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In these shaky economic times, the word ‘outsourcing’ can whip up passionate feelings on both sides. But looking at the issue objectively can yield some new understanding of its utility, and especially, its limitations.

One way or another I’m sure you’ve heard about the controversy over offshore outsourcing: American corporations farming out IT work to people in foreign countries. In poor economic times, jobs and foreigners usually become a sensitive subject. This is especially true if you know someone who lost his or her job because the work was outsourced. Because there’s emotion involved, the media has been giving the issue a lot of coverage. I’ve noticed that almost all the coverage is about very large corporations, the GMs and IBMs. What about smaller companies, the ones with small or no IT staff? Is there anything in offshore outsourcing for them, or is it more trouble than it’s worth? If I were to write an executive summary for small and medium-sized businesses considering outsourcing IT to foreign countries, it would be very short: Don’t do it. There might be more reasons for this conclusion than you think.

What’s an outsource?

The word outsourcing is awful. On first encounter, I doubt that anyone understands what it means. Sourcing, what is that? Unfortunately, nobody has coined a better word. Offshore outsourcing means having IT work (programming, call center, tech support, design, etc.) done by workers in other countries, often through some kind of intermediary–specialist companies that facilitate the work. The work is sent to other countries because it can be done for less money. It is less expensive principally because foreign workers get a lot less pay than their American counterparts. The business logic is basic: Foreign costs are less, usually substantially less, for the same work. Saving on costs generates more profits. This thinking is hardly new; manufacturing companies have been following it for several decades. It’s part of globalization.

Some people raise the objection that IT is brainwork–complex, difficult, often requiring creativity–not at all like manufacturing production. Yet how much of IT is routine? Think of computer operators, piece-work programming, or mailing operations; there is a great deal of routine work in IT. Much of it could be done anywhere. There’s also an implication that foreign IT workers are not up to American standards. It doesn’t look that way. There are thousands of college trained IT people in countries such as India, Russia, Brazil, Egypt, and Romania. The fact that they are already doing billions of dollars in outsourcing for major corporations proves a certain level of competence.

A foot out the door for SMBs?

Because offshore outsourcing can be done successfully, larger corporations have done it for years. Is there IT work that smaller businesses could outsource to a foreign country? I don’t doubt it. There are plenty of outsourcing companies that would be more than willing (for a fee, of course) to set it up. Is there a catch? There are more catches than in a World Series baseball game. Foreign outsourcing presents many problems, some of them unique to being foreign: Language. Different countries, different languages…even if the supposed common language is English, there may be difficulties in understanding (Chinglish anyone?). Many a contract has foundered on bad translation or a misunderstanding of pronunciation.

Culture. Cultural problems can hit from all sides–religious, ethical, social. The business and personal customs of other countries can be substantially different. Is your company prepared to abet bribery?

Management control. Even working with an experienced intermediary, foreign operations inevitably mean tenuous lines of control. In many cases, management reporting isn’t what you’d expect.

Quality control. Define quality to someone 4,000 miles away who barely speaks English. Having someone on-site works, but it’s obviously expensive. Intermediary companies help, but there can be long delays between the time a quality problem is discovered and when the fix is implemented.

Time and distance. Time zone and travel difficulties are obvious problems, but it’s still easy to underestimate how they can dramatically add to the “hidden expense” column, plus increase the difficulties for management, logistics, quality control, and the ability to react to situations.

Legality. Like languages, different countries have different laws. There are some very nasty gotchas; for example, some countries do not recognize copyright law.

Security and privacy. It’s tough enough keeping IT operations secure and private in the United States. Guarantees for either are hard to come by in most foreign countries, and the effort to get them will be costly.

Instability. While not always a clear and present danger, the risk of political and/or economic instability in most of the countries where IT is outsourced is relatively high. The threat of terrorism, especially of being a target, is also not out of the question.

The list is intimidating, as it should be. To the list you can add the problems that offshore outsourcing may cause at home. The risk of backlash in the company, in the community, even throughout the country, is real. Foreign outsourcing is usually very unpopular, and a company that handles it poorly may be visited by many kinds of political and labor troubles.

Overcoming the problems is possible, but difficult. Large corporations develop an internal staff to manage the outsourcing process. They have lawyers, consultants, and specialists to help with specific projects and problems. They may already have foreign offices and the international communication infrastructure. Typically, their outsourced IT projects are large enough to justify the expense of working through a qualified intermediary company or to set up their own operation. Can most small or medium-sized businesses do this?

We think we can

I will not say “never” because the range of IT activity for small and medium-sized businesses is very wide. There are certainly cases where the size of an IT project or its importance to the company can overrule the difficulties. How does a company decide if this is true? The steps are straightforward, even if the final analysis is not. First, the company needs an idea of what IT might be outsourced. If the answer isn’t obvious, stop right there. Then do the research on services available, where, how, and for how much. At some point, build a spreadsheet that will line up estimated (or known) costs for the specifics of the outsourcing with a comparison of in-house costs. Add some cost factor for the items in the list above (if they aren’t already present in some form). For calculations, some kind of cost benefit or return on investment should be possible. Finally, consider the intangibles, for example employee morale, the company’s ethical standing, and personal patriotic beliefs.

A problem of scale

Obviously, I don’t think many smaller companies are going to go through the cost, risk, and political analysis and come up with a full-speed-ahead on offshore outsourcing. Does this give the big corporations an advantage over smaller businesses? Possibly. As usual, very large corporations have an advantage when it comes to huge projects. But then it requires very big projects to justify the hassle of sending IT overseas, so in a way it’s companies using economies of scale to solve problems of scale.

One final thought: Smaller businesses should never rule out the possibility of offshore outsourcing of IT work when there is the benefit of unique expertise. A small company might send design work to a firm in India because there are brilliant designers. This happens and can be a big advantage. It’s usually called partnership.

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