As IT and software consultants who have spent years engineering specialty software, every so often a client will ask if they should consider outsourcing one aspect of their business or another. And we always respond with the same adage: "Never outsource your core competency."
Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company's own employees and staff. - Investopedia
A quick search for the phrase "Don't outsource your core competency" reveals many cautionary tales and projects-from-hell that could have been saved had founders kept their core service in-house and hired the technical talent they needed.
Let's clear something up first: we're not suggesting you should never outsource; in fact, if you're a financial services firm it would make sense to contract with everyone from lawyers to marketers, virtual assistants and of course cleaning services if you own a bricks-and-mortar office.
The problem arises when you outsource a service that's vitally important to your business — if a financial services firm outsourced accounting, that would be a large red flag.
Outsourcing your core competency introduces risk akin to handing your office keys to a third party. The logistical headaches surrounding project management, timeline and quality assurance just aren't worth the potential savings.
You need to be able to guarantee consistent quality and impeccable customer service for the competency your business is centered on, and you can't do that if you outsource it. Worse, you likely won't improve your core competencies.
We can look to recent high-profile examples in the news: two fatal crashes of Boeing's new 737 MAX have caused a PR crisis, cost the company billions, endangered its hard-earned reputation and resulted in chaos at airports as planes were grounded worldwide after the flaws were discovered.
The devastation can be at least partly blamed on Boeing's and subcontractors' choices to outsource software development and cut costs, and ensuing defects. After the company laid off experienced engineers, temporary workers making as little as $9USD an hour were hired to develop and test software.
Boeing and Rockwell Collins (which makes cockpit electronics) outsourced significantly to offshore companies in 2010 and 2011, claiming global design teams working around the clock offered efficiency. But according to the article, for Boeing engineers much of that time was eaten up by communications issues and mistakes as they worked around large time zone differences. In addition, fearing the loss of their jobs, some had watched engineering begin to become a commodity as they lost work to competitors overseas beginning in the early 2000s. Worse, poor decision making cost Boeing dearly: in 2011, its 787 model was finally ready to fly... three years late and billions of dollars over budget, in part due to confusion introduced by an outsourcing strategy with one of its contractors.
In another notable incident, US car rental giant Hertz is suing management consultancy firm Accenture for $32 million after the spectacular failure of a website redesign project. The promised functional site and mobile app were never actually delivered, and as of April 2019 the case had gone to court in New York. A comment on that article exposes an ugly truth of how large companies often rely heavily on outsourced labor, to the detriment of their own productivity and morale:
You would be surprised at just how small the IT departments are at many, many large companies. Every damned thing is outsourced. The permanent staff are busy putting out fires or mired in pointless meetings. Or about to get fired and replaced by... outsourcing. Or their workload increases beyond reasonable and safe limits. Generally, all three.
The great collapse is coming. People have no clue how vital IT is to the modern world and are literally cutting their own throats.
In light of these catastrophes, it's no wonder why some investors avoid getting involved with businesses who outsource production. Founder, consultant and startup investor Hugh Stephens explains his rationale:
A lot of investors (including me) will refuse to fund a startup who has gone to one of the dev shops to build their product. Not only is it a sign that you can't execute independently (agencies make money when you are dependent on them after all), it also means that you don't have enough hustle to find your own tech person/people.
When it comes to outsourcing, businesses of all sizes should remember that the balance sheet only tells a small part of the story. If you treat your business purely as a financial interest versus an entity that generates ongoing value for your customers, you'll fall prey to a toxic mindset in which short-term finances win out over a steady long-term outlook.