Phil Ruthven looks at the growing trend among businesses and households to outsource non-core functions, and the benefits it brings to the economy end employment sectors.
Outsourcing for growth and wealth
By the end of the 2016 financial year, outsourced functions from households, businesses and other countries (to Australia), since the end of our industrial age in the mid-1960s, will have revenues of $1.33 trillion annually. And it is growing fast. This represents 27 per cent of the nation’s total revenue and the value-added component will account for almost a third of our gross domestic product (GDP). We are approaching four million jobs this year, created by the outsourcing in the new infotronics age to the middle of this 21st century. These outsourced functions, mostly services, were once insourced or known as “do-it-yourself” (DIY).
In 1776 Adam Smith predicted outsourcing in Wealth of Nations , calling it a division of labour instead. England’s industrial revolution had begun less than two decades before the book was released, so Smith was perceptive if not prescient. The industrial revolution meant that things that used to be made by households or craftsmen – such as clothing, furniture, preserved foodstuffs and other commodities – could now be outsourced and made en masse more cheaply.
The US entered its industrial revolution in the early 19th century, and Australia in the second half of that century almost a hundred years later than the UK.
The advent of power as a new utility facilitated this revolution, firstly as water and wind power, then much later as electricity. Other clever developments emerged to help, including the standardisation of rifles and bullets in the US in the 19th century and production-line methods as pioneered by Henry Ford in the early 20th century.
We are now 50 years into our new age, and most countries in the Organisation for Economic Co-operation and Development (OECD) embraced the concept at much the same time in the early to mid-1960s. Households are now outsourcing more functions and services. Countries are outsourcing to other countries that can produce products more cheaply (or at all), as in the industrial age, and many of these products are services.
This time, however, businesses are also outsourcing internal functions to other businesses; again mainly services, and most termed non-core, instead of retaining them in-house.
A Growth in Outsourcing
The table highlights indicative outsourcing by these three outsourcing sectors, and also shows the new utilities that have facilitated these new services. In the 2016 financial year, households will have outsourced $410 billion in functions, representing 28 per cent of their gross income. More if we add the now-higher taxes that are returned in the form of increased government services.
Businesses will have outsourced $650 billion across the outsourced functions in 2016. Overseas countries will have outsourced around $270 billion in new functions, a staggering 80 per cent of all our exports, reminding us of just how much our export mix to the world has changed in the new infotronics age.
It is almost incredible that households this year will spend, on average, $42,700 on outsourced functions, chores and entertainment – the equivalent of $820 per week. These are activities that were DIY just half a century ago.
While older generations may have felt some guilt initially in getting these things done for them, such as lawn mowing and housekeeping, such sensitivity has largely disappeared with the effluxion of time and the newer generations, Gen X and Millennials.
Businesses have become the largest outsourcers in the new age, having done little of it in the industrial age when a self-reliant, secretive and fortress style approach was taken by firms.
One of the hard lessons learned over recent decades is that it is best to delay outsourcing non-core functions.
Trucking was one of the first in-house functions to be outsourced to the then emerging transport groups such as TNT and Mayne Nickless.
Outsourcing differs from sub-contracting in that the former is something that a business can do and has done; whereas the latter is usually commissioned when there is no in-house capability to do the task.
Benefits of Outsourcing
The main benefit of business outsourcing is not lower costs. It is the removal of distracting, non-core activities that frees up time, capital, management and other resources to focus on core activities that can differentiate one’s firm from the competition. Especially in the form of unique intellectual property (IP) expressed in systems, products and delivery.
One of the hard lessons learned over recent decades is that it is best to delay outsourcing non-core functions until they are running well, otherwise the outsourcer cannot define its requirements effectively to the tendering providers, leaving an inefficient function to be often expensively made efficient. The IT area is one of the prime examples of this expensive lesson.
The digital-disruption era that began in 2007 is a further sophistication of the all-pervasive IT utility of our current age, demanding outsourcing of this utility but the full adoption of its benefits to our businesses.
The growth in outsourcing has a long way to go. Just over a third of household chores and optional functions has been outsourced by our 10 million households. There is well over half of non-core business functions that can still be outsourced and Australia’s potential for exports (other countries outsourcing to us) is enormous. Tourism alone has the potential to reach over $200 billion by the end of the next decade.
We outsourced the growing and extracting (mining) of things in the agrarian age. We outsourced the making of things in the industrial age. And we are now outsourcing services in the current infotronics age to the late 2040s.
After that, we will need to think of other things to outsource in the enlightenment age into the 22nd century, and we will.
Each age has seen an increase in our standard of living: up 75 per cent in the agrarian age up to 1864; up 3.5 times in the industrial age to 1964; and already near treble by 2020 in the current new age, with several decades still to come before yet another new age.
Outsourcing has created economic growth, wealth and jobs galore since the mid-1960s, with the majority of the potential yet to be realised. Long may it continue.
New Age Industries 1965 – 2040S+
- Hospitality (meals, accommodation)
- Entertainment (clubs, casinos)
- Household services (everything)
- Personal services (beauty, fitness)
- Health (everything)
- Tourism (transport, agencies)
- Education (pre-school, tertiary services)
- Child minding (pre-school, nanny services)
- Finances (advice, management)
- Other services
Overseas Outsourcing (for us to do)
- Mining (energy minerals)
- Tourism (inbound)
- New era in agriculture
- Education (mainly tertiary, preschool)
- Aquaculture (fish and crustaceans)
- Manufacturing (smelted ores, advanced)
- IP (royalty arrangements)
- Facilities management
- Business services (accounts, legal, computing)
- Knowledge services (data, consulting)
- HR services (recruitment, staffing)
- Call centres/CRM services
- Operations (via franchising)
New Enabling Utilities (& technologies)
- ICT (especially very high-speed broadband)
- Cognitive computing and analytics
- Just-in-time systems
- Self-service systems
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