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fundamental question about outsourcing

First of all, this is not a country specific thread, when I say outsourcing I mean it could be to the company next door just as easy as to the big I.

Outsourcing originally started out as a method of sending peripherall work that your company was no good at doing, to a company that was, i.e. we don't want to hire a full time architect just for one office move, or we don't want to hire a janitor because we only need him 1 hour a day.

Later, it came to be production work, that is we we will design the Nike Air Jordan's Here, but we will send the work to another company to actually do (in the case of Shoes it was overseas, but in the case of beer, there are american "contract" breweries, that will make the beer to a recipe you give them)

Now it seems that everything except sales and marketing is being outsourced somewhere, do most people really believe that these should be the only functions of a company, sales and marketing?

The Artist Formerly Known as Prince
Friday, January 09, 2004

>> "do most people really believe that these should be the only functions of a company, sales and marketing"

No.  This is a "fly-by-night" strategy so-to-speak.  A company must always have a service or a product to "sell and market".  Where that product is made is a different story.  The bottom line is money, money and more money.


Friday, January 09, 2004

==>No.  This is a "fly-by-night" strategy so-to-speak.  A company must always have a service or a product to "sell and market".  Where that product is made is a different story.  The bottom line is money, money and more money.

Actually, I agree with the "money, money, and more ..." comment.

I disagree that it's a "fly-by-night" strategy. I've been independent for rougly 8 years now. My  most successful clients have done nothing but sales and marketing. They sit in the middle, broker the deals, outsource the actual work, find the customers, and make money hand over fist.

I'll give an example:

My current largest client is $WeProvideVisionCare. They make money hand over fist, but don't do a darned thing. They are partnered with a large national health care provider (roughly 18,000,000 members). Here's the deal:

$WeProvideVisionCare:

(a) Does not manage the insured groups and members. $LargeNationalHealthcareProvider does that.

(b) They don't service the patients. A nationwide network of $WeGiveEyeExams does that.

(c) They don't manufacture the frames for the glasses. They've outsourced that to a handful of frame manufacturers.

(d) They don't grind the lenses. They've contracted with a national lab to grind the lenses.

(e) All they do is sit in the middle and process claims for routine vision care services and guess what? They don't even do that!!! They've outsourced that to my company.

These folks do absolutely *nothing* but sit in the middle of the various entities: $LargeNationalHealthcareProvider, $WeMakeFrames, $WeGrindLenses, $WeGiveEyeExams, $WeWriteClaimsDatabases ... all they do is sit in the middle, make the process happen, and collect a *ton* of money.

I've seen this over and over for the last 8 years. The most financially successful of my clients are the ones who simply sit in the middle, make the connections between various other entities, and collect a fee. The make RealMoney without having to tie up capital in (as in the example above), frame and lense inventory, manufacturing and distribution, without keeping doctors on staff, without all of the associated costs.

I guess I'm saying to the OP that, yes, outsourcing *everything* in my limited experience, has lead to the most financially successful businesses that I run into on a day to day basis.

Your mileage may vary.

Sgt. Sausage
Friday, January 09, 2004

The problem is when a company can't even do the stuff that they don't outsource well.

Like WorldCom Wireless.  They didn't do anything but handle billing.  Which they would repeatedly screw up.

Flamebait Sr.
Friday, January 09, 2004

As a friend of mine once said:
"Being a VAN is a license to print money"
               
Philo

Philo
Friday, January 09, 2004

However, the problem with middlemen is that inevitably, once the process is up and running, someone will try to find a way to cut out the middleman.  Good money when you can get it, but not a viable long-term business.

Alyosha`
Friday, January 09, 2004

Philo, what's a "VAN"?


Friday, January 09, 2004

By fly-by-night strategy I meant basically what Alyosha said.  Middlemen don't last forever.  Maybe in some bloated segments like healthcare there is more room for companies like these, but they continually drive up the cost without providing any real value what-so-ever.  They neither provide a product or a service nor do they consume products or services.  Eventually this is figured out and the middle man is let go.

This is what bring about the argument with software being outsourced.  Theoretically and probably at an extreme the companies outsourcing all software development will end being just middlemen because the companies being outsourced to will have attained the knowledge.


Friday, January 09, 2004

...will have attained the knowledge once held by the company that actually provided the product or service.  Now the company providing that product or service has lost the knowledge because they have gotten rid of their workforce.  The same pepole who held the knowledge.


Friday, January 09, 2004

>I've seen this over and over for the last 8 years. The most financially successful of my clients are the ones who simply sit in the middle, make the connections between various other entities, and collect a fee. The make RealMoney without having to tie up capital in (as in the example above), frame and lense inventory

But that is not quite true...if they have outsourced their frame making to one and lens grinding to another they still run the the risk that the frame and lens put together will not sell and they will be left holding the bag.

If you look at it that way even Walmart is sitting in the middle. They buy from manufacturers and sell to end users.  Infact they even have the flexibility of being able to return goods without paying to the manufacturer if they are not selling....flexibility which your middle guy does not have and hence has a higher risk. So would you begrudge Walmart their profit too?

The fact that most people understand is that Time and Convenience is a valuable commodity in itself. People are willing to pay the middleman because they want to save the hassle of finding going to a frame manufacturer seperately from a lens grinder and putting together plus people want to go to one place and complain if something goes wrong...which is again a risk which the middleman assumes!

Code Monkey
Friday, January 09, 2004

I not "Outsourcing" really just a term used at the margin or the frontier of the never ending division of labor, and increasing specialization, for what we all take for granted when we say, get on airplane, or buy a loaf of bread, or hire a contractor to remodel our kitchen?

For example, if a company pays another consulting firm to develop a peice of software, instead of doing it in-house its "outsourcing".  If the consutling firm turns the experience into a product, the next firm they do business with is not outsourcing, they are just "buying a product".

 

Paul Mansour
Friday, January 09, 2004

Oops. That last post should start "Is not"

Paul Mansour
Friday, January 09, 2004

"...do most people really believe that these should be the only functions of a company, sales and marketing?"

Imo, you are asking a very complicated question that doesn't have a yes or no answer associated with it.

See the Levi Strauss post made on JOS earlier today for an example of one large company that use to produce a product that believes this is the way to go.

Generally speaking, the major risk these type of companies face is not having the ability to control the prices your suppliers want to charge you. Imo, global competition has made this particular business model very attractive to large-size companies that produce some type of product.

One Programmer's Opinion
Friday, January 09, 2004

On am more individual note (I *strongly* believe _indivuduals_ decide, not some _process_ that is independent and larger than the sum total of its participants), "Outsourcing" occurs when the decision maker is *not* the initiator of the business.

And *Initiator* is not restrcted to *Founders*. The term includes all men who have a personal attachment to the function of their product and the functioning of the organisation however long the organisation may have existed.

Indian Developer in India
Friday, January 09, 2004

Actually, speaking of Walmart, they make *more* money on the products they make themselves. If I remember correctly, roughly 20-25% of the stuff they still, is their own.

John Rosenberg
Friday, January 09, 2004

make that *sell*

John Rosenberg
Friday, January 09, 2004

I consulted for several years at a large consumer products company.  In fact, it was one of the largest in the world.  A bright guy who worked there once expressed the following concern to me, given the higher-ups' tendency to outsource everything.

"If we outsource IT, and HR, and Supply-Chain, and Manufacturing and ... (list goes on) ... we end up simply a marketing company.  Isn't the risk at that point simply that Microsoft or Amazon or whomever... with much better consumer data than us... can perform CPG marketing much more effectively?  And, since we would have no value-add of our own, we would have no way of differentiating?"

That's a very good question.

And the healthcare example of middlemen is poor, I think, because our current healthcare system is doomed.  Non-standardized/non-existent business processes in the chain of patient/provider/insurer/etc. allow middlemen to exist where no analagous middlemen thrive in "real word industry".  Given where our healthcare system is headed, the future of said middlemen is dim, IMO.

dir at badblue dot com
Friday, January 09, 2004

A friend of mine who works at an advertising agency once made a similar point to me.

He pointed out that making margerine and stuff like that was dead easy; anyone could do it; the thing that differentiated the successful companies was just their advertising.


Saturday, January 10, 2004

"do most people really believe that these should be the only functions of a company, sales and marketing?"

Nike does. That's all they do.

fool for python
Saturday, January 10, 2004

Record companies,publishers and lately Hollywood movies are examples of hghly successful industries where those that control the product don't own anything.

Middlemen normally perfomr a very useful funciton. In fact the norm throughout history has been for the midldleman, aka the merchant class, to make most of the money, and those that actually produce to be ocntent with the leftovers.

Time and time again governments have tried to cut out the "profiteer" aka wholesaler, and had to admit defeat when they found that their methods of direct sales were both more expensive and less efficient, (and sometimes more exploitative and corrupt as well).

Also crazy government regulations allow middlemen to prosper. Around miost government agencies and state owned industries there buzz the representatives of various companies whose sole raison d'être is to made procurement bids, the fulfillment of which is totally outsourced if the bids are successful.

And if you wonder if this is viable in the long term take a look at Haliburton or Bechtel.

Stephen Jones
Saturday, January 10, 2004

"And, since we would have no value-add of our own, we would have no way of differentiating?"

Well, I think cutting out middlemen is partially the role of the acquisitions game played by CEOs.  It's more likely that company could just be bought out for their marketing "experience."

After all, eliminating middlemen--and competitors--is how businesses get bigger.  Maybe what we're seeing the beginnings of a pan-industry merger. :)

Instead of a lot of companies that do "stuff" here in the US, we just have one large marketing regime for "everything," constantly focus-grouping and wargaming and proposing new product "tweaks" and "lines" to the offshore "dirty work" side.

it_ranter
Saturday, January 10, 2004

The MPAA and especially RIAA are cartels, which is why they have been able to last so long and become so powerful.  Middlemen elsewhere normally don't have that power structure to support them.

T. Norman
Saturday, January 10, 2004

Great example about Nike.  Absolute branding and design experts.

However... when competitors w/in-house, low-cost manufacturing (e.g., China) start to grok American branding, all bets are off.

dir at badblue dot com
Saturday, January 10, 2004

Hasn't this already happened? I mean, most of WalMart's corporate assets are in China... Walmart is the inside marketing track for a large number of Chinese manufacturers. Walmart even assists with the IP seizure by intentionally driving outside-china suppliers out of business.

Tony Chang
Saturday, January 10, 2004

What you are talking about appears to be called the 'theory of the firm' by economists, who have not settled the question of what really makes an organization an efficient unit of economic organization. That is, why do all modern economies contain organizations of a wide range of sizes? What makes this efficient, and what value does grouping people in organizations bring? Apparently, if you find the definitive answer, you could become famous in economics circles.

By the way, a non-obvious piece of data I saw referenced in a journal had to do with the distribution of organization sizes. At least in the United States, the number of people working in organizations of a given size was roughly independent of the size, on a logarithmic scale. That is, approximately the same number of people in the United States work in organizations of 10-99 people as in organizations of 10,000 to 99,999 people.

Dan Brown
Sunday, January 11, 2004

Coase theorom?

the artist formerly known as prince
Sunday, January 11, 2004

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