up to speed on the making of these products.  Any extra profit they made the first year or two was more than offset by the added expense of travel.

Quality was always an issue, and sometimes whole container loads would have to be shipped back or scrapped.  We all know the pain of scrap and loss, but it really hurts to scrap completed and already packaged product.  Still, the owners thought that these were just growing pains and that they would deal with it now and be profitable later.

However, these quality problems, along with delivery delays, caused issues with the retailers that wanted product on time.  Soon the larger retailers decided to go directly to the overseas manufacturers and have the products made for them.  The overseas manufacturers were more than happy to rip off the designs of the company and cut them out, by selling directly to their customers.

So, our little company got smaller and found itself only able to sell to small boutique retailers.  Now the company needed to be more creative, have new products, and new designs, but the “shop” was now empty, no more tools, no more factory workers.  So, they engaged professional designers to come up with new products.  The original cost of design was reasonable, but they all wanted a licensing fee for each unit sold, which further ate into the profit margins.

With the shrinking of the company’s sales, and the additional costs, cash-flow became an issue.  And because they had to order and wait for product by the container load where it required a lot of cash up front and 6-8 months before realizing any return they slowly went out of business over a painful 6 years.

Later in my career I saw a similar issue with a startup in woman’s fashion.  Where they had to go to China to find a manufacturer for their products and order by the container.  After waiting nearly a year for their product to finally hit US shores before they could get started, they found that because they had many different styles and each style had different colors and sizes that even with a whole container load it didn’t take long before they were out of a few of the hot selling SKUs, while still buried in hundreds of others.

In subsequent shipments they too had quality issues and found that unless they had more control over the manufacturing process that they would have to close their doors as well.

Below is a list of some of the pitfalls of outsourcing, but it all comes down to loss of control.  Unless you have control of as much of the process from raw materials to closing the sale as humanly possible you will be at the mercy of others for your destiny.  Think twice about every outsourcing decision.  Is this something I can do in house, and if I did it in house can a gain other efficiencies, capabilities, flexibilities, and advantages that my competition doesn’t have?  Often the answer is yes.

Here are some common risks and challenges of outsourcing:

1. Loss of Control: When tasks are outsourced, companies often lose a degree of control over how those tasks are managed and completed. This can affect quality, timelines, and alignment with internal processes.
2. Communication Issues: Working with teams in different locations, often across time zones and with language barriers, can lead to misunderstandings, misaligned expectations, and delays.
3. Quality Risks: Outsourced work may not always meet the company’s quality standards, especially if the outsourcing provider lacks a deep understanding of the company’s specific requirements.
4. Hidden Costs: While outsourcing is often promoted as a cost-saving measure, hidden costs like management overhead, legal fees, and unexpected revisions can make it more expensive than anticipated.
5. Security and Confidentiality: Outsourcing can expose sensitive business information, intellectual property, or customer data, raising concerns about data security and confidentiality.
6. Cultural Differences: Differences in work culture, ethics, and business practices between the outsourcing provider and the client can result in misunderstandings and misaligned goals.
7. Dependence on Third-Party: Relying heavily on an external provider may lead to dependency, which can be problematic if the provider underperforms, experiences financial instability, or raises prices unexpectedly.
8. Reduced In-House Expertise: Outsourcing can lead to a loss of internal skills and expertise, making it harder for a company to manage or assess outsourced functions over time.
9. Impact on Employee Morale: If employees feel that their jobs are threatened by outsourcing, it may lead to reduced morale, productivity, and retention.
10. Legal and Compliance Issues: Companies may face legal challenges related to labor laws, tax compliance, and intellectual property protection, especially when outsourcing to foreign countries with different regulations.

My recommendation is; rather than outsourcing, find ways to automate, be more efficient, control more of the process, and vertically integrate your company.  I think you may find this less work and less investment than trying to get something exactly the way you want it from a half a world away.  And my experience is that it can easily be the death-nail for small and medium size companies.

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