A lot of companies look at the option to outsource a function, realize they could cut down on recruiting costs, relieve internal people management capabilities, and slow down the need for physical space, and then… decide they’d rather stick to the traditional staffing methods. Let’s look at one of the underlying reasons for this.
“The Market for Lemons”—a paper written by economist George Arkerlof in 1970—describes how the quality of products in a market degrades when there is information asymmetry between buyers and sellers, using the market of used cars as a example.
Suppose there are good cars (“peaches”) and defective ones (“lemons”) being sold at any given time, since there are many aspects of the car that are unknown to the buyers (maintenance frequency, status of internal components…) the only ones that know the true value of the car are the sellers; as a result, the buyers are only willing to pay the average price between a “peach” and a “lemon” in hopes of getting the right value for their money.
Here is where it gets messy, since the price buyers are willing to pay for the product is below what a peach actually costs, business is no longer viable for peach sellers, so they start to leave the market, leaving only the lemon sellers behind. With time the price of the products can continue to devaluate while the quality continues to degrade until the market collapses.
Outsourcing and staff augmentation beyond the shore has become a market for lemons in the eyes of C-suite executives and decision makers, simply because there are too many unknown variables to know whether they are partnering with a peach or a lemon seller (status of the country, academic level of talent, values of their people, compensation, organizational structure).
But outsourcing is not, in fact, a market for lemons, it’s still one of the go-to options for many Fortune-500 companies around the world and the most viable way for many startups to kickstart their operation.
How to spot the peach sellers
As with many other sectors, navigating this market requires just a little bit of caution, when done properly businesses can look at big savings in costs and an actual improvement in the quality of their capabilities.
The first aspect to look for is cost, if the price tag seems too good to be true, it probably is. “You get what you pay for” comes at play here, there is an amount of money you can pay a company for a professional service, there is a part of this payment the company has to pay someone to do their job, and something on top of that for the company to make a profit, cover their own expenses, and take care of their (your) people. If the price is too low, it’s a good sign that one of these things will be thrown under the bus, and trust me, it’s going to be the last one. Find companies whose selling point is not their low price.
The second aspect is leaders, who is running the company will give you a pretty good idea of how it’s running, the company values, and the kind of talent they attract. Talk to them, listen to your instinct, research their background, a strong leadership team is often times a better indicator of a solid company more so than the number of employees and their time in the market.
The third aspect is the country the company is located at, major ongoing political or military conflicts cause instability in the economy, companies in these locations may face higher disruption and their service is at higher risk of being compromised. A company looking at outsourcing will also want to consider cultural synergy, how its own nation is perceived in the region and whether there are some similarities or discrepancies in the way their people live and express themselves will affect how the relationships between their in-house collaborators and the outsourced talent will unfold.
Ultimately, the risk tends to be much smaller than companies think it is and fairly easy to avoid. An organization may find a potential partner they feel reasonably comfortable with and start by filling a low-stakes role, the quality of work this person performs and the level of detail the company follows up with will be the best and most accurate indicator of what can be expected from them in a long-term partnership, and this could lead to either a quickly learned lesson on vendor selection, or the beginning of a journey of opportunities that will completely shift how the company sees their operation and how talent is acquired across the entire organizational structure… a truly fruitful relationship.
