Outsourcing and Offshoring in the Asian Century

The framework to take the decision to outsource elements of your organisation's operations has changed in the 21st century. Outsourcing traditionally relates to producing your products and services, such as assembly, or providing organisational support, such as through call centres or administrative functions such as account keeping, and the framework for that decision has been based on cost reduction, cheap labour and operational efficiencies.

In a knowledge economy, thinking about outsourcing in these terms is not enough.We define an organisation as a group of people with shared values, who share an issue (problem, opportunity) and who work together to provide a solution for all who are affected by the same issue. The very notions of shared values, issues, work and solutions are based on all within the group being able to identify those shared notions through knowledge.

When considering outsourcing, all partners to the arrangement must be sharing and creating this knowledge.

The long-term consequences of outsourcing without considering the very foundations of organisations are becoming more apparent, an example of which is the subject of a Steve Denning blog on the Forbes site in January 2013 on outsourcing and offshoring called The Boeing Debacle: 7 lessons every CEO must learn.

I made a comment on this article which included the criticism of using the terms outsourcing and offshoring interchangeably, because the issues are not caused by whether the outsourcing takes place internationally or locally and because offshoring may relate to leadership, management, administration and even ownership. The article is written from a North American perspective and this has affected the terminology being used, a common feature of debates around the world on this issue which tend to relate to the movement of employment offshore and the effects on "local" economies.

Organisationally, the real problem with outsourcing is “fracturing”, the splitting of what should be integrated parts of the organisation. As Steve points out in his response to my comment, fracturing can occur internally in an organisation through hierarchy, and externally through outsourcing, whether local or offshore. It is the risk of fracturing and the difficulty of solving the problems caused that grows in each of these scenarios.

Fracturing breaches the fundamental basics of Radical Management. The assembly will no longer have direct links to customers/clients, there is no capacity for creating cascades of communication, there is no room for self-organisation and the authority to make important decisions no longer exists.

If an Australian organisation wants to establish operations in Malaysia or work with a Malaysian supplier, that’s great for both countries and entities. They can add diversity, markets, new approaches, additional expertise. But only if they look at partnerships (rather than agreements) and create the framework that prevents fracturing and allows radical management. Unfortunately, a focus on cost cutting results in one key area of your organisation (eg product) being separated from the key values of your organisation, in distinction to those values becoming ingrained when you have a strong focus and direct links to your customers.

In the bigger picture, local economies are affected by other economies, regional and global. There are no closed economies anymore.

In the region of Oceania in the 21st century, growth opportunities are going to be available through partnerships in Asia. You will need to consider carefully the frameworks used to make decisions about organisational hierarchies, outsourcing and offshore operations at all levels, from administration and production to sales and customer service, whether you are the the outsourcing organisation or the organisation providing outsourced services.

Your frameworks will need to be based on the very fundamentals of organisations - shared values, shared visions, shared knowledge - and an understanding that as partnerships are created, become established and grow, the nature of the relationships will change and the possibilities and problems of fracturing will increase.

In the Asian Century, the opportunities for offshore partnerships will grow, especially for Australia and other Oceanic countries. A partnership approach based on fundamental organisational frameworks is more aligned with existing Asian social and business cultures and will help your organisation achieve greater success.

The very notion of "outsourcing" in its traditional sense, using an external organisation to provide services that remains external on the basis of a commercial contract, is disappearing because it has led to business failure and to excessive and unmanageable risk. However, asking partner organisations to provide functions may help your organisation focus on its core business and on delighting customers. Your partners need to understand your strategies to achieve that delight and the contributions they can make.

There is nothing wrong with offshoring in the knowledge economy, if you understand the fundamental foundations of organisations, and the importance of shared values, vision and knowledge.

In the Asian Century in the knowledge economy, the partnership approach is going to be a common and potentially highly successful way to operate.