Category Archives: Outsourcing

We Need to Hasten Onshoring and Nearshoring — the Drivers Will Pound Those Who Don’t Into the Ground! Part 2

In Part 1 we noted how it was great to see a recent article on Supply Chain Dive on 6 reasons why global supply chains are shifting because the unending list of disruptions, cost pressures, and geopolitical tensions are only going to get worse.

As per the article, six major factors were influencing the decision — landed costs, tariffs and subsidies, geopolitical risk, existing supply networks, agility, and ESG goals — but these are, frankly, only half of the reasons that you should be shifting back. (And again, read the article for a detailed explanation of each factor, it is extremely well written and Part 1 only described the factors at a high level.) Today, with that article as a preamble, we are going to dive deeper into why the global outsourcing craze (thatthe doctor has been rallying against and complaining about for over 15 years, since he saw the business case begin to crumble in the late 2000s) was, and is, fundamentally wrong.


Yes, this would is overused, misused, and abused, but if you truly want to work with your supplier, it’s much easier to work with a nearby supplier than a far-flung supplier.

First of all, they are on a similar timezone, so at least half of a normal workday should overlap. No more 7 pm / 7am meetings in the best case (or 7 am / 3 pm / 11 pm meetings in the worst cases when you also have to dial in a partner organization in a multi-tier assembly operation).

Secondly, if you need to go on site, even if air traffic is grounded (terrorist risk, volcanic eruption, dangerous solar flares, etc.), you can get in a vehicle and drive to an on-shore site and many near-shore sites. And even in the North America / South America situation, while we still don’t have a complete Pan-American highway (as we still have the Darien Gap), we do have complete connectivity in North America and in South America, and if trade were to increase, it would make a ferry service from Panama to Colombia financially viable, and trucks could be ferried from Port Panama City to Santa Marta (and cars as well, although there is already a weekly service from Colón to Cartagena that could be expanded to operate more frequently). This means that you could get goods from any country county in South America into the US mostly by land in 2-3 weeks, or get to a supplier site by land in the same time. However, suitable partner selection could get you, or your goods, anywhere mostly by land in less than a week! (So, during normal times, imagine how fast and easy air travel will be — without racking up huge, unnecessary, overseas travel miles.)

Cultural Understanding

Most countries have a better understanding of their neighbours (unless it’s a communist/dictatorship with completely closed borders) than they do of countries half a world away, which usually makes collaborative working relationships naturally easier.

Complexity Reduction

The further away the good, the more complex the sourcing. There’s enough complexity to deal with in modern business. Why increase it? Especially since there is NO Big Red Easy Button (and Gen-AI definitely WILL NOT deliver one)!

Back to Basics

And, finally, when you onshore home-source or near-source, you’re getting back to basics. If you look at the history of trade, which was always long, risky, and costly, you traded for what you did not have locally, not what you had.

Convincing you that off-shoring was a good business decision that would save you money was one of the biggest cons, if not the biggest con, that the Big X Consultancies ever pulled off, since, in the long term, the only organizations that will make any money in the end are them*.

These Big X Consultancies charged you a lot of money to help you off-shore (which involved identifying suppliers, managing global supply networks, redesigning processes, updating inventory management, dealing with more defects and quality issues, etc.), which took you years to recoup before you started making money … which you have to give them again so they can help you re-shore, which requires identifying new suppliers (because even if your systems have data from pre-offshoring times, chances are those suppliers are out of business), redesign your supply networks (as you need different carriers, new warehouses, new partners, and new regulations to adhere to), updating inventory management, and temporarily dealing with defects and quality issues as the new suppliers evolve to support you. After all, any staff who knew how to deal with near-shoring (as well as handle trade in a time where there were few recriprocal agreements, tariffs were everywhere, logistics was a nightmare, etc. … i.e. pre 2000s, retired during / post COVID when they decided they had enough as a result of your “temporary” furloughs, forced office returns, and/or headcount rationalization in favour of new “AI” systems that don’t work.

If you had just stuck to the basics, and instead of going half a world away for a quick win, invested in process, product (design for cost/reuse/etc.), manufacturing, inventory, and logistics optimization, chances are you’d be far ahead now while the rest of the world scrambles to catch up.

*Today’s soundtrack: Bullet with Butterly Wings

We Need to Hasten Onshoring and Nearshoring — the Drivers Will Pound Those Who Don’t Into the Ground! Part 1

It was great to see a recent article on Supply Chain Dive on 6 reasons why global supply chains are shifting because the unending list of disruptions, cost pressures, and geopolitical tensions are only going to get worse.

According to the article, the following factors are influencing the decisions — and the doctor encourages you to read the article as he’s not going in depth into anything already written, especially when it was written very well, but instead wants to emphasize why the global outsourcing craze (that he has been rallying against and complaining about for over 15 years, since he saw the business case begin to crumble in the late 2000s) was, and is, fundamentally wrong (and emphasize even more factors you may not be considering yet).

Landed Costs

Items have become more expensive as supply constraints on certain raw materials and food stuffs have significantly increased prices across the board, tariffs and taxes from protectionist policies have heightened prices further, and then the skyrocketing logistics costs during the pandemic and now due to canal crises (Red Sea, Panama, etc.) and the lengthened shipping routes around the Capes (Horn and Agulhas) they are introducing make farshore sourcing very expensive.

Nearshoring from Mexico or Central America can take two weeks off of delivery time and reduce landed cost by up to 20% from the average. On the flip-side, sourcing from China with “trade war” tariffs (that Trump is threatening to increase) can increase landed cost by 20% (as section 301 tariffs targeting China added a 25% duty on hundreds of products).

Tariffs And Subsidies

These trade penalties and incentives are flying fast and furious both in populist-run democracies/republics/parliamentarian systems with Our-Country-First policies and communist/dictatorship countries with protectionist policies or tit-for-tat trade-war tariff and incentive policies. This makes “neutral” countries the best choices for outsourcing. See the article for a great breakdown of import value trends as a result of these changes in tariffs and incentives.

Geopolitical risk

The trade-wars were just the start. Now we have the Russia-Ukraine War, the Israeli-Palestine conflict, the war in Sudan, increasing tensions between China and Taiwan, and so on. All of these have, and will, disrupt global sourcing. The global political trade risk in multiple countries is now significantly high.

Existing Supply Networks

Even though, for North America, China came at the cost of Mexico, the trade networks still exist, and are easy to ramp up again. Similarly, multinationals already have hubs in multiple countries they sell (a lot) in and re-orienting around those hubs is easier than finding new hubs half a world away. Moreover, reducing routes increases FTL/utilization of key routes, and allows for logistics optimization.


Extended supply chains mean extended ocean shipping times, congestion at ports and warehouses, increasing labour disruptions (which is the biggest supply chain threat right now), can create lead times that stretch into months when we want to operate in a near JIT (just in time) manner, and get restocks in days (or weeks at most). Nearshoring can often allow that. Offshoring (unless it’s very small components you only need a small number of that can fit in a cargo plane and where the cost is so high you can afford the high air transit prices) can not!

ESG Goals

Shipping takes fuel. LOTS of fuel. LOTS of dirty petroleum-based fuel. Hard to make your ESG targets when ocean shipping is one of the dirtiest industries on the planet when there are still container ships on the ocean that, in one year, emit the same amount of cancer and asthma-causing chemicals as 50 MILLION cars. (Link) Remember that 6 of the worst polluting container ships can pollute more than ALL of passenger vehicles in the US in a year. (And don’t tell me that electric cars will fix all that when the production of a single battery pack, which often requires burning dirty coal or oil, for an electric car can produce up to 16 metric tons of CO2 [Link] and charging that battery from a dirty coal power plant can result in the indirect burning of 950g of CO2 per kWH, meaning you could be producing 78kg of CO2 every time you fully charge your battery pack for a Tesla 3. This means that, in the worst case scenario where the battery and frame production was as dirty as possible, you would have to drive 1,000,000 kms for that clean car to become carbon neutral!)

And while these are most of the major reasons to consider nearshoring and onshoring (but not “friend”-shoring, but that’s a different article), there are others. And we will discuss them in Part 2.

OneMarket Continues to Power Your Procurement with Its P2P (Procure-to-Pay) Solution

As per our last post on how OneMarket Sources Your Contracts with Insights in its new Integrated Source-to-Contract Portfolio, LogicSource was founded in 2009 by experienced professionals who wanted to improve sourcing and procurement in organizations that didn’t have the knowledge, experience, and infrastructure to execute in an efficient, effective, and transparent manner. Their view was that every consultancy can offer advice, but not every consultancy can help the customer implement that advice and get results.

In order to do this, they decided to build out an end-to-end suite to support their indirect/tail-spend clients with their particular service-oriented needs. As per our last post, they launched OneMarket for Source-to-Contract in 2020, which followed the Procure-to-Pay (P2P) solution that they have had since they acquired the Cirqit P2P solution in 2009. It was updated and rebranded as OneMarket P2P since OneMarket launched in 2012 and has undergone continual development and updates through 12 versions since 2009.

The UX has been updated and is maintained to be consistent with the rest of their platform and the solution is tightly integrated with their analytics solution and supports very detailed PO, Invoice, and Spend Analysis on all transactions that go through the platform.

Buyer Side Procurement

The platform was designed to be a simple shop, buy, pay experience that supported simple quotes (bid-and-buy RFQ) for standard / repeatedly purchased products (to negate the need for a full sourcing event), single and multi-supplier catalogs, and rate cards for standard services. It’s really easy for a user to generate a requisition using each of these capabilities, as well as selecting options against approved supplier purchase orders (POs), blanket POs, and, as just mentioned, rate card POs. They support approval chains of 0 or more suppliers (where orders to approved suppliers with negotiated pricing within budget can be setup as auto-approved where there exist approved supplier, blanket, or rate card POs) which can be configured on implementation and updated on an as-needed bases by administrators.

When a Purchase Order is approved, it goes out to the supplier who can reject it (if there is no contractual requirement), request a change order, or accept it and flip it to an invoice with as few as two clicks (if they intend to ship in full), or a few key field updates of unit fields (if they are fulfilling with a partial order). Once the invoice comes in, it goes into its own approval stream of 0 or more approvals (as rules can be configured so that exact-match invoices under a dollar amount are auto-approved), and when approved for payment, the ok-to-pay is pushed to the organization’s system. In addition, if the payment system is integrated, the platform will monitor for updates and update the invoice status when the invoice is paid.


The entry point to the buyer’s P2P application is the Dashboard that summarizes:

  • Requests awaiting their approvals
  • Their requests in process

LogicSource understands their target market are overworked, often don’t have Procurement as their primary role, and aren’t the most advanced on the Procurement ladder, and designed the entire application to be as simple and straightforward for the average buyer as possible, and make sure every screen takes them directly to what they want or need to do.


The buyer application has four primary options:

  • Create: which allows a user to create bid-and-buy projects, request estimates, create purchase orders (from existing approved supplier, blanket, or rate card POs), or enter a non-PO invoice that was received
  • Transactions: which allows a user to access their estimates, orders, invoices, reviews, and projects
  • Catalog: that allows the user to access their catalog(s) (which can be integrated or held separate), and which can be drilled into by organization (which limits the items that need to be searched and ensures the services and items that are found are those that have been approved)
  • Analytics: that takes the buyer to the analytics application


Catalogs are hosted and work exactly as you would expect, with standard search, filter, and one-click select, but the level of item detail is deeper than you expect, and the ability to manage internal inventory, supplier commitments, volume-based pricing, and order minimums or maximums goes well beyond a standard P2P catalog. (Punch-out catalogs are coming, but the plan is to support hybrid or internal hosting as much as possible as their application supports more information and capability than punch-out catalogs.)

Search is by item id or description, and can be quick-filtered by category, supplier, status, keyword(s), and organization (which provide cross-catalog subsets relative to the different buyers and departments in the company). When a user selects a catalog, all they have to do is specify an order quantity to add it to a requisition.

When it comes to catalog item details, which can be seen upon drill in and maintained by the organizational administrator(s) as needed, the catalog will specify the internal item code, version, description, category (and subcategory), target organization, location types supported, keywords, whether or not the supplier is preferred, supplier part id, manufacturer item number, brand, more detailed description, inventory Unit of Measure, Quantity per Unit of Measure (i.e. there might be 50 gloves in a box), organizational item status, activation date, deactivated date if inactive, standard order quantity suggestion, organizational product owner, inventory manager, primary buyer, barcode, and any additional comments. In addition, the cost allocation can be pre-specified in the catalog item so the buyer doesn’t have to deal with it (and select the wrong/default “other” category all the time, which, of course, screws up analytics). Finally, if there is volume pricing or order limitations from the supplier, these can be defined as well as any commitments the supplier has made to item availability at the price points. (Supplier commitments are important as ordering against these can automate requisition approval as pricing and availability have already been confirmed and accepted by the organization.)

When the buyer is done shopping, they can create the requisition which will either be automatically approved and converted into one purchase order per supplier (if there are existing approved supplier or blanket POs and budget is available), or sent off for approval (and the approver will be notified through email and can approve through the email or through the system, as they will also see the request for approval on their dashboard), and then, once approved by the appropriate individuals, there will be one purchase order created per supplier.

Each purchase order will have an auto-generated purchase order number as well as the corresponding order id, order name, requester, contact, and deliver by date automatically extracted from the requisition. It will contain the full item information for each item: id, description, UOM, (agreed upon) catalog price, quantity, line item total, subtotal, tax, order total, (default) shipping information, and any associated digital specification documents. All of this can be updated by the buyer (on an auto-approved PO) or the approver if necessary before the PO is sent to the supplier. Internally (i.e. not shared with the supplier), the Purchase Order will also maintain the cost allocation from the catalog for processing and any associated messages that have been sent between the buyer and supplier.

Bid-And-Buy / Requests for Estimate

A buyer can request a(n updated) quote on one or more existing catalog items or variations with new, detailed, specifications (especially if the catalog item is a placeholder for products that can have multiple configurations or services). Specifications can be extremely detailed and can be configured to go well beyond standard catalog specifications and can have subsections for each type of specification required. For example, for a mailer (for those who still do print campaigns), you can specify the high level project description (header), specific project details (component information), the paper attributes, the artwork details, the prepress details, each individual component (i.e. envelope, mailer, artwork, etc.) that can be drilled into, associated digital files, shipping information, estimate specifications (type:RFQ/Sealed Bid/Auction, due date, expiration date, commitments, etc.), capabilities required, and selected suppliers.

Once the suppliers have responded, the buyer can click into the estimate and see all of the bids by component by supplier with the lowest bid highlighted and preselected. The buyer can select the award as is, or change the award by component, and when the buyer is happy, select it and the requisitions and/or purchase orders (depending on what suppliers were selected, the total cost, existing purchase orders, and approval rules) are automatically created (and, if auto-approved, distributed).

Supplier Side Procurement

The platform is designed to be super easy for suppliers to respond to bid-and-buy requests and orders.


The entry point to the supplier’s P2P application is the Dashboard that summarizes:

  • Bid-and-Buy Estimate Requests awaiting their response
  • Orders
  • Recently Completed Estimates

If you think about how a supplier generally interacts with a buyer platform, it’s to provide quotes, fulfill orders, submit invoices, and request status. The dashboard captures most of this (as the supplier can flip an order to an invoice once they have fulfilled it), and it’s a single click into one of the three main main drop-downs to bring up the invoice (status) screen (although SI feels it would be really useful to have a quick summary of unapproved invoices so a supplier who can’t figure out a menu doesn’t call the buyer asking for a status they can look up themselves).


The supplier application menu has three primary options:

  • Dashboard: that we just discussed above
  • Create: where they can create change requests and invoices
  • Transactions: where they can access their requests, estimates, orders and invoices


When a supplier clicks into an order, they see all of the header, client, shipping and line-item information right up front. From here they can accept the order as is and flip it to an invoice, altering the unit quantities to those they can deliver now if they want to, message the buyer for more information, or make a change request, which will be returned as an associated change order if approved by the buyer.

Clicking the ‘Create Invoice’ button takes them to the invoice screen where they can provide more details or alter other information as required (or desired, but changing prices, terms, or delivery dates will prevent a PO match and could delay the buyer’s processing of the invoice). When they are ready, they either accept the PDF generated by the system (as an unalterable historical record) or upload their own (from their AP system), and then it’s one click to submit the invoice (both the application and PDF version) to the buyer.

Centralized Procurement

A lot of LogicSource‘s customers are operations with multiple locations, including brands that own retail chains. These customers need a solution that can help them keep track of spend across their locations, help their locations buy, but do so with corporate policies in place and supplier/distributor minimums in check. The OneMarket solution contains a simplified configuration just for location managers who only need to make orders and manage orders and invoices.

When a location manager logs in, they see a dashboard that summarizes their orders: incomplete, pending receipt – action required, and open; and a search bar where they can begin a search and start a new order. Search brings up all matching results, where they can select a preferred item, enter the quantity they want, and add it to the cart. They can continue until they have everything in the cart, and then go to the cart screen where it groups the items by supplier, shows subtotals by supplier, and indicates, with red highlight, if there are any sub-orders that don’t meet order minimums (or violate any other rules for the supplier). They can then increase the quantity, add more items, or delete all items from that supplier until the entire order meets business rules. When they are happy, it’s one click to check-out and the orders are distributed to the suppliers (as no approvals are needed since their catalogs are limited to pre-approved suppliers and products with commitments and approved prices).

Procurement Analytics

The analytics solution we discussed in our last article on how OneMarket Sources Your Contracts with Insights is also integrated with the P2P solution and, since the data that flows through OneMarket is automatically categorized and clean, OneMarket can pre-configure a lot of meaningful and detailed reports out of the box. These can include change orders, client operations, missed opportunity, order activity, order detail, supplier order, tracking list, inventory, and retail reports in addition to all of the reports described in our last article. Retail reports can include billing status, capital project analysis, commitment status, project costs, freight detail, historical shipment analysis, order history, pre-paid allocation, and tax reports, among others. The existence of detailed PO, invoice, and line-item data allows for very deep analysis on spend and P2P process time. Spend, supplier spend, supplier rating, invoice throughput, and supply chain analysis are preconfigured on all available data and the out-of-the-box cubes are detailed and deep.

LogicSource‘s OneMarket is a great P2P solution for organizations that do a lot of indirect Procurement and need a simple, service-supported, solution or a solution that can be rolled out to multiple locations with limited Procurement expertise and capability. It’s definitely worth checking out if you are that kind of (mid-market) organization.

The Big X are Pushing Operate Services … But Can They Really Offer Them? And Are They Real?

And if they are real, can anyone?

Backing up, in the beginning, there was traditional Business Process Outsourcing (BPO), which became very common in the 1980s and 1990s as the result of constant claims by McKinsey and their ilk that the only way businesses could enhance their flexibility and agility and maximize their competitive advantage was to outsource processes they weren’t good at to the Big X Outsourcing offices. (In some cases they weren’t wrong. When the business had no competence in a function, grossly overpaying someone with reasonable competence, even if that someone was not the expert the Big X claimed, generated a good return for the business. The function was done efficiently and effectively, negating the loss the business used to suffer, and it allowed the business to focus on the functions they did well, which increased their profit even as they (often unnecessarily) forked out seven (7) and eight (8) figures to the Big X every year. (And we say unnecessarily because most of the time they could have outsourced to a smaller, niche consultancy at one third to one half of the cost and achieved the same result.)

Then, as Big X tried to steal business from their competitors and niche firms tried to break in, they upgraded to “Managed Services” which was supposed to be more than just performing the service for you cost efficiently (by supposedly reducing your costs by doing it better, and thus, cheaper) and adding value. The idea was that it didn’t just take over a point-based function, but instead provided a dedicated team that basically took over an entire department for you, just offsite, and worked exclusively on your projects. They learned your business, and improved the service offering over time to not only maximize efficiency, but maximize value. If they took over your IT department, they learned the systems you used, optimized those, learned to provide quick and effective problem resolution on the help desk, and, when you needed a new solution, helped you identify the one that would work best with the systems you had. If they took over your AP, they learned your suppliers, your payment rules, your PO formats, and implemented systems that allowed them to match POs to invoices for high-value invoices to reduce overspend. They also helped you build catalogs from suppliers that could meet your MRO / internal needs at the lowest possible cost. And so on. Over time, they not only met SLAs, but improved on all key metrics.

But now a few of the Big X are saying that Managed Services is not enough to maximize value and you need premium “Operate Services” (which come at a premium price, of course). So what’s the difference? Hard to tell. The best definition we can find is it’s a “holistic approach that is focused on delivering outcomes and spurring innovation in a model that leverages automation and data insight to generate substantial business value”. the doctor thought that was what managed services was supposed to do for you? Other definitions indicate that “operate services” differentiate by providing “on demand access to expert talent”. Isn’t that why you use a managed service, so they can identify when the team needs a new expert and add that expert? Other definitions also indicate that “operate services” are more “collaborative”. Are they saying that the managed services they provided to you in the past, where they often acted as an entire department, weren’t collaborative? WTF?

In other words, while they are presenting it as a more advanced premium service model, for which they want to charge you a premium, it really isn’t, or shouldn’t be, because if it is, they are admitting they have been ripping you off for decades!

In some consultancies, it is just a specialization of managed services for IT/IT Security, Analytics-Heavy Functions like Strategic Procurement or Network Analysis, or highly technical functions like supplier identification in direct manufacturing. And it costs more because those people, who are much rarer than experts in traditional business functions and processes, are more expensive, as are the tools that they need to secure your enterprise, analyze your global spend, analyze your supply network, or analyze potential suppliers for your electronic components. And we can see how that could be fair, as long as they aren’t using “operate services” to increase costs across the board where there is absolutely no justification for it.  (And only using it to differing a subclass of specialized services they offer, and admitting its nothing more than managed services, just applied to a new set of business functions.)

But if the consultancy is trying to pitch these “Operate Services” across the board with claims that these new services are better and more specialized for your business than any other kind of service, then they are admitting they are currently ripping you off in your managed services and you should just fire them (from a cannon preferably — and TikTok it — it’s all the rage, right?). Because there should be no difference with the exception that the subclass of operate services we defined in the last paragraph generally require more advanced systems and more resources with a high TQ, which usually cost more. But that’s it.

So don’t fall for this brand new business con if they try to pull it on you — simply compare what they are offering to any other firm that says they can fully meet your needs with a traditional managed services model and give the business to the firm that is the most honest among those that can meet your needs.  (Basically, as far as <i>the doctor</i> can tell, some of these Big X Consultancies are just upset that they haven’t come up with a pressing new need they can take advantage of, so they are just relabeling what they have in the hopes you’ll fall for it.)

Low Cost Labour or Leveraged Labour — It’s Not the Same.

Organizations are always looking to cut costs to increase profits, and this goes double in tight economic times. An area that they are constantly looking at is labour, as it’s often the organization’s highest fixed cost. To reduce these costs, they try to move operations to low cost locales, low cost cities in low costs provinces and states for operations they need to keep in their home country, and they move as much labour as they can to low cost countries when they don’t have to stay at home, possibly through outsourcing.

In their minds, they are leveraging cost differentials, global opportunities, currency exchanges, and making smart investment decisions. (And, in their minds, they are doing a good deed by giving people work who might not otherwise get it, often by taking jobs away from people at home that should be doing them.) And herein lies the problem, they think they are saving money by leveraging low cost labour instead of leveraging labour for greater value. And, guess what, the labour that gives your organization more “value” is not the lowest price labour you can find, even for jobs that are traditionally seen as relatively unskilled, or low-skilled.

Let’s take the common example of a call center. Thanks to modern technology, and low cost VOIP, you can put it anywhere there are speakers in your language, often eliminating expensive landlines at the same time. When you move jobs from a $15 hour minimum wage location to an offshore location that costs you $3 an hour in comparison, that saves you 80% right? Maybe. Let us say the local resources you replaced were better educated, better trained, more familiar with your products, and resolve 80% of issues on a single call of 12 minutes or less, for an average issue resolution cost of $3. Let us say the new resources are not as well educated (average high school diploma, not college or university educated like your local resources), minimally trained (they are told how to politely answer a call, but no de-escalation training), and no familiarity with your products besides overview documents and issue resolution scripts. As a result, it will be likely that it takes them an average of three (3) calls of thirty (30) minutes each to fully resolve an issue. This means that the average cost for this “low-cost labour” to resolve an issue is $4.50. That’s 50% more than using a well-trained local resource to resolve the issue. That is not savings. Plus, some of those customers are not going to be happy that a 10 minute problem took 90 minutes of their time plus hold time plus time in between connecting to the rep. And a small percentage of those customers will switch to your competitor when it comes time for them to replace the product. That’s definitely NOT savings!

Let’s take garment production as our next example. This is a typical outsourcing industry that tries to find the lowest cost locales possible. When you go to the lowest cost locale, you end up paying significantly higher freight costs, possibly being stuck with inferior quality garments when the plant switches to lower quality fabrics, possibly ending up with garments with lower shelf life due to inferior stitching when they are manually made by lesser-skilled resources. In comparison, imagine you had a nearshore location that was low freight, used locally sourced high quality fabrics, and skilled workers who used a mix of automatic stitching machines and hand stitching, as required, for high quality production. If quality goes down, satisfaction goes down, and customers start to complain. Then brand reputation goes down and sales go down. Is that savings? Well, if the local production is $5 a garment and the outsourced production is $2 a garment, maybe. But what if the outsourced garment shop uses labour that is child labour under local laws (if not their local laws), the media gets hold of the story, it blows up, and there is a big brand backlash and sales drop 40%. Is it still savings? I’d argue not.

Let’s move upstream, to software development, which is happening more and more often due to many countries having good education systems and skilled workers who aren’t demanding the inflated IT salaries in the USA. Now, there are a lot of countries with highly educated talent who can code (like Poland, India, etc.) that are not the USA, Canada, the EU, the UK, and other countries where high tech has been traditionally clustered, and many of these, after currency conversions, have talent for 1/3 the cost or less. If they have about the same coding rate (in terms of lines of code per hour) as these first world countries, you can argue that it’s a saving. But it’s not just code lines per hour, it’s error free code lines per hour and, most importantly, it’s finishing the project on time, on budget, and to spec. Most IT projects fail and go well beyond budget and timelines and this is triply true in IT Software Development Outsourcing. (the doctor does not want to recount just how many projects he’s seen fail over the years, especially after advising companies not to outsource certain projects, which they did anyway.) Why? Because software development requires more than the ability to code, it requires understanding what the software has to do, who it has to do it for, how it has to do it, and why. If you don’t understand the domain you are developing for, the business who will be implementing the system, the culture of the user, and how they need to work — the system will be a failure even if it’s delivered mostly bug free. So while this is usually expected to be the largest area of cost savings, it’s usually the largest loss a company, especially one new to the game, ends up taking. (Outsourcing can succeed with the right, hybrid, model, but most companies have no clue what this is. Only a few figure it out.)

In other words, if you are trying to leverage low cost labour for cost savings, you’re usually looking in the wrong place. Especially if you are interested in maximizing return on investment, in whatever form that takes (lower total cost of ownership, higher sales, better brand image — which positively correlates with more profit). If you want to leverage labour or value, it’s the right labour, not the lowest cost labour. The labour that is the most productive, produces the highest quality product, gets it right the first time, and keeps your customers coming back. That’s true low-cost labour, because properly leveraged labour increases company profit, making labour costs low in comparison. Think about that the next time you try to replace talent with untrained troops.