Outsourcing and The risk of brand damage

Car manufacturers started in the seventies with optimizing their value chain by outsourcing activities and has since then progressed into almost every aspect of our economy. Think of Indians analyzing x-ray pictures for European/American hospitals, South Africans administering mortgage requests and Philippine’s doing the salary administration. The main drivers behind this wave of outsourcing are technological advances and the breaking down of national trade barriers.

The same technology enabling business process outsourcing also allows for an increasingly intimate relation between company and customer. Books, pizza’s, insurances, movies; almost everything can be ordered these days by TV, laptop or PDA. The technology behind these advances are however so complex that most companies have to rely on external technology partners/service providers to design and manage the technology. The pressure to work with external partners is increased further by the relentless pressure to lower cost, increase quality and innovate.

If this goes all well, the advantages for the company interacting with the consumer are overwhelming. It allows the company to gather valuable information of the consumer behavior, allowing for more tailor made offerings. More precise consumer data allows furthermore for optimized production volumes and better prioritization of future innovations.

The increasing reliance on external suppliers has however also an effect on the risk profile of the company having the relationship with the consumer. So are the troubles with the Toyota Prius ‘insourced’ from an external partner as Toyota does not make the affected components themselves. Other examples are consumers unknowingly investing in the Madoff scheme, because the bank did not exercise adequate control over its asset management value chain. In Germany financial and personal data of some 21 million went on sale on the internet after some dodgy service desk providers got hold of it. In this case the prime service provider had subcontracted the service desk activities to smaller service providers to further reduce cost.

As a result consumers think they do business with one party, but actually deal with a dozen. In theory this should cause no problem for the consumer as it can hold the company liable, but in the meantime is it the consumer who is the one driving the faulty car against the tree, is the one seeing its pension evaporate due to mismanagement by the bank or sees its credit card information for sale on the internet.

This results in reputation risk resulting from outsourcing becoming increasingly important for companies: addressing the potential damage to the brand value due to external partners messing up. External partners which are often chosen for one reason alone: lowest cost. And lowest cost is directly related to what you get at the end of the day.

I’m not trying to say that call center outsourcing is a bad thing, on the contrary. It drives innovation and productivity gains and a more even distribution of wealth across the world. What I am trying to express is that companies introduce a strategic risk when cutting up their value chain in many pieces without being able to execute adequate control over it. Governing and integrating end-to-end value chains (from consumer all the way down to the subcontractors) is thus a topic I expect to grow further in importance. And that starts with transparency. Transparency and trust. Transparency, trust, and not just going for the lowest bid.