No, I'm not talking about the financial markets. I'm talking about the toy market. The cat food market. And overall the market for offshore outsourcing.
And more than anything else, what I'm seeing is a lack of proper management of risk and quality in these big offshore deals.
Historically, outsourcing has been pretty easy. You made a deal with a contract manufacturer and the contract manufacturer, among other things, made sure that the product met all applicable standards: your own and the legal ones for the market you're selling into. You thus have been able to outsource not only the manufacturing, but also much of the quality control. Whether the manufacturer was in the US, Mexico or anyplace else, you had real leverage to insist on those standards being met. If they weren't, the contract manufacturer ate the costs.
That's the way it was when I was at HP (NYSE:HPQ) several years ago dealing with contract manufacturers around the world. That's before everything was being shipped from China. Sure, we had problems from time to time, but our manufacturers had every reason to work with us, and pretty huge incentives to avoid doing things wrong.
With China all that has gone out the window. The legal system is stacked against you, so that recovering from a manufacturer that doesn't meet standards is virtually impossible, and failure to pay might even get some of your own people thrown in jail. The manufacturers themselves often don't know or care about the standards to be met. [Somewhat off topic: My brother recently had a discussion with a friend in China who was amazed that he has investments in Israel, given the political instablity. His response: "In Israel, if I get screwed, there's a court that will hear my case and make a decision based on the language of the law, not my relationship to party bigwigs and government officials." Not so in China, Vietnam, Russia or any of the other "emerging" locations for outsourcing. India is probably the best of them in this respect.]
And as a result, much of the cost savings is ephemeral, because you still have to do your own quality control, and have to structure things in such a way that you are able to nip things in the bud when problems occur. The idea of outsourcing and forgetting about it doesn't apply in China.
This will be a negative to outsourcing in China over the coming years. Companies are going to have to start recognizing that they have to add back all the costs of quality that they used to be able to mostly outsource. They will also have to build in reserves for the losses that they'll face from time to time when things go bad.
And it gives project managers one other thing to worry about.
-btc
