Is the enthusiasm for subcontracting fading away?
"There can be few companies whose outsourcing strategy is as well-coiffed as that of TopsyTail. This small Texan company has sold $100m-worth of its hair-styling gadgets since 1991. And yet it has virtually no permanent employees of its own. Almost everything the company does--design, manufacturing, marketing, distribution and packaging--is handled by subcontractors. Tomima Edmark, TopsyTail's boss, says her company could not have grown so swiftly in any other way.
Outsourcing, as this reliance on subcontractors is known, used to be a last resort for big companies in trouble. Now, says Frank Casale, executive director of the Outsourcing Institute in New York, it is part and parcel of the way American companies of all sizes do their business. Having shrunk and reorganized themselves to focus on their ``core competences", big firms turn to specialists to supply them with everything from janitors and guards to salesmen and machine operators. Small firms, meanwhile, see the use of outsourcers as a way to reduce risk and grow rapidly without taking on extra fixed costs...
In principle there is nothing wrong, an indeed much that is right, with this [trend]. It is simply the latest manifestation of the efficiency-creating division of labor that Adam Smith observed with such delight in an English pin factory two centuries ago. Mr Casale forecasts that firms in America will spend $100 billion on outsorucing in 1996, and by so doing will cut their costs by 10-15%. But can the division of labor sometimes go too far? In their scramble to outsource, some American firms are in danger of tripping themselves up.
When Compaq Computer, a leading personal-computer maker, outsourced some of its laptop-PC production to Japan's Citizen, it hit all kinds of difficulties, in design, manufacturing, cost and quality. The problem, says Greg Petsh, head of corporate operations at Compaq, was that "there was nobody in command." The American firm eventually put two of its people in Citizen's factory to oversee operations ...
One reason why outsourcing may not live up to expectations is that American firms have already cut costs to the bone, leaving subcontractors little leeway to turn a profit.
A second drawback is that American firms have traditionally taken a piecemeal approach to outsourcing: in deciding what to contract out, they have tended to look at short-term savings in overheads, rather than at long-term strategy. By contrast, Japanese companies, which pioneered outsourcing, use it to improve long-term quality and efficiency rather than to cut overheads. This, paradoxically, has resulted in bigger savings...
Vikas Kapoor and Arnab Gupta of Mitchell Madison, a New York management consultancy, see such cosy, long-term relationships between firms and subcontractors as "almost un-American," on the grounds that they abandon the discipline of the marketplace ...
[Several] firms fear that outsourcing may weaken their relationship with customers ... Lynda Applegate of Harvard Business School points out that "customers can't separate out who's done what when things go wrong." When several big American and Japanese car manufacturers were forced to recall 8m vehicles earlier in 1995, it was the car makers who took the flak. Few customers blamed Japan ...
Ironically, however, it may be the need for extra speed--the very factor which first drove many companies into the arms of outsourcers-- that will force may managers to reconsider. High-tech products as diverse as pagers and PCs are increasingly being built to order ... But if Compaq is to build its PCs to order, says Mr Petsch, it will have to rely less on outsourcing ...
The choice of what to do in-house, and what to outsource, should be the result of careful thought, rather than fad or fashion."
Source: The Economist, November 25, 1995