The Outsourcing Rush

Is it just me, or is the heat starting to go to everyone’s head south of the equator?

In his bestseller “The Power Of Unfair Advantage”, John Nesheim illustrates the boom-bust cycle of market phenomena as a “Wave” consisting of six stages: Displacement, Euphoria, Overtrading, Mania, Financial Stress and finally, Revulsion (where no one gets funded). It’s a good model, and one which those of us who experienced the tech bubble five years ago (who didn’t?) will identify with. And before that, those that were invested in China in the late nineties will recognise. And if you were active at the time of the market crashes of the late eighties and even 1929, you’ll recognise the stages of Nesheim’s “wave model” too.

Those are just a few examples, so what is it about the nature of waves that keeps them coming back time and time again, only to eventually suck in a zealous camaraderie of supposedly informed market participants? Usually the problem in identifying an overly bullish market is in the fact that it takes on a form we don’t recognise, so it’s harder to see coming. But if there’s a fairly standard pattern, shouldn’t it be obvious?

I’m not sure about everyone else, but almost monthly on the front covers of the Business Monthly’s and daily in the financial presses at the moment I read more amazing news about the development of outsourcing to all these cheap, far-flung locations and how it is saving Western companies millions/billions of dollars a year on such ‘overpriced’ organizational components as IT and Customer Service at the same time as providing an entire platform/solution for economic development for these poor economies. In fact, one would be forgiven for thinking that some Western companies are contemplating ‘outsourcing’ the entire organization altogether (actually I think I saw something on that too) and that such reputable enterprises as AT&T and Bell Canada might soon re-brand as IT&T and Bell India.

Has everyone forgotten the days only half a decade ago when every company was going to become ‘virtual’ overnight and the internet was going to totally replace physical reality with such ground-breaking concepts as (virtual pets and pet food!), (virtual real estate agents!) and infamously … Worldcom (what was it exactly that they were going to do again other than make more millionaires than any other company around?)

Nesheim breaks down his six-stage wave model into the following summaries:

  1. Displacement: Something arrives to upset business as usual.
  2. Euphoria: The first excited investors being to put money into related new enterprises
  3. Overtrading: A rush starts to get in on the ground floor, and money flows into many new companies.
  4. Mania: A wild rush to get in before it is too late sends a river of money flowing into anything related.
  5. Financial stress: Reality arrives as new enterprises begin to crash and optimism turns to pessimism.
  6. Revulsion: Investors depart, many with nothing.

In my experience, stages 4 and 5 are usually accompanied by a distinct set of psychological conditions.

o First of all, common sense hits the window. Any type of rational analysis is usually put aside at the expense of the hype being circulated in the marketplace.

o The advocators of the trend being hyped usually admonish “This is happening and you can’t top it!” as pretty much a blueprint reply to any kind of critical attempt at reasoning.

o At these stages the press is full of articles about how glorious this new revolution is, as the PR machines of organizations that are eager to promote the new trend are working in overdrive.

o There can be absolutely nothing wrong or potentially perilous about this new trend and anyone who dares to criticise it is “old fashioned” or “behind the times”.

o There are usually just a few market participants who are benefiting big time off the new trend, with most zealously “following the crowd” in implementing this exciting new trend of standardisation.

The parallels between a bull-market rush and the outsourcing phenomenon are so remarkable, I’m very surprised no one has thought to point them out yet.

In Context

Common sense suggests to me that if you pay bottom dollar for something, you’re probably getting bottom dollar delivery. Only for a very short period in time does a trend or solution represent actual value, as Microeconomic theory dictates. Someone suggested to me the other day that outsourcing was not only cheap, it was higher in quality than if you did the process yourself. My response to this is: Please. But it’s not just the cost-saving that is worrying in the outsourcing phenomenon, it’s where the cost-saving is being exercised, and the degree to which it is being done. Areas of organizational operations such as “Customer Service” are the fundamental building blocks to any kind of successful operating principle: who would honestly, given the choice, rather have an unknown company eight thousand miles away dealing with their customers on a more regular basis than doing that themselves. What is really worrying though is point this perfectly valid criticism out to anyone in the outsourcing industry and you get the standard response: “It’s happening anyway. You’re behind the times.”

Most of the hype is centred around India, but on closer analysis, one has to seriously question the validity of the outsourcing model as a Long Term strategy. India’s infrastructure is not just second-rate, it’s practically non-existent. One-third of the population is illiterate (half of those women), the transport systems are a nightmare and the national power grid is some of the worst in the world. To this kind of criticism Indian politicians reply flatly: “We’re a democracy. We can only grow so fast.” That may be all well and true (though it sounds more like a statement to appeal to Western organizations) but with these massive infrastructural faults in place, is there really room for the mass-development of an entire quality industry?