Last year reading The Black Swan made me aware of a major problem with the outsourcing business. According to Mr. Taleb, surprises and drastic events outside of your control will always happen sooner or later. Successfully navigating the unexpected requires minimizing your exposure to and increasing your ability to cope with negative surprises, while maximizing your exposure to positive surprises. Pretty simple.
For the average outsourcer, eliminating exposure to the negative is nearly impossible to do because you can never make the downside of not having any work goes away. When the economy tanks, your big customers disappear or your industry evaporates, you are stuck with no work, very little income, and a big payroll. At least in many businesses, if it is impossible to eliminate the risk it is possible to hedge that risk with an equally large return. No sane business puts it all on the line for just an average return, right? But that's just what outsourcers do time and again. A possible solution is to negotiate for bonuses and royalty shares for reduced costs upfront, but that's usually not an option. Thus when the customer hits it big you get nothing except perhaps more work, good karma, and a better reputation. This will get you more work and gives rise to the illusion that outsourcing is a "safe" industry.
Among outsourcing companies, I often hear of talk about having less risks and greater stability than companies offering services directly. In my experience, this is true while there is good demand for outsourcing services but when the economy tanks you will be stuck paying a large payroll with no income. In this situation, the companies that do well in bad business climates "externalize" this risk onto their employees (endless part timers and contractors cut automatically when there is no work etc). Obviously any company engaged in these practices will be unable to retain skilled employees for any length of time, severely limiting their future potential. In this light, outsourcing is not less risky, but in a normal business climate the risk is simply ignored. Exchanging an ignored and perhaps comfortable risk for minimal return is not a very good bargain in the long run.
What does this mean for me? At least for the immediate short term, I expect contracting to be a portion of my income, but as long as the risk of no income is the same, I must be focused on creating a business that provides value directly to customers and will let me reap the rewards from any upturn. (much easier said than done!)
*black swan image by Calvin Teo
