Outsourcing Is Not the Answer
Certain aspects of a business (call center, customer service, etc.) should be kept close to home. Pro or con?
Pro: For Business Operations, There’s No Place Like Home
In the midst of a shaky economy, many organizations turn to outsourcing as the be-all-end-all. Yet I find when it comes to good business, some aspects are better kept close to home. Recent research conducted by Lyda Bigelow of the University of Utah’s David Eccles School of Business shows that if companies outsource critical components of their business, they are more likely to fail.
With my wife, I own a direct market tour operator that provides overseas vacations to 115,000 older Americans each year. We operate a call center in downtown Boston, in the same space as our day-to-day operations. Our call-center associates answer 11,000 calls a week from our customers—to book trips, arrange flights, raise an issue, or pass along a compliment.
We have invested millions in technology to maintain the center and train our associates, including sending them on international trips so they can address calls with expertise.
Keeping our call center in Boston has enabled us to grow because we offer personal attention—the "high touch" vs. today’s popular "low touch" approach. But beyond that, it has strengthened the culture of our company. Having our call-center associates under our roof has allowed them to be part of our team, not just an extension of it. We empower them to make decisions based on the core values of our company and to share valuable feedback.
We’ve done the math and realize outsourcing could likely save us $3 million each year. But we ask ourselves: Could we give our customers the same service if we outsourced? Could we sustain our community of travelers? In our case, the answer is no.
Con: Companies Must Take Advantage of Outside Talent
Think you have everything you need to run your business within your walls? Think again. There’s one area where outsourcing is critical today—innovation.
"Open innovation," a term pioneered by Henry Chesbrough, illustrates the need to look to outside talent for innovative ideas, and global companies from various industries have demonstrated that it is the right strategic choice.
Just look at an example from the oil industry. Following the Exxon Valdez oil spill, there was an immediate need to separate the oil from seawater. The issue wasn’t resolved until 10 years later—not by an expert from within the oil industry but rather by a person with expertise in the construction industry with insights into the manipulation of near-solid cement during large pours. Ultimately, this demonstrates that more and more successful innovations utilize know-how originating beyond industry boundaries and that companies need to go beyond simple outsourcing (e.g., just asking an industry expert) to harness expertise from outside areas.
Engaging with an even larger number of external experts can be very expensive. Yet open innovation may economize on these costs along two dimensions.
First, it can offer a cost-effective approach to managing a company’s R&D budget. Open innovation competitions, such as the X Prize, and similar activities allow businesses to pay for a proven solution rather than incurring huge R&D expenses that may in turn fund failed innovation efforts. Research shows that capital efficiency is a key challenge because the returns on innovation are highly skewed, such that larger R&D budgets don’t necessarily result in high-quality innovative output. The shift from internal R&D to open innovation in the pharmaceutical industry underscores this point.
Still not convinced? Consider the second dimension—the open source phenomenon, where scores of talented software engineers, coders, and hackers develop operating systems and applications with no immediate monetary rewards. The open source phenomenon teaches us there is a wide spectrum of motivational needs for talent: A firm can harness outside talent not only through monetary rewards, but also by appealing to social recognition or intrinsic motivation needs.
While outsourcing has been shunned by some business gurus, the open innovation motto, "The world is my lab," has never been more relevant. Bottom line: It’s time to rethink the value of outsourcing, at least when it comes to innovation.