Outsourcing and Innovation

The Business Insights section of the Wall Street Journal presented an article on how Offshore Outsourcing can impact customer satisfaction. The line of reasoning was that if the labor cost arbitrage is used for increasing investments in technology or customer services, the company will see an increase in customer satisfaction. Corollary, the arbitrage savings from non-customer services functions, if invested might not show up as increases customer satisfaction.

While this is well researched and true, I propose another way to think about this.

If the cost saving received from labor arbitrage is significant enough, check and recheck that premise that the company is saving money. The desire to show savings and therefore improve the bottom line is so great, especially in today’s short-term Wall Street driven company strategies that functions might be offshored that are very critical to the business. I had read excerpts of an interview by an ING Direct executive, who seriously questioned the prevailing wisdom of outsourcing the customer service function.

A report by McKinsey identifies three main innovation challenges faced by financial institutions. These are ‘limited use of customer insights and external idea networks; lack of organizational mechanisms, such as dedicated innovation funding; and poor capabilities in specific areas critical to innovation’. When companies are so focused on their bottom line as to go around the globe in the eternal labor cost chase, what is lost is more than the short term growth potential. They lose the ability to innovate and generate sustainable growth over the long term. When that happens, growth becomes more a function of luck than strategy.

I am going to tie the findings above to my case for a well thought out outsourcing plan.

Outsourcing really serves an organization best when a function is outsourced for significant savings but when there are opportunities for the outsourcing partner to collaborate with the outsourcing organization. If we can pull innovation from various such channels, we have begun to form an innovation strategy around external idea networks.

The next step is to then to look at our complete supply chain and evaluate how might the organization collaborate more rather than have a supplier/client relationship. An honest and spirited exchange of feedback is one of the best and least inexpensive ways to elicit innovative ideas.

The savings realized from outsourcing should be spent according to organizational priorities. That said, innovation focuses on top line growth rather bottom line savings and anytime that is the focus, the organization has a chance to reinvent itself or capture a greater piece of the value chain thereby improving its’ capabilities.

The Business Insights article can be accessed here.
The McKinsey report referred to above can be accessed here.