Outsource This!

The principle behind “outsourcing” is simple: “if there is a benefit to having somebody else do something, why should I do it myself?” For example, let’s say you have a friend whose birthday is coming up and you happen to know that your friend likes chocolate cake. You could bake a cake from scratch using a recipe like one of these, but you may not have the time or the necessary skills; you could make a cake from a mix, which is a lot cheaper and a lot easier, but even though it is less of a time commitment it may still take more free time than you have. Or you could pick up a pre-made, beautifully frosted cake from the bakery department of your local grocery store. It might cost more than a box of cake mix (probably on a par with the cost of making from scratch), but you know it’s been done right (even if it isn’t quite as mouthwateringly delicious as a well-prepared homemade cake), and it’s almost instant from your standpoint.

Clearly, I am applying the term “outsourcing” in a very broad fashion that is appropriate for home, office, and large organizations. You may have noticed that the decision to do something “in house” or to “outsource” depends on many factors, including cost, time available, and ability to complete the task. Unfortunately, too few people and organizations faced with this decision ask themselves the other version of my simple question: “Wait, what exactly is the benefit of having somebody else do this?”

Many people make decisions only using one of the factors we have laid out: I don’t know anything about electrical wiring so I’d better hire an electrician instead of tearing into things myself; I don’t have time to cook dinner so I have to get take-out; I don’t have enough money to buy a pre-made cake at Albertsons, so I’d better get that cake mix. This isn’t necessarily a bad thing, sometimes it is merely a necessary thing. Trust me, when the breaker has popped is the wrong time to learn about household wiring.

These decisions change according to scale, too. If you owned, say, a duplex, it’s probably best to hire an electrician and be done with it. But if on the other hand you own a 100 unit apartment complex, you almost certainly will save money putting a handyman on staff, who can not only do basic electrical work, but also basic plumbing, carpentry, repairs, tile work, HVAC, appliance troubleshooting, and the like. Not only that, you will probably save time not having to find, make appointments with, and pay the various contractors our theoretical handyman replaces.

But why stop there? Lets say that apartment complex sits on about 6 acres of land. Why 6 acres? Because I happen to know from experience that one can have all the landscaping on 6 acres done on a weekly basis — including seasonal color and maintenance of the sprinkler system — for about $1800 per month. I double checked that figure with an industry insider this morning. That size is big enough that it might not be cost effective to have your handyman mowing lawns; there are too many other things he could be doing on a property that size. This is known as opportunity cost, and it’s the same type of decision we made above regarding the birthday cake, namely that time and money we spend one place can’t be spent another place. But how many 6 acre apartment communities do we have to arrange landscaping on before it becomes cost effective to lease a truck, buy some garden tools, and hire another guy to mow those lawns? Remember, you’ll be hiring a “pro” who will almost certainly do a better job than your handyman could, even if he did have the time. Does it stop being merely “cost effective” and become “profitable” if we hire out his excess capacity mowing other lawns? Now we are starting — just barely — to touch upon economies of scale, the idea that if we do enough of one thing, the cost of each unit of that one thing may go down.

So now we have demonstrated that there are sometimes benefits to outsourcing, and sometimes benefits do doing things in house. For example, GM outsources a lot of work not related to building cars, yet they still own a large chunk of their finance arm, GMAC, and furthermore some of their outsourcing adventures such as their Delphi subsidiary are not doing so well. Delphi in particular is a reminder to ask what benefit we get from outsourcing; the idea that an “independent” company could do the same work with the same workers and the same equipment for less money seems like a prescription for disaster.

Strangely enough, this brings me to today’s news. The International Herald Times tells us that the recent problem with Thomas the Tank Engine toys that may be giving kids lead poisoning is a tale of “hubris” and “the realities of offshoring….” Although many sources will be eager to correct me that offshoring is not the same as outsourcing, they still work on the same principal: goods are made (or certain services rendered) by people who do not work for the parent company, normally at a substantially reduced cost (because it still costs money to ship things around the world), freeing up the parent company to focus on things like “core competencies.” The only difference is what country the workers are in. Issues of worker’s rights, safety conditions, local laws, international trade, the cost in money and fuel of transporting finished goods, foreign standards of living, environmental issues of foreign nations, and the like are important in the grand scheme of things, but a footnote to our current conversation.

The thing that we as consumers must remember about such outsourcing, the IHT tells us, is that it allows American companies to charge top dollar for cheaply made imported goods that might be bad for us while making oversized profits and claiming to know nothing about what happens behind the doors of their manufacturer. It’s clear how that benefits certain companies, but it sure doesn’t benefit us. And that’s without even mentioning American workers.

Nor are American corporations alone in outsourcing; the Federal Government does it too. That article points out that “There are now more people doing federal jobs under corporate contracts than there are people employed directly by the government.” They’ve outsourced all kinds of things under the publicly stated principle that “private industry can always do it better than government” while ignoring the principle that “for-profit corporations are in business to make a profit.” The idea that private industry is always better also ignores the potential economy of scale issues involved in something being done by an entity as massive as a national government. Of course the privately help principles at work sure seem to involve helping buddies make a buck. And just like our situation with Chinese made poison toys, the buck just keeps getting passed around, because everybody claims ignorance and nobody is responsible, except just maybe some low-level, expendable grunt. Sound familiar?

While Mr. Hightower’s article focuses on issues such as military support, the college loan program, the proposed privatization of Social Security and the like, the fact is that some people would also like to outsource, or “privatize” schools (through charter schools and vouchers) and even national parks, which were specifically made national parks because they were too important to be in the hands of individuals.

Clearly this is a time to start asking — and keep asking — that question: “Wait, what exactly is the benefit of having somebody else do this?”

In closing: a wall runs through campus, the proposed border fence (which most people see as a waste of time and money) will actually be well on the American side of the border, splitting a community, wreaking environmental havoc, and creating passport issues for students and other citizens — but remember, an obscure provision of Real ID says they can build their wall without respect to any other darn laws, and no court has any jurisdiction to stop them; murder may be a sin, but more importantly it’s a crime punishable by life in prison; the GAO Subcommittee on the Obvious reports that government agencies ignore the laws that President Bush signs while saying they don’t apply; when you don’t think about zebras you spend a lot of time figuring out why certain horses have stripes, or “Refugee illnesses often misdiagnosed in U.S.”; the Left doesn’t like Hillary, but check out the rest of the story here and here; if the economy is so darn great how come Best Buy is complaining about consumers tightening spending and a poll says the economy is getting worse; an item on a film called No Child Left Unrecruited; something for Archeology buffs, Lost Kingdom of the Upper Upper Upper Nile; and maybe not new, but still cool, thanks to Brian for pointing out some of the world’s smallest computers.