Outsourcing

Hoefle / Marquart / Schnopp

 

SUMMARY

It turns out that outsourcing to cut costs has often been uneconomic and disadvantageous for the firms concerned; core operating functions have been amputated and outsourcing has not prevented the emigration of entire sectors. Firms that remain onshore are mostly highly specialized niche suppliers: for example in the clothing, home entertainment and computer peripherals sectors. A study of outsourcing cases in terms of drivers and management behavior reveals a consistent pattern: belated efforts to raise productivity domestically are followed by attempts to find a quick solution by outsourcing to low-wage countries.

It is a case of tackling the symptom rather than the cause. The perceived quick solution proves to be a dead end. The scale of cost-driven outsourcing can be directly attributed to patterns of thought and behavior known as managerism: in other words, simple wage-cost comparisons, myopia, collective behavior, pseudo-rationalism, and a lack of commitment.

Many of those responsible, primarily in publicly traded corporations, see themselves as hard- working managers forced to constantly search for ever cheaper locations. They have little confidence in the capability of their workforce, and their own ability to motivate employees is under-developed — unlike that of owners of companies like Boehringer, Freudenberg, Merck, Trumpf, Viessmann, Wacker and many other hidden champions of the German mittelstand who take the responsibilities of ownership seriously.

Experience shows that market winners are those who try to improve productivity domestically and then use this highly efficient production base for an ongoing internationalization of their business. The market losers, on the other hand, usually act out of desperation or opportunistically exploit short-term cost advantages. Often their understanding of technology and processes is superficial. They show little interest in engaging employees and employee representatives in searching for sustainable solutions. They switch production from one cheap location to the next.

Neither is exchange rate-driven outsourcing of own production or procurement volumes to the dollar area a lasting solution. Erroneous decisions to outsource are never openly admitted due to fear of losing face. This explains the oft cited ten to fifteen percent failure rate of outsourcing projects. Internationalization creates additional employment, unless exports are sourced from the new markets.

 

Hoefle, Marquart, Schnopp, 2007, ISBN 978-3-00-023026-4