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Outsourcing’s short-term gains may be outweighed by long-term costs, U. study says

SHARE Outsourcing’s short-term gains may be outweighed by long-term costs, U. study says

SALT LAKE CITY — Outsourcing is to a company's viability as high unemployment is to a job-based economy.

At least it can be, according to a new study co-authored by University of Utah David Eccles School of Business researchers that is an explicit heads-up to companies bent on cutting corners — and often jobs — in a desperate attempt to cut costs.

The strategy of bolstering a firm's bottom line through outsourcing manufacturing, quality control and even customer service holds as much long-term risk as it does short-term financial or market position gain, according to Lyda Bigelow, an assistant professor of management whose ongoing research focuses on strategies businesses use to expand and how they handle, or often mishandle, change.

Despite the hazards of losing quality control through outsourcing, which has a long history of being an Achilles' heel at many companies, outsourcing is booming.

Companies are invoking it to reduce overhead as well, outsourcing labor and in turn adding to an unemployment rate that remains above 9 percent. The nearly record number of people without work after being laid off by companies that have closed or are looking to streamline their operations has in turn, according to U.S. government reports released this week, led to the largest decline in consumer spending since 1942.

"This is a critical strategic choice that firms make," Bigelow said. "Companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail to survive."

Outsourcing is all about saving money or paying less for a service or product that a firm hopes or has been convinced can be made cheaper and faster than doing so in-house, according to an analysis by Bloomberg posted Wednesday. But even the expediencies of outsourcing are maxing out right at the time more companies continue to decide that it is their best and possibly only strategy.

The strategy worked for a while for Toyota in its pursuit to overtake GM as the world's largest automaker, Bigelow said. Boeing also outsourced to reduce the cost and spread production contracts on its Dreamliner aircraft.

The parallels of today's outsourcing approaches with the early U.S. automobile industry, whose behavior is the central figure in the new research, are remarkably similar, but massively different in scale.

As the nature of competition began increasing in the nascent auto industry in the mid-1920s, Bigelow said, "firms that continued to come up with innovative ways to design vehicles were penalized because the market no longer valued that kind of radical innovation. What it valued was greater reliability and durability, and a lower price."

"Across the board, we find statistically significant increases in the failure rate for firms that don't consider transaction costs in their outsourcing decisions," she said. "Firms need to look beyond production costs to other costs such as poor quality, delivery delays and risk of price increases by suppliers. In this situation, it's no surprise when things break down."

Boeing outsourced 70 percent of its Dreamliner plane, the largest ever in its history, Bigelow said. That resulted in savings that have been more than offset by increased redesign costs and expensive delays, and a decision by Boeing to rein in its outsourcing on the next model.

While the importance of a good product and good business strategy can't be overlooked, in both the past and present, Bigelow said, "the firms that do the best are the ones who make these judicious sourcing decisions."

e-mail: jthalman@desnews.com