Rational Outsourcing Rule #1: No free lunches!

I was recently reading an article entitled "As the BPO Business Grows, There's a Greater Focus on Metrics and Measurement"
[Published on January 14, 2005 in Knowledge@Wharton]. The line that initially caught my eye was:

Ask companies why they outsource, and no matter what they say, their answers can largely be summed up in two words: cheap labor.

While I also believe that most outsourcing customers still feel that cheap labor is the primary reason for outsourcing, the reality today is far too complex to be "summed up in two words." I was concerned that this article would not have anything new to contribute and was about to move on to something more productive. Then I noticed that it quoted Wharton professor Ravi Aron extensively. I met Ravi when he presented at a Technology and Operations Management seminar at the Harvard Business School. Given his background and his research, I continued reading, looking for a nugget of true insight. Ravi did not disappoint:

The myth, says Aron, is that companies with spaghetti-like, poorly managed processes in the U.S. and elsewhere are those that get the most out of outsourcing. "Firms that get the greatest value from outsourcing aren't those whose operations shops can't deliver in America; it's the ones that already run a lean op shop here and know how to calibrate incentives to customer needs and reap gains from going to India. They achieve shorter times to market and can add on to existing product lines. It's no accident that companies like American Express and GE have benefited - they have a culture of measurement and submitting themselves to numbers. On the Indian side, the BPO providers that have done best are those that share this culture of metrics and measurement."

What Ravi points out is perhaps Rule #1 of rational outsourcing: “There are no free lunches.” Outsourcing is not a magic bullet where you outsource and your problems are solved. You have to align your vendors’ incentives with your own goals and your end-customer’s requirements. You also have to monitor the vendor in real-time and proactively manage the shared process: Ravi calls this the 'extended organizational form.'