Drivng Home the Point - An Outsourcing Story in China
A few years ago, I visited Beijing for the first time. At Beijing airport, I got into a taxi and paid 450 yuan (about US$54) to get to the city. I was horrified to find out later that the normal taxi fare for the same distance was 60 yuan!
The next time, I went to Suzhou from Beijing. My local friends advised me to take a plane to Shanghai airport and catch a taxi from there. They told me that the taxi fare from Shanghai airport to Suzhou should be around 400 yuan.
When I arrived at Shanghai airport, I saw a middle-aged man holding a placard, with "Suzhou, Wuxi" written on it. He wanted to charge 200 yuan for the ride.
That caught my attention! It was half the price I expected. I checked out the man-he looked pretty decent and it seemed like a good deal. And so I accepted the offer.
The man carried my luggage to his car, drove me to a nearby spot and asked me to wait. Five minutes later, he came back with another car and another driver. He explained to me that he did not have the licence to drive in Suzhou and had asked his friend to help.
Before parting, I paid him 200 yuan and confirmed with the new driver that he would take me to Suzhou. I transferred my luggage to the new car.
During the trip while chatting with the driver, I realised that he was on the way home to Wuxi, bypassing Suzhou. The man who had "contracted" him had paid him 50 yuan.
His car stopped outside the city of Suzhou. He told me that he was not familiar with the roads of Suzhou and would help me get a taxi.
Within a few minutes, he flagged down a taxi, told the taxi where I wanted to go, paid the taxi driver 10 yuan and transferred my luggage. The rest of the journey was uneventful and I arrived safely at my hotel, on time to meet my customers.
There were three persons in this value chain. First, the man at the airport offered to meet my needs at half the normal price. He made his money by outsourcing the "production" to the Wuxi driver, who could do it at a cheaper cost. Second, the Wuxi driver "outsourced" to the Suzhou taxi driver for the same reason.
At the end, the man at the airport earned 150 yuan, while the Wuxi driver earned 40 yuan and the Suzhou taxi driver earned 10 yuan. I was the biggest winner because I saved 200 yuan!
The bottomline is companies should focus on what they are good at, and leverage on others' strengths. But today, many companies still try to do everything themselves in-house.
For instance, IT departments within big corporations try to develop applications that are available in the market-yet non-core to their business.
Many companies also think that manpower cost is fixed, so it is better to work with existing resources than to incur additional costs in IT applications or services.
They think that manpower cost is just basic salary, and forget about the other costs such as bonus and employee benefits, as well as overheads such as recruitment and rental. They underestimate their manpower cost.
The fact is unless you understand the actual costs of a particular process or project, it is difficult to decide if outsourcing is a better alternative.
Besides costs, the question is: can you do a better job than someone who specialises in the field? Just think of the Wuxi and Suzhou taxi drivers.
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