Outsourcing of services by colleges and universities is again in the news (see “The Ins and Outs of Outsourcing,” The Chronicle of Higher Education, 24 August 2015). Having been a purchasing/supply chain manager while working in industry, there are four fallacies that university leaders should be aware of:
- Outsourcing = Savings. Maybe, maybe not. The metric commonly used to determine savings, “purchase price variance,” gives an inaccurate reading of savings: unit price, not total cost. Be prepared to incur higher costs in other budget categories.
- Someone whose only job it is to do XYZ will do it better and at lower cost than the university can (“core competency” argument, brought to us by professors who never worked in industry). Likely not the case, since both the university and outsourcing company process material and information the same way: batch-and-queue. The savings come from lower labor costs (“you get what you pay for”) and minimum contracted services (subcontractors will miss their profit plan if they go the extra mile).
- Scale drives down cost. That is only true if material and information are processed batch-and-queue. Flow diminishes or invalidates the economies of scale effect.
- Outsourcing helps administrators focus on the educational aspects of the college or university. That’s bullshit. The value proposition for students is unchanged (higher tuition, same education) and the quality of instruction usually remains exactly as it was before outsourcing.
The Lean view of outsourcing is as follows:
- To the extent both possible and reasonable, an institution should have and be able to do everything it needs to provide educational and related services to students.
- If you own the process, you can see the process and its problems, and take immediate action to improve the process – and thus reduce costs immediately.
- Outsourcing difficult work weakens the capabilities of both the people and the institution.
- Never lengthen supply lines; in this case, the information supply chain. Instead, get closer to the last process (student success and graduation).
In most cases, outsourcing decisions made by leaders is cost problem avoidance rather than addressing cost problems directly via process improvement. They hand their problem off to a supplier, rather than take responsibility for their own process problems.
Outsourcing may be appropriate for some activities. However, the decision-making process must not be biased towards the upside savings potential (“Let’s do it! We’re going to save millions”). It must be balanced and include the downside (“What could go wrong? What might our liabilities be? How much could it cost us?), in addition to awareness of the above four fallacies.