investiledysfunction

I’d previously co-authored an article (along with Sandeep Arora) that appeared in Business Finance Magazine titled “The House of Rolling Heads” in which we decried mindless cost cutting in favor of a more thoughtful approach which segmented expenses into strategic and non-strategic.

It seems Tom Peters, author of In Search of Excellence, agrees with us.  In the December 2008 issue of Inc Magazine, he comments,

“Instant, mindless cutting of R&D or training or salesforce travel in the face of a downturn is often counterproductive - or, rather, downright stupid.  Tough times are in fact golden opportunities to get the dro, and the longterm drop at that, on those who respond to bad news by panicky across-the-board slash and burn tactics and moves that de-motivate and alienate the workforce at exactly the wrong moment.”

The rhetoric around outsourcing will, at some point, pick up in this election year so despite the heat which the argument generates, it’s good to understand why outsourcing happens.

1. Sometimes, it can be done cheaper somewhere else
2. Sometimes, it can be done better somewhere else
3. And sometimes, it’s both #1 and #2

The main point is that people think #1 is the only driver of outsourcing, but it is not.  You can often attract a level of talent to a job overseas that you cannot get here.  Take a function like accounts payable.  Oftentimes, you can find smart MBAs to do this overseas at a fraction of the cost you get here.  So you’re getting better prices and better talent.

And even if the price differential goes away or becomes less compelling (as is happening over time as many outsourcing markets suffer from serious wage inflation), the skills differential is still vast enough that the quality of the work output created justifies it being outsourced.

If we were in the carrying stuff business as this gentleman in India is, we’d certainly find a way to hire this guy.  He puts these 200 kilo (400+ lbs) motorcycles on top of this bus so they can be transported to another city.  For this effort, he charges 20 Indian Rupees.  That’s $.50.  There aren’t many people who can or will lift a 200 kg motorcycle at all (skill differential) much less for 50 cents (cost differential).

Outsourcing is our friend…