I've given a good deal of thought to a point my brother, Jed, raised over the weekend - about one of the unseen perils of outsourcing. The peril? In many cases, outsourcing effectively amounts to subsidizing the competition.

Here's the idea:
Every time you outsource an aspect of your business out to a third party, you're sending them work. The problem is, that third party won't just end up working for you - they'll want to diversify. Accordingly, to stay competitive, they'll end up becoming specialized. This will make the services they offer become something of a commodity - one that your competition can use to increase their own bottom line. In other words, outsourcing can be a great way to subsidize your own competition.

Question: Do you really therefore want to subsidize the coding of your business logic? What about Support? Or maybe payroll, accounting, or legal? What about manufacturing or other aspects of production?

Obviously there will be times when it makes sense to outsource. (Getting your own lumber-jacks, mill-wrights, paper-spoolers, etc. to cut Office Depot out of the loop and get the leg-up on your competition may not go over too well with the Board - for example.) But I suspect there may actually be times and places when commodities such as accounting and legal may actually make sense to keep in house. Case in point, if you're in a high-tech manufacturing business, SURE you can get access to 'external' (outsourced) patent lawyers, but would you be better off having a patent lawyer on your payroll that knew your products, inventions, and company? Or, would it make more sense to have that same lawyer 'out in play' as a viable 'outsourcing' commodity for your patent needs?

Case in point: Dell.
Dell's customer service (especially support) just plain sucks. I used to recommend their products to all of my non-geeky friends who solicited my geeky insights on 'new computer' purchases. Not any more - while the costs may be excellent, I just can't, in good faith, really recommend their systems (at least not without big caveats about the fact that a computer from Dell almost amounts to a computer with no service contract due to their unbearable incompetence).

The sad thing? What an incredibly stupid move for Dell. SURE people want excellent prices on hardware. They also want support. Hell, they actually need support. Yeah, non-geeks may need some serious hand-holding, but even non-geeks (like me) expect someone on the other end of the phone who can help them when they need a fan, keyboard, or other component replaced. The problem is that by outsourcing their support Dell is effectively trading what COULD BE A STRENGTH in to subsidization for their competitors.

Trading that potential strength is the real mistake though. I've heard some people claim that the accents of support folks in India are difficult, and that makes outsourcing a bad move. I disagree - support could be outsourced to Idaho or Iowa where the costs would be cheap, but the problems with outsourced support would remain. The problem, you see, is that by handing off a core competency in what should be YOUR BUSINESS, you're losing ground to the completion. Dell's problem with outsourcing has nothing to do with who is HANDLING the other end of the phone - it has everything to do with the fact that the person on the other end of the phone really isn't empowered to
1) Help customers with problems,
2) help ensure that Dell creates and ships better products down the road.

Sadly, the true goal of the person on the other end of the phone is to get you OFF of the phone, so they can process more calls. That's the real driver behind what they're doing. And what's worse, is that if you actually get someone who cares, they're not empowered to do anything - they're nothing more than an automaton with a set of scripts in front of them designed to help herd you through their pipeline. (Which is why it took me over 3 hours of dealing with support personnel last year when I needed the obviously broken fan replaced on one of my Dell machines.)

Imagine what would happen if Dell un-outsourced their support personnel, empowered them to help customers, and took some pride in ownership and problem solving to make customer experience excellent. Not only would it help provide a valuable service to individual clients, but keeping things in-house would logically lead to improved product down the road - the goal would be to make better products, not to get people off of the phone.

If they took this approach, tell me that the 'problem' with support (as they currently see it) wouldn't become a major strength - one that people would actually pay more for.

Then imagine what that would do to their competition.