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Too Much Outsourcing Is Bad For Your Revenue

Help Wanted. Maybe the talk about jobs and the need for more of them is a way to obscure a darker issue: what globalization will ultimately do to the American middle class. By Walter Kirn. [New York Times: Business]

Two things I advocate (and expressed in Walter Kirn's Help Wanted article) are:

  1. Build sustainable local economies. As a business executive you should look at building the economy around your offering. In the most simplistic of examples, if you manufacture cooking grills, it is in your best interest to:

    While your company doesn't personally have to be involved in each industry that supports your own, you must be aware of them. You also must know when to lend support to enhance those contributing factors that improve your own business position.

    Unfortunately outsourcing middle-class jobs for the sake of bringing down salaries takes away the local buying power. A better method would be to increase the foreign demand, then setup shop to support that demand at a lower rate. You won't experience an immediate reduction in costs, but overtime will produce a larger market at a lower life-cycle cost.

  2. Create jobs that support your business. If you move jobs out of your local area that were indirectly contributing to the purchase of your product or service, then you must replace this capital source. This could mean creating new industries, introducing additional revenue sources, or reducing buyers costs in other areas leaving more money to buy your products.

    Economics should teach us that while outsourcing lowers our current costs, which lowers the sale price of products, if you outsource too much you will also remove the demand. It's great for business when you can get a $60,000 a year software engineer for $5,000 in another country, but we forget the $55,000 pumped into the economy surrounding our business.

    What good is low overhead if no one can afford to purchase what you produce? To address these issues, you have to look beyond your local company and look at systems of distribution and end-user activities. This means tracing down your product interactions to disposal, understanding how your company interacts financially with those around it, and focusing on your long-term influence when considering short-term decisions.

Even business-to-business companies must consider what harm outsourcing can create if over-used or not properly implemented. Lower costs of labor aren't necessarily the most profitable thing you can do for your business. Sometimes it's better to innovate with new product, new manufacturing technique, or even creating new demands.

/ management-strategy | relationship-realms /

By Justin Hitt at August 17, 2003 2:46 PM  Subscribe in a reader


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