I spoke recently to the Southern California Chapter of the IAOP—International Association of Outsourcing Professionals about the impact that today's social technology will have on the practice of outsourcing. In short, history teaches us that outsourcing will not only continue to flourish, but it will explode as a practice and move up the value chain, all because of today's social technology.
Not just a labor or cost arbitrage play anymore, outsourcing will take on more of a value creation mandate as tightly linked ecosystems will work seamlessly together to not only drive productivity but also to drive innovation—with the following caveat. This will only happen if these ecosystems are enabled through the efficient use and application of today's social technology.
The Late, Great Diminishing Firm
Why do companies exist? What's the economic rationale for their existence? Ronald Coase answered this question in 1937. They exist because it's a more efficient way to organize resources when compared to transacting with the external market. At least it was in 1937, when all manner of costs existed in transactions between different unrelated parties, e.g., slow information flow, slow and expensive travel, misalignment of incentives, poor communication quality and velocity, high search costs, cumbersome contracting processes, etc. etc.
The world of business today is much more efficient and the world of engagement between parties is becoming even more efficient.
Now, enter today's social technology. When business has an economic incentive to do something, it will be exploited. Today's social technology embeds intellectual and productivity advantages in it's ability to change how we connect, communicate, collaborate and create community between people and between companies. Exploiting these economic advantages will drive a new wave of outsourcing and create tightly integrated ecosystems from the individual contract employee to the outsourced IT function, where a monolithic corporation existed before.
Outsourcing For Innovation
As engagement costs continue to drop, transacting with the external market becomes easier, less expensive and increasingly seamless. The need to organize and control resources under a corporate umbrella goes away—there's no longer an economic incentive to do this. However, there is an economic incentive inherent in getting more out of the business partners that support your company. From the individual contractor, to the IT outsourcer, to your extended suppliers there is unrealized value in these networks. Your company and your business partners are a contextual social network, with one thing in common, your business success.
Outsourcing will not only continue to exploit cost arbitrage opportunities but as a practice it will start to be viewed upon as an untapped source of innovation. Service providers will be seen as an under leveraged wellspring of ideas and innovations. As a result, they'll start to be more tightly integrated and entwined with the buyers of their services—but this will only happen through today's social technologies—because it's the most efficient way to do it.
The Whole Ecosystem As A Value Creator
The whole will be greater than the sum of the parts in these social technology enabled corporate ecosystems. The self-employed who understand this will be able to link in and out of different ecosystems through social technology with a level of efficiency that will drive high levels of engagement, interaction and creativity. Service providers and suppliers who start to socially re-imagine how they engage with the buyers of their products and services will provide a new source of competitive advantage around their offerings. One focused on value creation, not just cost arbitrage.
The economics of the corporation tell us that when transaction costs with the market decrease, the size of the firm will as well because there's no longer an economic disadvantage to engaging with the market. This isn't your grandpappy's 1937 anymore, it's the future. And the future of outsourcing has never been brighter. Want more value creation in your business? Your business partners are waiting and social technology is your ticket to leveraging them.
Thank you to the IAOP for having me and also to the sponsors and hosts of the event Toyota, Avasant, HCL, Morrison-Foerster and CGI. Here's my Prezi from the meeting.