Weekend Economists Volvemos a Puerto Rico May 22-25, 2015

[MattSh]

43. More on the Myth of Outsourcing's Efficiency | naked capitalism

A pet issue is that the claim that outsourcing and offshoring lower costs is greatly exaggerated. Offshoring and outsourcing (we’ll just say “outsourcing” for the purposes of this post) do lower direct factor and lower-level worker costs. But they do so at the increase of greater coordination costs of much more highly-paid managers. And they also increase shipping and financings costs, and downside risk. Having people work at a distance, whether managerially or by virtue of being in an outside organization where the relationship is governed by contract, increases rigidity (harder to respond to changes in market demand) and the odds of screw-ups due to communication lapses. And outsourcing also reduces an organization’s skills. Those lower-level people have a lot of product know-how that you lose when you transfer activities to an outside operation. It’s nice to think that you can hollow out your organization and just do all the sexy design and marketing stuff and dump the grunt work on other players. But over time you are breeding future competitors.

Thus offshoring is best understood as a device for transferring income from the rank and file to middle level and senior executives.

Yesterday in commments, reader Clive explained how outsouring over time starts to create its own bureaucracy bloat. It’s the modern corporate version of one of the observations of C. Northcote Parkinson: “Officials make work for each other.” As Clive describes, the first response to the problems resulting from outsourcing is to try to bury them, since outsourcing is a corporate religion and thus cannot be reversed even when the evidence comes in against it. And then when those costs start becoming more visible, the response is to try to manage them, which means more work (more managerial cost!) and/or hiring more outside specialists (another transfer to highly-paid individuals).

From Clive:

I have to laugh (actually, it’s more of a groan; if I didn’t I’d cry) at what has happened quietly and almost imperceptibly at where I “work”. So unobtrusively did it sneak in, it is now impossible to remove its tentacles.

With the fashionable fad for outsourcing and offshoring, labour has become ridiculously cheap (obviously in the offshore locations more so, but real incomes have also fallen onshore so the same effect is present, albeit to a lesser degree).

As someone put it, management can find people to do the same job cheaper. They can’t do it as well, but they can do the job. The snag has been in what precisely constitutes the “not as well”. Put simply, it needs more people to do the same job and the spans of control are narrower. The people are cheaper, so the overall cost seems lower. But hidden, unbidden, in this change to labour sourcing and organisation, is a new cost, the cost of co-ordination.

Complete story at - http://www.nakedcapitalism.com/2015/05/more-on-the-myth-of-outsourcings-efficiency.html