Is outsourcing a cheap solution?

I recently read an article about the business drivers for outsourcing and the author had an interesting thesis. He said that outsourcing is not a way for companies to save money; rather, outsourcing is likely to be more expensive than any internal solution to the problem. The author noted that companies did, however, used to consider outsourcing as a means to remove a noncore competency from internal management and have it managed less expensively by a third party.

Maybe this just shows my age, but in my experience, saving money was never a factor when deciding whether to outsource or insource development or operational functions. In fact, it was just the opposite. The assumption was that outsourcing any service would be far more expensive than an internal solution, but because of certain exigencies such as time, expertise, or temporary need. The company I was with was willing to pay the outsourcing premium to provide a necessary service.

Granted, my time in the industry is limited to 11 years, so I've by no means, seen it all. However, I don't think that before my time, outsourcing was this overarching panacea where you could get better solutions, faster, with more longevity and for less cash. That's the business that I'd want to be in, you simply couldn't argue with such a perfect value proposition. If that were the case, I suppose that everyone would be an outsourcer because no other business model would look competent.

My point, is not to pick on the author of that article, but that these arguments lead me to consider outsourcing as not just a business process, but also a philosophy. I would argue that if a company wants to save money through an outsourcing model, one way to actually do this is by treating your internal organizational divisions as outsource groups.

Now, I fully realized that the notion of " charge-back " has been existence for a while. That is, companies have an internal accounting system that tracks when any organizational division does work for another group. During that work process, there's a fee associated with that service. At the end of the day, the accounting folks subtract or add those charges from or to the service division's budget. I've seen this in action and have been a part of this process.

However, I've lived in the Soviet Union, and charge-back procedures smack of Marx's theory of labor value and Khrushchev's implementation of a wage scale, neither of which seems to have played out in the " real world. "

I would argue that to potentially save money in outsourcing, the internal divisions within a company need to compete with outside firms. I imagine that most in our capitalist society agree that competition produces efficiency in design, cost, implementation time, and foments technological innovation. An internal group, focused on such competition would, no doubt, highly resent it at first, but the outcome of the process would be a more focused and effective divisional organization.

And maybe, farther down the line, these internal divisions will become so efficient that they can begin to compete for outside business and turn into a profit center.

Senior Analyst Tim Wilson is with Enterprise Management Associates in Boulder, Colo., an analyst and market research firm focusing exclusively on all aspects of enterprise management. Wilson has over 10 years of experience in covering e-business and enterprise management issues, most recently with InternetWeek, where he was chief of reporters. He can be reached by clicking here.

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