Some “experts” were yelling and shouting from the rooftops that outsourcing is to blame for the failure of Boeing 787 Dreamliner project. They say, that outsourcing as a business model doesn’t work and no one should take it into his head and business. Do everything yourself or you are a loser.
However, here is the question. How can the model designed to increase efficiency, reduce costs and time not work? Comparatively long history and successful experience of many leading international companies demonstrate that outsourcing works and keep showing perfect results. Perhaps the answer suggests itself: the thing is that the management of The Boeing Company had two left hands and worked only with short-term goals. So, let us assume that in the situation with the Boeing 787 the problem was in wrong management decisions.
The history of failure
Several years ago, there was the almost simultaneous forced landing of 50 Boeing 787 Dreamliner aircraft around the world. The carriers suspended the operation of aircraft due to the risk of ignition of lithium-ion batteries. For the «dream liner», it was a blow below the belt since these batteries were one of the key components of its innovative energy-saving system.
The project cost billions USD, the aircraft deliveries were postponed at least for 7 times, the carriers received the first models with a three-year delay. Only 6% of the ordered Dreamliners were brought into service. This situation caused serious losses and reputation risks for The Boeing Сompany.
What was the matter?
Nothing special. The American giant just wanted to save money and outsourced design, engineering solutions and production of aircraft components. They saw the lower cost of the labor force, but did not see the situation in a whole and did not take into account other vital factors. This is a classic example when a company was deceived by bright figures of labor saving without taking into account the «hidden» long-term risks. It is interesting, that Boeing recognized that the key mistake was not even the transfer of production processes abroad, but the outsourcing of engineering solutions.
Where was the brain?
This ridiculous and very expensive error is explained easily. The reason was traditional: in excessive devotion to maximizing the shareholder value of the company, managers wanted to demonstrate the fastest result. The emphasis on the short-term growth of capitalization eclipsed the strategic long-term goal of any business. This miscalculation killed the project.
For some reasons giants don’t like to advertise that they hire outsourcing teams, but there are a plenty of positive and loud examples. Here are seven stories of winning business and strong arguments in favor of outsourcing, where stubborn figures and facts speak for themselves.
The idea of Niklas Zennström and the Dane Janus Friis wouldn’t have been a part of our lives if they hadn’t outsourced the back-end development of the app to three Estonian developers, who later became partners. Skype became a widespread tool among businesses of all size. From 2011, Skype is part of Microsoft who bought it for $8.5 billion.
- Procter & Gamble
Product companies have a big challenge performing in a very rapidly changing market. It is critical to bring out a new product ahead of many competitors. So one day, after decades of product race, P&G made a decision to outsource some R&D activities. The result exceeded all the expectations. Outsourcing boosted its innovation productivity by 60% and generated more than $10 billion in revenue from over 400 new products. Today, about half of P&G’s innovation comes from external collaboration.
As one of the top companies that pride themselves on taking care of their in-house culture and employees, it might look as a bit of a mistake to list Google here. Well, it is not because the tech giant headquartered in Mountain View, California, has been taking advantage of outsourced staff for years. Whether it was a matter of IT specialists, developers, as well as virtual assistant types of work, Google is a strong implementer of outsourced work to take care of the many projects they continuously deploy and work on.
One area that made it on the news, and that many might not know about, it is when they decided to outsource phone and email support for AdWords to around 1000 reps. AdWords is one of their top grossing product, so they wanted to have the biggest ROI possible out of it. And, this might not come as news to you, they’ve succeeded.
- Alibaba.com, known to many as “China’s eBay”
Jack Ma, the founder of Alibaba and the richest man in China, said “eBay is a shark in the ocean. We are a crocodile in the Yangtze River.”
Не and his friends outsourced the development in the USA when they had just started the venture. At the time, overseas development talent was still in short supply and the U.S. had the skills Alibaba needed to compete with e-commerce giants like eBay, and did it all behind the Chinese internet restrictions. Alibaba.com started as a small “internet company” called China Yellow Pages. Today Alibaba is the world’s biggest global marketplace.
While growing, transnational companies face dramatic operational problems. Well-known consumer products giant Unilever Europe, over the years, had expanded by country and division. As a result, different business groups and geographies operating across 24 countries were all using multiple ERP systems. In 2005 its leadership team made a strategic decision to integrate the company’s multiple business units into a single and create one ERP system across Europe. Not being a specialist in IT solutions, the company outsourced the development of ERP system to an external party. As a result, these improvements have directly contributed to the €700 million annual savings on operational activities.
Founded by two former Yahoo! employees, Brian Acton and Jan Koum, this startup that was launched in 2009 and got acquired by Facebook in 2013 for $19.3+ billion, has never denied taking advantage of outsourced developers.
Acer, the Taiwan-based personal computer maker, has used capability sourcing to make itself into the world’s second-largest PC manufacturer. Since the spin-off of its contract manufacturing operations in 2000, the company has made a big step ahead of its competitors. Acer executives knew it was good at branding and marketing and chose to outsource everything company had a harder time with, like manufacturing. The move led Acer to faster-growing sales and gains in market share. The company now maintains a strikingly lean and flexible operation. Its 6,800 employees represent a workforce less than a tenth the size of its largest competitor.
These amazing stories show, how one good decision can bring great success and development for business. Outsourcing must be strategic and deliberate.
So if your airplanes are knocked down — it’s only your doing.
1. There was a smart businessman, who has changed the world by making some luxury product affordable for the ordinary people. Later, there were over one billion of these products registered all over the world. Who was he? The name of this great man was Henry Ford. In 1923 he said the following great words: “if there is a thing that we cannot do more efficiently, cheaper or better than a competition, there is no point in doing it further – we should hire the one who does it better than we do”.
2. Writing in Forbes, contributor Jonathan Salem Baskin, said the 787 Dreamliner has been vexed since its inception. «While this idea might make sense for sourcing coffeemakers, it was a nonsense approach to assembling perhaps the most complicated and potentially dangerous machines shy of nuclear reactors. Parts did not fit together with others. Some suppliers subcontracted work to their suppliers and then shrugged at problems with assembly.”
3. Ken Landis, the Principal at Deloitte Consulting LLP, said: «Outsourcing can deliver value to companies that enter into outsourcing for the right reasons using a right model such as centralize-standardize-outsource, transform-operate-transfer, commodities outsourcing, risk transfer, and shifting fixed costs to variable, and have superb talent in-house to manage these deals from inception to execution.»
Outsourcing must be a part of the business strategy, not a short-term step to reduce costs. Companies need to be as clear as possible with their tasks and then outsourcing will become one of the most effective tools for progressive strategic development.