The Trouble with Outsourcing

I was reading Michael Hiltzik’s column in the Los Angeles Times business section the other day, and nodding along with his contention that the problem with outsourcing – having various parts of your product or service built/performed by lower-cost workers or subcontractors overseas – is that people keep treating it like a moral issue, when it occurred to me that this is a lot like saying that the problem with the Pacific is that it is wet, or that the problem with the Sun is that it’s a huge ball of radioactive fire. Hiltzik contends that it is obviously immoral to abandon “loyal” American workers and attempt to gain cost savings by having the work done elsewhere in the world; I contend that like most matters of morality, the question isn’t quite as black and white as he’s making it out to be. Moreover, I have to say that the key points he’s making would apply to ANY subcontractor relationship, foreign or domestic – and any company that behaves in the fashion described would be in for just as much trouble…

If you don’t have access to the Times where you live (or don’t want to bother tracking down the article in their archives) you can pick it up here if you’d like. The original article contends that argues over the morality of outsourcing are obscuring the fact that it is frequently difficult, time-consuming and expensive to outsource parts of a major manufacturing process. In the case of Boeing, the company being profiled, the least profitable and most problematic part of building an airplane is the final assembly process – and that was the one part Boeing had elected to keep in-house. Mistakes, problems, compatibility and tolerance mistakes made overseas would all have to be corrected by Boeing at their own cost during final assembly, and if a subcontractor fails them or refuses to correct the manufacturing mistakes, the company has no choice but to take back that part of the process and make the requisite parts themselves – incurring still further costs and delays. This is why the 787 Dreamliner project is so far behind schedule and so far over budget, for example. But while these conclusions are obviously correct, I’m not sure they completely address the issue…

As previously noted, there is no point in mice deciding that cats should wear bells if the cats are of another opinion. Similarly, there is no point in remaining loyal to your home-town workforce if you then go out of business, bankrupting your stockholders and destroying the careers of all of your personnel (not just the ones affected by the outsourcing) because your labor costs make it impossible to produce an equivalent product at a competitive price. If Mr. Hiltzik is right (and he generally is), the problem with the Dreamliner project isn’t just that Boeing outsourced the primary components of the aircraft, but that they did so in a strategically foolish and contractually idiotic fashion. Outsourcing parts of this product line may have lowered the company’s profits, destroyed their production schedule, and tarnished their reputation, but all of those things would have happened if they’d outsourced those jobs to South Carolina, San Antonio or Sacramento, just as surely as sending them overseas did…

Now, I don’t want to downplay the moral aspects of outsourcing. But the fact is that while the 787 has more parts and components that are made overseas than any other Boeing product, a full 30% of the aircraft, that’s still a lower percentage than the amounts of most ostensibly American-made cars, for example. Whether we like it or not, international business and off-shore manufacturing are here to stay, and the real question is becoming whether we can keep the company in business, provide good jobs for at least some of our workforce, and generate enough return on investment to keep our ownership from withdrawing their capital support for the company under these conditions. Sending jobs overseas may be morally wrong, but destroying our company so that we can remain morally pure is not a better choice. The problem in this case is that Boeing appears to be doing both at once…