The single most common reason we hear for outsourcing particular roles in corporate IT organizations is staffing flexibility. In other words, someday, when we have to remove some people, we’d rather remove the contractors than our own staff. Usually, the IT department blames this strategy on the finance department. The argument goes something like this, “We’d like to keep X% of our staff as contractors, so that if we hit a future snag in our growth, we can easily remove the contractors and keep the staff.”
I haven’t seen any concrete statistics on what percentage of staff in most IT organizations are outsourced; anecdotal evidence would seem to indicate between 30% and 60%. We’ve seen organizations as high as 80%.
Of course, outsourcing this heavily comes at a cost. First, there is a literal cost. We pay a premium to contractors. But, there are also significant soft costs: loss of intellectual property, lack of contractor dedication to company vision, reliance on staff who can leave easily, etc.
But, these are not the most significant problems with outsourcing for flexibility. The most significant problem is that this process in fact makes the organization LESS flexible. Let me explain what we’ve seen over and over again.
When a company encounters a need to reduce its staff, it is usually because of some kind of market or company financial trouble. The company needs to move quickly to reduce its costs. And, invariably, it seeks the quickest path to that cost reduction. First, it turns to its contracts with its outsourced vendors. But, here is where the problem begins, unlike its relationship to its employees, it has contracts with its vendors. Contracts have start and end dates, and chances are, the end dates don’t meet the company’s needs. Of course, frequently, they buy their way out of these contracts or cancel with some notice, but most often, they follow the path of least resistance: the relationship with employees of the company is far more flexible. They can be severed at will. And, they are.
And, of course, this exacerbates the problem. Perhaps the company was 40% outsourced before the layoffs, now they may be 50% outsourced AND now because there is a higher reliance on more expensive labor, the organization is actually more expensive for the output it produces.
If it is truly finance departments that require this kind of outsourcing, why doesn’t anyone tell them they are crazy?