Outsourcing and the network effect

Some people say outsourcing is a sign of incompetence. But what could be more incompetent in the era of the network than to cut yourself off from the network?
Written by Phil Wainewright, Contributor

Over the past few days, several ZDNet bloggers and Talkback posters have been postulating that organizations who outsource do so because they are incompetent. In this day and age, that's just inane! The reverse is closer to the truth: organizations that refuse to outsource are neglecting their full potential.

I guess I shouldn't be surprised that so many readers and writersThere's bad, industrial-era outsourcing, and there's good, collaborative-era outsourcing here on ZDNet haven't seen the light yet. It's the classic engineer's fallacy: "If only I/my systems were good enough, I wouldn't have to rely on all those others." But surely the one lesson we all ought to have learnt from the open source movement by now is that you get a better result by pooling resources than you do when you act alone.

Perhaps the bias against outsourcing is also a hangover from the tail-end of the industrial era, when people believed that the pinnacle of success was to build and own the biggest, most monolithic closed system of them all. Much of our experience of outsourcing has been with companies equally steeped in that mindset. EDS-style outsourcing simply substitutes someone else's huge, monolithic closed system for your own. No way is that going to deliver any of the network effects of outsourcing in the Web 2.0 era. There's bad, industrial-era outsourcing, and there's good, collaborative-era outsourcing. 

Another problem is that outsourcing is really the wrong word to convey what actually happens when you connect to a service provider in a Web 2.0 context. It implies you're just sourcing from outside something you could equally well choose to do in-house. Whereas what you're really doing is connecting into the wider resources of the network.

Employease, one of the hidden giants of software as a service, illustrates this well. Founded in 1996, the company provides HR management as a service to more than 1,000 US customers with a combined total of over 700,000 employee records. Its big differentiation from an on-premises solution is that it doesn't simply provide an application toolkit that the customer still has to connect into payroll systems and insurance providers and 401k schemes and compliance systems. All of those connections — to 3,000 partners —come already packaged as part of the service. Once a customer's employee information is uploaded into the system, the third-party services are immediately available to select.

"It goes beyond software," co-founder Mike Seckler told me in a call earlier this week. "It's all about these network effects ... With our one-to-many model, we provide a great platform for outsourcing."

An HR provider like Employease is a superb example because so many of the services that an HR system connects to are external by their nature (no one is going to argue that healthcare for its workers is a core competence for an automobile manufacturer or a software company — are they?). But in an increasingly connected, collaborative world, how many systems and processes will stay competitive if they remain insular and monolithic?

The broad benefits of being able to connect into a rich, collaborative network of varied resources will, in almost every case, massively outweigh the narrow advantages of having every single aspect of the system under your own control. That's why organizations today don't run their banking or their raw materials production in-house and it's why in the Web 2.0 era fewer and fewer of them will run their information systems infrastructure wholly in-house. What could be more incompetent in the era of the network than to cut yourself off from the network? Doh!

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