Perhaps one of the leading misconceptions about outsourcing is that a company that outsources needs to cut the jobs of current employees. For sure, there are instances where we see that happening. But that is a result of a flawed mindset deriving from an early stage of outsourcing history where increasing the margins (for the sake of profit) was the only purpose. It works, but it’s short-sighted.
Outsourcing done right has a lot to do with frugal innovation. Navi Radjou coined the term and defined it as a mindset exhibited by individuals and organizations that strive to do more and better, with less. Most managers will translate this: “Ah, I need to cut costs while keeping the same revenues level.” Contrary to this understanding, frugal innovation rather translates to “How can I maintain my current level of expenditure while increasing the efficiency of output and revenues?” In other words, how can I increase value to my customers, while at the same time not spending more towards that purpose?
Outsourcing is undergoing a shift in mindset
This switches the angle from which managers look at outsourcing: it becomes a strategic decision (i.e. from cost-cutting to cost saving). The outsourcing partner comes in to complement an existing organization, and act as an extension of its teams in order to tackle larger projects or peaks in demand. Besides bringing in raw capacity, the outsourcing partner will contribute (if selected well) with a strong focus on end results, since their business with that organization depends on it.
But let’s take a step back and think through the model of frugal innovation. Without any doubt, it’s quite easy to find a solution by spending a lot of capital (especially if it’s available and this seems like a good cause, right?!). However easy that may be, it actually drives down innovation and creativity (since most likely an existing solution will be chosen, one that can be bought off the shelf). While taking the decision to outsource is a step forward, it’s hardly the only one you need to take. The other critical step in reaching higher levels of value is the innovation process through which old practices and processes are entirely re-thought or upgraded. That puts the outsourcing partner (and whether they like it or not, the organization as well) in a tight spot that doesn’t allow for any status quo such as using piles of cash as a safety net. As Renault-Nissan Group CEO Carlos Ghosn once said “In the West, when we face huge problems and we lack resources, we tend to give up (too) easily. Frugal Innovation is about never giving up!”
The lesson from emerging markets
Although frugal innovation has been associated more than often with emerging markets (and for good reasons), more and more organizations in developed economies are considering this mindset because of the rising consciousness that resources are limited (i.e. see the Skills Gap for human resources or fossil fuels). The last economic crisis that swept many western markets off their feet has contributed towards that same consciousness.
Outsourcing based on that mindset is probably one of the soundest decisions that an organization can make (where applicable, see the organization’s core or niche specialty capabilities that represent its trade secret), especially because of its sometimes harsh but healthy side effect: it enables that same organization to innovate faster, better, and cheaper (without giving up on any of the three). All of which are quintessential to success in the New Economy where capital takes the back seat, while talent drives.
Here’s a challenge that takes you out of the comfort zone, out of a profit-only or damage control mindset. What will you do?