A Consultant's View

Prairie Trail Software, Inc. ............................................................. March 2013

Where is Outsourcing Headed?

American businesses have done quite well by outsourcing production. We have moved production from our cities to the rural areas, then to nearby countries, then to Asia. However, there are signs that we are not just reaching the rational limit, but going past it. Outsourcing always has risks and as we reach further and further, the risks increase.

Back in the early days of industrialization, the leaders had lived through the breakup of the Spanish Empire and could see the British Empire fading. They were very aware of how geopolitical forces could affect their operations. Thus, companies like Ford tried to bring the full supply chain under their control and owned not just the automotive factories, but coal mines, steel mills, trains, tire factories, and a rubber plantation. They wanted control so that no outside force could shut them down.

Today, many companies operate as if the world is a safe place. Today, we have "virtual companies" that only operate the headquarters and every thing else is outsourced. The attitude seems to be "any time there is a problem, outsource further." The supply chain can run through hundreds of companies in many different countries. Every time we stretch out the supply chain, we add risk to the system.

What are the risks to the current outsourcing? There are major risks to outsourcing: health, ethical, intellectual, and political.

Every major new disease, Plague, Flu, HIV, etc. has followed trade routes. The supply chain is bringing in invasive species. The CDC is tracking a number of human, crop, and animal diseases that could be spread by the global supply chain.

Every time we add another layer of outsourcing, we increase the risk that someone criminal is in that chain. For example, when a fire killed a number of garment factory workers in Bangladesh, several major retailers were surprised to find out that their garments were being made at that factory. People "up the chain" had lied about where they were getting stuff made.

The history of intellectual advances shows that it is almost impossible to keep intellectual property. People will come and work for a place, learn all they can, and then leave to start a competitor. This practice has been going on since the Bronze Age. Countries give encouragement to this practice in order to change trading patterns. England did it to Spain. The US did it to England. Now, other countries are trying to do it to us. Outsourcing accelerates the process.

Political risks are often the most damaging to individual companies. Political risks include corruption, the pressure to invest for political reasons, politically motivated inflation, and nationalization of assets. Politics and wars have cut supply chains in the past and are likely to do so in the future.

The world is not the safe place that many managers want it to be. It will be interesting to watch as the risks fail.