Is Outsourcing Good or Bad?

Is outsourcing good or bad? Let's talk about it. So first let's define what outsourcing is. Outsourcing is typically the process of giving someone else responsibility in part of your company. So that could mean manufacturing. If you're developing a product, let's say you're developing a fork, and you don't actually know how to manufacture forks, and so you hire another company to manufacture your forks for you, you don't have to know anything about the manufacturing process. They're going to do it for you. You give them the specs for your fork and they do it for you. Could be the same thing with customer service. You outsource your customer service. Now, maybe you know a little bit about customer service or a lot about customer service, but you don't want to do it yourself. You don't want to hire the people. You don't know how to hire the people. And so you hire another company who has the talent and the ability to acquire more talent. And they are going to train their people. You're going to have to be involved in training them on your systems. But then once the training is done, they they're responsible for your customer support and you don't have to deal with it. Now, typically there are multiple different types of outsourcing or really locations of outsourcing. So you could outsource locally, which would be called onshore outsourcing. So someone close to you can do the manufacturing for you, or you could nearshore it, which would be from a nearby country. So let's say you're in the United States and you want to have your manufacturing done in Mexico. That would be considered near shoring. Offshoring would be sending your manufacturing to China. So now you're outsourcing your manufacturing to China, which is far, far away, and there's a little bit more management involved. So then before we talk about if it's good or bad, let's talk about why people do it and what problems they run into. So number one, the number one reason is probably cost savings. If you're sending your stuff to a country where labor is cheaper than your labor, typically it's going to save you money. Now, not always, because as soon as you hire someone else to do it, they are going to add management involved and they're going to add their profit involved. And so now you have the people that they are hiring and their management that they're hiring, and you have some people that need to manage their people and their company needs to make a profit. And they. And so Their people are marked up. And so if you had hired those people yourself, it would have cost you less. But you probably are still saving money versus hiring locally. The next reason to do this is time. You only have so much, let's call it bandwidth, where your mental capacity as a business owner, you can only do so many things. So if you want to run social media marketing campaigns but you don't know how and you don't have the capacity to hire a team, well then you can hire a another team to do your social media marketing for you. Now you don't have to deal with hiring a local person or paying them benefits or managing that person. You're just going to hire another company to do it for you. This may or may not save you money, but at least it saves you time in not having to do it yourself. Now you can focus on what you're really good at, which is manufacturing your widgets instead of doing social media marketing. Another reason people outsource is to get access to different talent. So if you're hiring locally and you're locally market is not very big or is not very educated, or you've just is, maybe the competition in your local market is so high where you can go to the Philippines and find really educated people who are really talented and the wages are still are still acceptable for you, well then you get access to a really big talent pool at really affordable rates. So in this case, maybe you're not even saving time, you're just getting access to more people so you can bring better talent into your business. And in the case of the Philippines, you're getting it at quite lower rates. In addition to that, oftentimes when you hire people overseas, when you outsource overseas, you get a bunch of flexibility where you don't have as many local government regulations to deal with. You can scale easier because it's easy to find more talent, it's easy to bring them in when you need to downsize. It's easier to let people go than it is locally where you have a bunch of things to deal with. So to summarize the reasons people outsource, number one is to save money. Number two is to save time. Number three is to gain access to another workforce. And number four is so that you can focus on what you're really good at rather than focusing on hiring and maintaining a workforce yourself. So what are the typical challenges and difficulties in outsourcing? Well, number one, you often lose control. So if you outsource your customer service, you no longer have access to the people Doing your customer support, you can provide the training, but that training is typically going to be filtered between some managers and someone giving that training to the people actually doing the support. You may not actually see the customer support that's going on. Now. Obviously you can structure it so you can manage this, but you're going to lose some control there. If you're outsourcing your manufacturing, well, someone else is going to be in charge of the, of the machines and the processes and the inputs and the outputs that are going on and you lose some control there. Next, there's often cultural differences. So if you're near shoring or, or offshoring your outsourcing, well, you're going to deal with some cultural differences. From the US to Mexico, there's quite a cultural difference. From the US To China, there's an even bigger cultural difference. From the US to the Philippines, that cultural difference is not as big, which is why so many people have head to the Philippines. Now, from the US to India, the cultural difference is really big, but to the Philippines it's not as big and so you're not dealing with as difficult of a cultural difference. Next, the time zone difference. The time zone difference between the US and Mexico is zero. Where the time zone difference between the US and India is a lot. And between the US and the Philippines, well, it's 12 to 14 hours difference. So typically you're going to work in the day and they're going to work in your nighttime and you're not online at the same time. That can cause problems. Although what most people find as they actually outsource is their times overlap with the people that they're working with. And it's not really a big issue at all. The last challenge is, is quality control. So you've lost some control over things. Next, you kind of lose some control over the quality of the work. However, as you work with them, you can typically get that quality to exactly the same place where it would have been locally or if you had brought it in house. Which brings me to the last piece of outsourcing. Is it good or bad? Well, you can kind of combine the outsourcing plus in house people by what we call insourcing. And this is hiring people overseas. So you're offshoring, but you're actually bringing them into your company so they work for you, which is, we typically see this with the Philippines where you get the benefits of both outsourcing and local people and then you get access to a really big talent pool that is also really easy to find and Easy to scale up and scale down with, but you bypass the extra company's management costs and profit costs. This allows you to save the wage difference, but you get control over outputs and inputs, you get control over quality. It's a really good balance between the typical way of outsourcing, which is send it to another company where you have no control versus doing it completely locally. Now you gain the regional cost differences while maintaining the control and bringing people into your company so they're going to continue to work for you. So then let's answer the original question. Is outsourcing good or bad? Typically, when people think about outsourcing, they think about shipping jobs overseas. And that's actually usually not what's happening. In the case of needing to save time, the process either wasn't being done correctly locally, or you couldn't deal with it because you didn't have the time. And so now you're actually creating jobs. And some of those jobs may be local, some of those may be overseas, but you're creating more jobs by outsourcing it. So shipping jobs overseas isn't typically the case we see in outsourcing, at least not as much as the narrative that's being told around it. The next thing to consider in is it good or bad? Is where is the knowledge work happening? So we're seeing a global shift in labor where western countries are typically becoming less and less industrialized and that work is moving to other parts of the world. So now in your company, is it good or bad? Well, do you want to be doing the industrial work or do you want to be doing the knowledge work to develop the right product and have someone else doing the work of. Another thing to consider and is outsourcing good or bad? Is we live in a global economy where them benefiting doesn't hurt us anymore. It often actually benefits us. Where in the past we typically thought if they benefit, we lose. That's not the case anymore. Now if you send jobs to the Philippines, well, those people are going to buy iPhones. And now you're benefiting the U.S. you're shifting some economic growth to another location that is still going to typically bring economic growth back home to where you are. Often this allows you to innovate faster because you're gaining access to a bigger workforce that allows you to focus on what you do the best and bring in really talented people from, say, the Philippines, have them help you grow your business, which then also grows other businesses around you because those people are now buying goods from your location. So the good of outsourcing is it creates growth everywhere. It creates growth for you, the company. It creates growth for people in other locations who might not have otherwise had jobs. It lifts them out of poverty and allows them to live a better life. In addition, it allows them to buy goods that they wouldn't have otherwise bought, which are typically going to come from developed nations who are developing the goods now. Their market is bigger, so you now have more people buying more things. When people typically think of the bad side of outsourcing, you typically think of shipping jobs overseas, which we already talked about isn't the reality most of the time. You also have cultural things to deal with and loss of control to deal with with, both of which can be dealt with. And it's pretty reasonable. So in the end, it's not really a question of is it good or bad. It isn't inherently good or inherently bad. It does create some good and some bad in both situations. The reality is, how do you treat the people you're outsourcing to, whether they're locally sourced or whether they're overseas? How are you treating them? Is really how you can define is outsourcing good or bad?