What's ahead for LSPs?

The U.K.'s The Economist featured an opinion column last summer on "The trouble with outsourcing." When The Economist, arguably the best newspaper (their term) or news magazine in the world, speaks, we listen.

Recognizing that outsourcing (offshored and otherwise) has transformed the global economy, they nonethe-less questioned how long the boom can last and whether the practice is actually useful.

One telling citation was a report of an upswing in legal disputes over outsourcing. Their prime example in-volved IT services, but our experience is that there are more than enough lawsuits involving logistics and supply chain services to keep several graduating classes of new lawyers happy. Our involvements in the United States have primarily been with mutually unhappy logistics service providers (LSPs) and their customers.

But there are examples—some stunning—of failures involving sourcing and procurement decisions and the performance of manufacturing suppliers. Their reference to Boeing's well-publicized problems with 787 Dreamliner components not being delivered on time and not fitting together is factually correct. But the fault may lie more with sales and marketing decisions than with supply chain-driven outsourcing selections. That is, some say, because sourcing components from places around the planet that would be prime markets for sales of the finished product could have been a powerful sales incentive to would-be buyers.

Whatever, the legal alternative is not fun, costs fortunes, takes amazing amounts of time, and does not al-ways satisfy either party. And that's only here in the United States. In other parts of the world, legal systems may not work at all. In yet others, the machinations of courts have been charitably described as "Dicken-sian."

MORE BAD NEWS

One respected industry researcher and analyst reports that the average outsourcing contract's value has dropped by nearly 20 percent, with the United States' precipitous decline dragging down the global average. The same firm suspects that outsourcing may be approaching a saturation point—what can be spun off to others already has been, at this point.

We happen to disagree, but a few examples illustrate why some might think so. In the U.K. economy, one of the world's most mature, 10 percent of the workforce is engaged in outsourced jobs—and that doesn't in-clude those jobs that have been outsourced "offshore" to Asia or Central/Eastern Europe. The United States employs more outsourced contract workers in Afghanistan than it does active military personnel.

At one time, Ford was one of the most vertically integrated companies in the world, with 'most everything it needed to convert raw materials into finished automobiles in one location outside Detroit. There, with 100 miles of private railroad track, 16 million square feet of factory floor, and its own blast furnaces and rolling mills, 100,000 workers churned out Model As, Model Bs, and the V-8s that were favored by Depression-era gangsters. Today, the River Rouge plant is Ford's largest and employs just 6,000 people. The steel mill is owned by a Russian company.

In the logistics sector, the field is characterized by mega-players, many with genuine global reach and end-to-end supply chain capabilities. There is an abundance of not-quite-mega-players that are multibillion enter-prises offering a vast array of services, either organically or through working alliances with specialty firms.

As we slowly climb out of the pit of the Great Recession, most seem to be doing well and are profitably growing with satisfactory, if not yet bright, prospects for the future.

BAD STUFF HAPPENS—WHY?

As we've seen, outsourcing can go colorfully, even spectacularly, wrong. When it does, it can be really tough to unscramble the eggs. Maybe the former department involved has been made redundant, as our U.K. cousins like to say.

Perhaps a giant customer has squeezed the financial life out of a desperate supplier. Sometimes no one fig-ures out that customers might be put off by having complaints handled by someone in another land who has no clue about the importance of a relationship between a business and its customers.

It is possible that a bad contract has been written; the prospects for this increase exponentially when lawyers make the decisions rather than simply offer counsel and risk assessments. Not infrequently, a company fails to understand the magnitude, complexity, or mission-criticality of what it is planning to outsource.

And sometimes, sellers lead buyers astray.

GYPSIES, TRAMPS, AND THIEVES ...

No slur intended; just borrowing lyrics from a song by Cher.

But here's a reality check. Not every peddler of outsourced services is competent. And not every buyer has a clue as to how to evaluate and qualify a potential service provider. When the buyer is under-informed and the seller is unscrupulous, a bad marriage is 100 percent predictable. And the Kim Kardashian solution of walking away with millions is not an option.

Actually, our belief is that the overwhelming majority of service providers in our supply chain world are honest and capable, hard working, and creative on behalf of their customers. And most buyers of outsourced services have decent intentions, even if not all the experience they might need.

But during difficult economic times, otherwise dependable people might make less-than-the-best decisions under stress, and salespeople with targets to meet and families to feed might be over-optimistic in their com-mitments. Even in good times, to be blunt, those service providers in which investment firms and venture capi-talists have significant equity stakes face enormous pressures to drive top-line results and deliver bottom-line outcomes.

WHAT THE FUTURE HOLDS

So, does all this mean that the established LSP industry is facing decline? Are these developments fatal threats? Our opinion—absolutely not!

What this does mean, though, is that the solid organizations in the field have a golden opportunity to differ-entiate themselves by defying the stereotypes. Under-promising and over-delivering, rather than the other way 'round. Helping the confused, or inexperienced, buyer find the right path, rather than making the biggest, fast-est, sale possible. Showing the potential customer where the risks and potholes in the process lie.

We understand that this may be counterintuitive to people whose only known talent is to make the one-time sale. It will make loads of sense to those who understand that the value of a 20-year business relationship is phenomenally greater than the margin on one sale that won't be repeated because the ship has run aground.

This is especially important if one believes, as we do, that the scope and extent of outsourcing will continue to grow, particularly in an economy that will remain globalized, even with in-sourcing, in-shoring, and other supply chain redesign initiatives.