Be Smart! Lessons from Manufacturing for IT Outsourcers

People groupOne of the criticisms of outsourcing manufacturing is that the company that formerly was a manufacturer ends up losing much more than the capability to build stuff: They lose in-house knowledge. Cutting jobs can also mean losing expertise and brain power. Some people argue that it all works out in the end, that companies can shift redundant workers into more knowledge-centric jobs, and that, you know, the great omelet of progress doesn't happen without a few eggs being broken.

Although the situation with IT outsourcing and BPO is different, the issue of manufacturers making themselves dumber raises some key issues for providers and  buyers of IT and BPO services.

Clayton Christensen, Harvard business prof and author of The Innovator's Dilemma, reportedly warned in a recent presentation that American semiconductor companies are, as this Motley Fool columnist put it, "outsourcing their brains."

"The problem lies with the business schools," Christensen said, because they teach business managers to focus on profit margins above everything. Short-term gains might look good, but not if the means of increasing profitability involve shedding or not investing in knowledge, in the skills and smarts of workers.

In his presentation, Christensen described how chip makers have outsourced materials and fabrication to mostly Asian producers. But in the process, he said, they are forfeiting a lot of fundamental knowledge and understanding. (Intel is the exception, he says.) To cut labor costs, they are "trading away some pretty valuable assets like knowledge accumulated from entire fabrication process and the subsequent loss of innovation from that lack of critical knowledge," as the Fool's Brian Stoffel reporter summed it.

Does the same thing happen when companies outsource their IT work and their business processes?  It is certainly a danger, some experts and economists have warned. As Bharat Vagadia writes in his book Strategic Outsourcing: The Alchemy to Business Transformation in a Globally Converged World:

"In an information-based economy, it is this human capital and knowledge that creates worth for the firm. Exporting key knowlsege from within the firm therefore poses serious risks. . . . It is the concepts, strategies, ideas . . . it is the workers and their knowledge that differentiates one firm from another, giving it an identity, value, and an advantage in the marketplace. . . . In a knowledge-based economy, knowledge is the value!"

I doubt anyone reading would disagree with the belief that workers are one of the main ingredients in an IT company's success or failure. As many experienced outsourcing buyers and providers would agree: Success is all about people and relationships. But I also suspect that businesses focused on their short-term goals are willing to forego those intangible knowledge assets if it means boosting profits, and count on things to work out eventually. They wouldn't agree with Christensen, and there are some unemployed programmers and engineers out there who could attest to what happens when experience and brain assets are outweighed by real and perceived costs.

Maybe getting rid of the old dudes makes sense, in an economic way. For those managers who believe no one over 35 (or is it 25?) can program for the Web or mobile, then it's righteous to dismiss the elders. Let them take their Cobol and go to Brazil to work on legacy systems.

If businesses in "developed" nations are willing to take the chance of losing some of their knowledge value, businesses in "developing" nations should be keeping an eye on the consequences of that. They would be wise to invest in their people, pay for training, send them to school to learn new skills or improve the ones they have. ITO and BPO providers in the Nearshore region are attracting work from clients in North America or Europe because they do have the skills and knowledge that those clients need. They also often have the right price for labor.

However, surrendering knowledge and ideas, skills and dedication, on behalf of the P&L spreadsheet is not necessarily a good plan for the future. It's a situation that today's successful Nearshore providers are likely going to face, if they're not already.  They will have to have the debate: Do we cut our professional training budget, do we cancel that IT curriculum we sponsor at the university, do we stop underwriting education programs, do we nix the entrepreneurship fund in order to send a bit more back to the owners or shareholders?

Technical education and training are exceedingly important in today's world, especially in countries that are intent on realizing their potential as IT providers. Not even the Scroogiest CFO would disagree. But in those meetings where big decisions are made about the future of a company, and the professionals who work there, it's essential that IT service executives argue on behalf of the creative human beings – and their ideas – who helped them get where they are today.