When companies outsource critical product and customer-centric processes, they’re draining the baby with the bath water! And it’s showing.

Thrilled to move into her newly decorated house, a friend’s happiness turned to horror, when a doorknob broke off followed by sparks from an electrical socket. Furious, she called up the decorator. And then the chase-me-charlie began.

The decorator had only done the design. Execution was outsourced to a contractor. The contractor had further outsourced it to painters, plumbers, electricians and so on. They had, in turn, brought in their brothers, cousins, uncles… Everyone got paid, no one took responsibility.

Surprised? Well, it’s market practice. From car manufacturers, to Insurance companies, telecom operators to the guys who make the aircrafts we so frequently travel on. Everyone’s been on the outsourcing bandwagon for years.

To be fair, over the past twenty-plus years, outsourcing has not only provided cost and service efficiencies, it has been a huge boost to the Indian economy. Not to mention better employment and general wealth creation.

Initially, the Math drove the equation: we can do it cheaper than you. In the expensive West, eyes popped out at the sheer savings. Sure there was a drop in quality, but that was accounted for – you get what you pay for!

Indian companies too saw the opportunity. The infrastructure already existed! Soon call-centers began to flourish. How noble! Providing customers a toll-free number if they need service. The toll collection – in terms of customer dissatisfaction – actually begins when the ‘third-party’ service center is unable to go beyond their script.

The numbers, though still holding up, are getting shaky. The ISG Outsourcing Index for Q4 2103 shows that while the number of contracts awarded grew marginally by 2%, the annual contract value (ACV) dropped 18% (ACV > US$5Ml). India is a part of this number.

The value side too, isn’t looking bright. An article by Oscar Halfhide and Liselore Sauer in KPMG Advisory’s Strategic Visions on the Sourcing Market 2014 states: “Two out of three outsourcing deals deliver less customer value than expected. About a quarter of the outsourcing contracts end prematurely.”

Maybe it’s time to review the graph. The drooping quality line seems dangerously close to the rising cost line. It’s only a matter of time before they touch – and cross, threatening to replicate itself in the domestic market as well. Outsourcing, per se, comes packaged with issues of quality of delivery, trust, collaboration between delivery agencies. Whether it is a service, product or an entire assembly.

Some have gone overboard: Boeing’s Dreamliner – the Boeing 787 – is a classic study on how outsourcing can go so totally wrong. Seriously over-budget, inordinately delayed and still not out of the woods, the Dreamliner is now every airline’s nightmare.

Boeing’s elaborate model outsourced not only manufacturing, but engineering to a multi-layered vendor portfolio! Consequently, parts did not fit, shoulders were shrugged. Boeing ended up spending US$ 1 Bn to buy up one of its suppliers. Still, batteries overheated, windshields cracked, transponders failed and wings still in the production line had cracks.

Learnings from Boeing’s and similar sins of the past – and size doesn’t matter, the principles do – can be quickly listed:

1. Math is a tool, not a deciding factor: Numbers have an inherent quality – they can be presented in a myriad of ways. Hence numeric data should be cut in several ways and, even then, used as an indicator rather than a decider. Total Cost of Ownership Estimator™ is a holistic tool that gives potential outsourcers a good direction – and it’s free (http://www.reshorenow.org/TCO_Estimator.cfm).
2. Experience saves: Look around and evaluate mistakes of the past – competitors, comparators, even your own! Market feedback, satisfaction surveys, can save loads of money and heartburn. It’s okay to make new mistakes, but downright foolish to repeat old ones!
3. Never, ever, ever outsource business critical processes and services: Business critical processes are linked directly to core competencies. Outsourcing these can seriously limit innovation and the agility to change.
4. Never, ever, ever outsource customer facing/centric initiatives: This is where the domestic market is mortgaging its future. Customer interaction must be handled in-house if quality service is to be assured. If the primary interaction of the customer is with a third-party, they could choose to vote with their feet – then graphically describe their experiences online for the world to see, comment, scoff and laugh!
5. NiSource: Reversing past outsourcing initiatives is not a sign of weakness. It indicates repentance. And customers – not shareholder – should drive it.

Whether it is sophisticated flying machines or interior decorators, insurance policies or refrigerators, companies will continue to outsource processes. Because the buying population just continues to grow. They’ll just flog the sales guys harder!

Repent! The cost-value lines threaten to cross each other on the graph. The time for penance has come!