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Outsourcing Limbo: How Low Can You Go?

So what Coase proposed more than 70 years ago seems to hold true today: If companies can buy it cheaper than they can make it, they should buy it. What's amazing and unique to our current business environment is how many functions it now makes sense to outsource. This is a direct result of two key phenomena: enabling technologies and a tight labor pool. New information technologies have made it easier to outsource business functions that were once considered core. Areas such as manufacturing and marketing communications can now be delivered by outside vendors that specialize in these areas. Information technologies integrate these vendors tightly into the corporate fabric. On the labor front, even with our current economic conditions, it remains difficult to find qualified managers and technicians with specific expertise—it's much easier to let someone else hire, train, and retain hard-to-find skills. These two dramatic forces have combined to create a new version of Coase's model that looks much more like Figure 2.

Figure 2 Effects of technology and tight labor pool.

In today's business environment, functions that used to be clearly "below" the outsourcing line have now jumped above. What started with payroll and IT has now moved to manufacturing, engineering, HR, and finance. No company function is immune to this new reality. In fact, the executive management team of any product company will soon be reviewing all internal functions with the decision tree shown in Figure 3.

Figure 3 Make-or-buy decision tree.

Can we buy this capability from someone else? We can't? Then we need to staff and manage that function internally. We can purchase this capability? Great. Now, before we outsource this function, we need to determine whether we as a company add value to this particular function. For example, we could outsource our IT function, but we're using IT advances to be the low-cost provider in our markets. Managing that function internally means improving the bottom line. Let's not outsource that function. But if we can't add margin by managing the function inside, outsource it!

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