David Hack, Freelance Writer

Filling in the gaps

By David G. Hack

The Edge, September, 2004

Outsourcing has been getting a lot of negative press lately, but the practice has acutally been around for a long time.

Mike Langridge of the Iowa Quality Center in Marion points to the auto industry where Iowa companies like Williamsburg Manufacturing have been producing parts for major automakers for years.

The question a company must answer about outsourcing is whether they can do the “whole pie” or if they need to ship out pieces.

“Businesses need to identify their core competencies, look at what they’re good at doing, and then find others who can fill in the gaps,” said Gary Nesteby of the Iowa Quality Center.

There are many reasons a company may consider outsourcing. A company might be most effective if it focuses on its core strengths -- making widgets, perhaps. However, a company might not have the expercise, skills and technologies to ship those widgets. That's when it might consider outsourcing that part of the operation.

Outsourcing may reduce a company’s investment in assets which frees those resources for other purposes. Forming a partnership with another company may open other business opportunities.

One serious question that needs to be answered, however, concerns the workers of a business. If a company outsources as a way to save money, they must weigh that savings against the impact the move may have on employees.

Will current employees be laid off?

“The loyalty effect of your work force is an intangible that doesn’t have dollar signs,” Langridge said.

Outsourcing in recent years has been associated with the movement of companies to offshore facilities resulting in loss of employment for some workers in the United States.

“If a company focuses on the bottom line and moves offshore for cheaper labor or perhaps for tax benefits, the move is questionable,” added Nesteby.

If an offshore move is driven exclusively by lowest labor costs, frequently there will be an accompanying backlash politically or by consumer groups targeting specific companies and boycotting their products.

In addition, there are many hidden costs to such a move.

A company may actually have to increase management costs to oversee the offshore resources. Extensive training may be required for employees as new systems are put into place.

However, a study of outsourcing’s impact on the U.S. economy conducted by the consulting firm Global Insight found that American companies’ sending computer systems work overseas led to higher productivity and has created 90,000 jobs through 2003. The study released in March, 2004, estimates that twice the number of U.S. jobs were created than were lost in sectors ranging from manufacturing to financial services.