When Logic is Outsourced

Every so often, something gains a momentum that make it seem like it's everywhere. Everyone seems to be talking about it, it's on the news nearly every day, and it seems like every company is making use of it. "Investors in People" awards were an example a few years ago. Then it was companies taking to social media to promote their brands.

A relatively recent one is loved and historic sports grounds being renamed for some incongruous commercial sponsor. Exhibit 1:- The Sports Direct Arena. See if you can remember what that used to be called, and is probably still referred to as by its regular inhabitants. Answer at the end of the blog. Exhibit 2 - The Kia Oval, one of London's Test cricket venues. Obviously, for the tenants, there's a great deal of money involved. The downside is the associative element. For the first example, I imagine a stadium full of people cheaply made, ill-fitting tops and naff looking trainers. For the second, my mind is filled with pictures of crappy cars.

But there's another, more sinister craze which although it's been rumbling along quietly for years, has really picked up the pace recently. Outsourcing. However, unlike the previous examples, I can't really see the sense in outsourcing. I really can't. OK, there are a few strictly limited situations where I can see outsourcing being a sensible option:

1. You're a company who needs a product or service you've never experienced before. You effectively buy in the knowledge and experience necessary. No sense starting from the ground up, when someone else has already been there, done that.
2. You only need a product or service infrequently or irregularly. Again, no sense employing someone full time (or even part time) if the demand for their service doesn't justify it.
3. You're a small company and need the economies of scale enjoyed by a large scale provider of a given service or product.

There may be more. Please leave a comment if you can think of more options. It makes no difference whether you are talking about a private company outsourcing tasks, or public entities outsourcing tasks in the public sector to private companies.

But this isn't what I'm talking about. I'm talking about situations where a large company has been doing a particular task "in-house" for a protracted period of time. They then outsource the process. Result; contractors doing the same job that the employees had been doing, on a daily basis, and apparently for less than it was previously costing. Or so we're told.

Now here's the bit I really don't understand. How can an external company possibly supply exactly the same service that your (now ex-) employees did, make a profit doing so, and for it still to be cheaper than the original setup? I've seen several instances of outsourcing like this, and in most of them I'm left scratching my head. I just don't get how it works.

As I see it, there are the following possibilities;

• The new company is paying its people less, perhaps by outsourcing to an area with a cheaper labour rate, e.g. call centres. Maybe it's the same people on less favourable terms and conditions. See the recent arguments over privatised/contracted out court interpreters. Or maybe it's different people, less qualified for the role, but therefore cheaper. Again, see court interpreters. (1, 2)
• The new company is using cheaper products or materials than the original company was previously.
• They aren't doing the job as thoroughly as it was being done previously.
• The original company no longer has any interest in the task it's outsourced.
• The original company didn't know how to do the task properly in the first place.
• It actually costs more to provide the service like this, but in the twisted world of corporate accounts, it makes the business look better on paper to have fewer permanent employees.

Now, I have been called a cynic in the past, and I've even been called "negative". At the risk of reverting to stereotype, I'd hazard a guess that the real reason for most outsourcing options is one or all of the last three suggestions above. I haven't even considered the possibility of corruption, the possibility of being in a position to outsource/privatise something in order to make one's chums a large pile of cash. You might say that, I couldn't possibly comment.

If you're thinking that I'm perhaps being a bit hard on accountants with that last suggestion, consider this: I once worked for a company that was privately owned by a handful of people who were principally engineers, practical people. They had a "no-debt" philosophy. If they needed a forklift truck, or a car, they bought it outright, keep it until it had depreciated to almost nothing, and then replaced it. If it was working well, they might even keep it beyond its "shelf life". The company was floated on the Stock Exchange, and soon accountants were all over the place. Within no time at all a lot of the wholly-owned items, like the cars and forklift trucks, were sold cheaply and replaced with leased items. In essence, paying a monthly fee but never owning the item in question, a situation intended to go on in perpetuity. Despite it being plainly obvious that this process was costing the company more money in every conceivably way, we were told gleefully that it was better. The explanation is that when you buy something, you hold it as an asset, and that adds to the amount of capital required to make a given profit. Apparently it's better to improve that ratio, as it's looked at by potential shareholders, than it is to reduce costs and increase profit.

I try to apply logic to most things I look at, but the world of accountants (and bankers) is, to me, unfathomable. I've tried. Really I have. Maybe someone can explain it to me.

Oh, by the way, you and I probably know the Sports Direct Arena as St. James Park, Newcastle.