How does outsourcing harm the industry?

Outsourcing: Cheated

The maxim is simple and concise. “Everyone should do what they do best,” says Jörg Pribil, Nokia Managing Director for Austria and Switzerland. The Finnish cell phone manufacturer has taken the principle of outsourcing to extremes. "We ourselves only take care of the most essential and central functions," says Pribil. Around 30 employees are enough to look after the entire Austrian and Swiss market. Only sales and marketing agendas are carried out in the head office, all services such as IT, repairs or the helpline area are outsourced. Customer support is handled “through our 2500 partner shops”, explains the Nokia governor.

The decision to outsource tasks mostly results from a need for specialist knowledge, the desire for more flexibility, but often also from the simple dictation of tight budgets. And while the outsourcing partner specializes in a defined area, the client can concentrate on his core activity. Sometimes it saves the costs of setting up, training and, if necessary, the dissolution of entire teams if the associated task no longer exists.

In the opinion of management consultants, however, outsourcing is only considered economically viable if the costs can be reduced by 20 to 30 percent. "The hurdle for cost savings is at least 20 percent," confirms Albert Felbauer, Managing Director of Siemens Business Services Austria (SBS), an IT service subsidiary of Siemens Österreich AG. "After all, the partner has to take responsibility and make investments that have to pay off in the long term," says Felbauer.

If the hoped-for savings goals cannot be achieved, smart entrepreneurs are better off keeping their hands off them: The multimedia provider Hutchison 3 G Austria, for example, rejected the idea of ​​outsourcing the IT area because the possible savings did not appear to be large enough in the end.

Full service. SBS sees itself as number one in the Austrian outsourcing market. With a turnover of 130 million euros in the previous year and 600 employees working in this business area, the company has a market share of around 25 percent throughout Austria. SBS also focuses on IT consolidation, mobility solutions and security. Demand is also strong beyond the borders, especially in south-eastern Europe.

The approximately 160 customers of SBS also include the mobile operator One, which recently outsourced the operation of the entire IT infrastructure including 28 employees. The order was placed over a period of seven years and represents a volume of 35 million euros. Felbauer: “This is full outsourcing, which doesn't happen very often. As a rule, customers opt for selective outsourcing. "

As part of the contract, SBS takes over technical operations from One, including databases, IT help desk, standard applications, archiving, backup, system management, monitoring, end-user computing as well as data transmission and voicebox services. This was not the first such step for One: Certain IT matters were outsourced to SBS in 2003, network operations to Alcatel at the beginning of 2004, and customer service was partially entrusted to the partner Master Management in the previous year. “The outsourcing process is now complete,” reports One company spokesman Florian Pollack. "With these measures we can concentrate better on our core business."

Industry and the banking sector are also outsourcing, with some positive experience. For example, studies by the economics department of Bank Austria Creditanstalt (BA-CA) have shown that Austrian industry owes some of its competitiveness to the outsourcing trend. At the same time, however, the employment figures within the industry are also falling. "Outsourcing is one reason why the share of industry in employment is falling," says BA-CA economist Marianne Kager. However, the jobs are often not completely lost, but sometimes just relocate to an external service provider.

This is of course not possible with so-called offshore outsourcing, whereby individual divisions, fields of activity or departments are outsourced to Asia or Russia, for example. The possible savings are naturally greatest with this type of game. In computer and information technology, for example, the trend towards moving business agendas to low-wage countries continues unabated, according to a survey by the consulting firm Frost & Sullivan. In 2004, a total of more than 825,000 IT jobs from the areas of customer service, network administration and software development are said to have been relocated to Asia from 14 countries. These data were collected through surveys of IT decision-makers; Germany, the USA and Japan are among the 14 countries. These three countries were also among the main exporters of jobs to India and China last year.

In addition, if an Austrian company wants to outsource certain fields of activity in its own country or in a comparable country, it must comply with more rigid legal requirements than when relocating jobs to the Far East - in particular regulations for temporary employment relationships and certain minimum standards for income. For Walter Hanus, managing director of the industrial consultant IVM, who advises the industry on purchased information services, outsourcing within EU borders is therefore a quality feature. On the other hand, those who move jobs as far away as possible, says Hanus, are often just on the hunt for the last cent of potential savings.

Hanus ’preferences in this regard are of course not entirely altruistic. Because his sphere of activity is the EU market, and the business of the 220-strong company is currently doing well according to its own statements. "This year we expect an increase in sales of five to seven percent," says Hanus.

However, the market potential is far from being exhausted. In Austria, between 100,000 and 120,000 people are currently “outsourced”, ie working in the context of temporary employment relationships or the like. Hanus refers to countries such as Great Britain and the Netherlands, where the proportion of such employees is now eight to 13 percent, depending on the industry. That would mean a number of 300,000 people for Austria.

Price adjustment. The outsourcing of IT work, especially programming activities, is still very common. The hourly rates for the client are roughly between 40 (for simple activities) and 100 euros (for complex application software). When choosing an offshore provider, in India or China, for example, simpler services can be purchased for 20 to 30 euros. However, these providers also tend to be more expensive, which correlates with increasing demand.

In addition, the rule applies: the more personal a certain service, the more important the socio-cultural environment in which it is provided. Beate McGinn, spokeswoman for Philips Austria, cites the training department as an example from in-house. It was outsourced, including some employees, to the training and seminar company Heptacon. However, the responsible employees of Heptacon are still located directly in the Philips building on Wiener Triester Straße.

However, Philips has already used outsourcing over longer distances. TPV, a company headquartered in Hong Kong, manufactures monitors that bear the Philips brand. With the deal, a sales volume of 1.5 billion euros went to TPV, 1700 employees were affected. The outsourcing of complete manufacturing processes is a business in which the electronics giant Flextronics, for example, has specialized.

Lack of supervision. In addition to information technology, customer service is the second major field of activity for outsourcing providers. In the area of ​​so-called Customer Relationship Management (CRM), call centers (telephone exchanges for customer inquiries) come into consideration. It is true that there are companies in practically every industry today that have their customer contacts handled by such call centers - whether telecommunications providers, car manufacturers or food companies. Of course, it is precisely these services that receive the most criticism due to the sometimes poor quality of support (see interview on page 66), and recently providers such as Linz-based CLC AG made headlines in connection with their insolvency.

"We don't even offer that because we couldn't maintain the quality," says IVM managing director Hanus. "The prices of the providers are going down, at the same time the companies are demanding more and more performance." This would damage the required customer service in the long run. Hanus: "Everyone knows from their own experience how often they have to be angry about the support."

Sometimes, in view of negative experiences, counter-strategies are already emerging. The computer giant Dell, for example, brought its call center for so-called Optiplex desktop PCs and Latitude notebooks back from India to the USA a few months ago. The responsible Dell board member Randy Mott had to admit this to the media rather meekly: “We have learned a lot and will proceed more carefully in the future.” Mott spoke vaguely of “quality problems”, while the trade press reported that the Dell call center was among the support Inquiries simply collapsed - and customer satisfaction plummeted as well. In the banking and stock exchange sector, fear of quality problems has meanwhile even ensured that supervisory bodies have introduced their own catalogs of guidelines for outsourcing providers.

Intellectual property. In addition to quality, it is also about image - now also in terms of corporate policy. In the USA tenders are increasingly beginning to stipulate a US value added share of 100 percent, under the motto “Buy American”, so to speak. And finally, the protection of specialist knowledge and intellectual property is up for grabs: Anyone who does not relocate simple activities but rather complex tasks and perhaps entire construction processes to China or India should not be surprised if their product or at least components thereof will soon be on the market under a different name come. Software products are particularly tricky here - the proportion of pirated copies is up to 90 percent.

In any case, consultants like Hanus recommend a sense of proportion when making long-term decisions. Anyone who wants to bring back a department that has been outsourced to China after years has to start almost from scratch. In addition, according to Hanus: “You will never be able to outsource a service that is strongly related to the person.” This also applies to complex, indispensable processes of a company - otherwise you are surrendering yourself to the outsourcing partner, as it were.

However, outsourcing providers are also aware of the needs of their customers. For example, new providers are pushing into the market at the EU borders, for example from Romania and Bulgaria. EU patriots like Hanus are not averse to this. "You are, so to speak, in the middle, both in terms of the disadvantages and the price advantages."