Thursday, January 28, 2010

Does Outsourcing diminish the Intellectual Capital of a firm?

A studious reader of this blog asked me a very pertinent question the other day – does outsourcing diminish the Intellectual Capital of a firm? Her reasoning being that outsourcing - by definition - reduces the number of in-house employees, which therefore should correspondingly reduce the Human capital of the company! Makes sense on the face of it doesn’t it? This line of thought naturally raises the follow-up question – If outsourcing diminishes the Intellectual Capital of a firm, why is it in vogue? Why is it that firms across the globe spend enormous amounts of time, money and energy on outsourcing? Hmm… now that is a tough one. We have to believe that no management worth its salt would deliberately diminish the firm’s Intellectual Capital - since we know that Intellectual Capital is the very source of its competitive advantage in the market place. So how then do we resolve this paradox?

We will have to scratch the surface to find the answer to this one. First, let us understand why firms outsource jobs in the first place and what it is that they outsource? Rampant outsourcing, as is prevailing today, has come about due to the passionate advocacy by Management Gurus to focus on Core Competencies and ‘buy’ everything else that is peripheral for the firm, in the regular course of delivering its products or services, from the external market. Thus it has come to be that a manufacturer of computers focuses on the design of the internal circuit board and overall computer performance, but buys the chips that sit on the board from the external market. Similarly, a Telecom service provider focuses on enhancing the reliability and scalability of its telecom network while delegating the task of handling customer complaints to an external call center. Other examples abound, but in each case you will find that the firm that the outsourced jobs are peripheral from the point of value addition to the firm. The point I am making is that no firm deliberately and willfully out sources its core competencies. Outsourced work is commodity work from the firm’s point of view. Hence it is best performed by those who can provide the maximum cost benefit to the firm.

Second, outsourcing peripheral jobs requires a core competence in interaction and supervisory governance of the external supplier. In the case of the Computer manufacturer this may translate to having in-depth knowledge of the various product lines of the multitudes of chip manufacturers and the ability to negotiate the best price. In the case of the Telecom service provider this may translate to constant monitoring of the service quality of the call center. And so on. The point here is that while firms can and do outsource peripheral work, they cannot outsource the supervision of such work. Such supervision or governance therefore becomes a new Core competence for the firm. Without such supervisory competence in place in-house outsourcing can be a terrible disaster waiting to happen.

Finally, many a firm that outsource existing jobs train their existing staff (whose jobs are being outsourced) into either accepting a supervisory position or re-train them in another area of core competence for the firm. The Human Capital of the firm therefore gets automatically reinforced and enhanced in the process.

So if you sum it all up, outsourcing enables the firm to focus on its core competencies, reduces the cost of doing business, stimulates the creation of newer core competencies as well as enhances the value of the firm’s Human capital - all in one shot. A bit like having your caking and eating it too, isn’t it? No wonder outsourcing continues to be in vogue. It took me a bit of verbiage, but I think the reader got the answer she was looking for.


Prashant Shetty said...

Another aspect to outsourcing (of a firm's core competency) is to address growth issues. For example, a firm that's historically worked with US customers and now needs to service clients with products/ services on the other side of the globe, start by outsourcing that aspect of their business. And in this case they are increasing their intellectual capital because they are seeing diversity in client base, addressing regional specific issues in their product they hitherto didn't think...

My understanding is, when a firm's intellectual capital has reached a maturity level, it needs outsourcing to grow out of the mold and increase its intellectual base. Outsourcing is a manner of letting what they know well be allowed to be done by partners while they concentrate on building more intellectual capital.

Ghhashpush said...

Who in an organization gets outsourced (specific to Indian Industry)? The lower 20%. its bread and butter.
the upper crust would never get outsourced, as they are the future of IP/IC.
Am I right?

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