Outsourcing as a Profit Strategy

Outsourcing Pitfalls

Outsourcing doesn’t have much to do with marketing itself, other than as a marketing consultant, I’m exposed to a diverse range of businesses and their strategies that need help with their cash flow and marketing issues. Recently I was offered a gig as a consultant for a company that has 6 different business models under its roof, with all relying on outsourcing as a solution for their clients, whether that’s customer support, QA, testing, cloud infrastructure, website and application development, or some combination of those.

Most of my clients gather under the software and engineering canopy, who are mature enough to afford my rates and are sizeable enough to have the types of problems I solve. Some don’t, like an Alpaca farm I worked for once which keeps things interesting. This particular firm I was about to work for has 1400 employees, more or less, with the vast majority being in India and the HQ and their clients being stateside. They successfully market themselves to midsize enterprises, and it’s a nice niche they’ve found. This allows them to capitalize on the lower wages of populous and wage-hungry India and the higher rates they can charge to clients here in the US, by having the headquarters and facemen here in the USA. They act as the middleman and project managers, taking a tidy profit for their involvement, using an agile methodology.

Outsourcing itself isn’t that big of a deal and is smart for multinational firms like Ford or General Motors, who can hire locally for manufacturing positions, pay above-average rates in those countries, and as a result of their supply chain, sell those products in the same countries in which they operate, as well as elsewhere. It’s not exploitative because it keeps supply chain costs down and provides wages to those local customers that the employees and their families need and offers them the very products they build at lower prices. They sell their products right there to those customers and people regionally, and they can pay higher rates and are expected to in order to do business there because of their size and heft. That differs in a way from companies like Apple, who manufacture nothing and is strictly a marketing and design firm. They design products to market, then outsource the labor to workers that specialize in making tiny electronics and pay their employees rock-bottom prices. Nike does it too; they make nothing and hire low-wage offshore employees to make their products to sell at high-margin prices. Neither has a gear or cog turning here in the US. The often get rightfully burned for human rights violations even though they take measures to minimize that happening, and in fact, plan on getting caught at some point. It’s inevitable. But managers in China, the Philippines, and elsewhere know how to skirt regulations, get tip-offs from corrupt regulatory inspectors, and get around laws that try to keep slave-like conditions and wages as low as possible because that’s how their business plans work within their county’s specific cultures. When nabbed, the companies pay, as expected, but the practice still goes on. Everyone’s in on it. Ironically, the people here in the US that are most vocal decrying such illegal practices are usually the most voracious consumers of their products. But they still aren’t the most egregious ones that take advantage of offshoring’s financial appeal.

Darjeeling India
Darjeeling, India

At the bottom rung of the ladder are companies like the one I was about to work for. They even market offshoring as a profit center to their clients explicitly. Even worse, the CEO and founders are from the very country they’re exploiting, which is how they have an “in” and got the business started in the first place. Here in the US, they’re hailed as geniuses of business and placed on the Inc. 5000 year after year, until their business plan begins to break down, and they call in consultants like me. They even go one step further to maximize profits: instead of establishing operations in large cities like Bangalore, they chose to set up their staff in a more “rural” Mangalore, where the wages aren’t as high to get those margins slightly higher. Similar to how wages are higher in San Francisco, Boston, and New York City here in the USA. Mangalore would be like setting up shop here in Louisville, KY but charging New York City prices to clients in foreign countries. What it ends up being is a type of arbitrage, which is discouraged in the financial services industries because it isn’t a sustainable strategy. Nor is it elsewhere, in the case of arbitraging wages globally. Market forces and competitors will move in and eventually shrink those margins to the point that keeping the business running as-is doesn’t become feasible, or at least very difficult without some major pivots that are unappealingly expensive. Executives sense that problems lie in marketing, which is why consultants like me are called in, or try to find areas where shrinking margins can be made up, usually in vain. A whole new business strategy needs to be identified and pursued to keep revenues increasing to satiate investors. The large players in this space can stay alive because they’re diverse, like IBM and Oracle, who also produce and offer all sorts of other products and services in their line. But it’s clearly a temporary endeavor as a sole pursuit, at best.

I hadn’t realized this until this engagement opportunity was put on the table in front of me and I began doing some necessary and related research. As the CEO told me during our interview and information-gathering session, people don’t know or want to see how the sausage is being made. They just want the sausage. But unlike the sausage business, the components that go into it aren’t human lives relying on decent wages. It gives it a quite unsavory taste and is the definition of exploitative, in my opinion.