Outsourcing transfers the perishability risk to the provider

As outsourcing becomes an important issue in the US Presidential elections- it's interesting to look at the perishability risk of services and how the provider or vendor takes over managing that risk. But first about perishability in services.

Services have been differentiated from goods in terms of service characteristics that include intangibility,perishability,inseparability and variability.  The idea of perishability seems to come from the food supply chain where unless you refrigerate and have a good reliable cold chain perishable foods like dairy,produce including meats literally perish. Thus, the example of trying to sell last minute, seats on an airplane or rooms in a hotel. Once the plane leaves the empty seats represent perishability and  lost revenue as does the empty hotel room. Keep in mind that all the operating costs of the airline or hotel stays constant, it's just that the revenue disappears. Thus, you have the last minute deals that try to get some revenue in.

Now let's think of service outsourcing and perishability. Consider a manufacturing organization that  outsources  its cafeteria. The cafeteria is managed by a contractor who is in the "running cafeteria" business and probably runs several of them and has figured out the processes, routines and solutions to common problems that come about for different clients. Meanwhile, the client company does not bother about the cafeteria and focuses its leadership and management attention to its core manufacturing business. The managerial focus and attention is a scarce kind of "perishable" commodity. Let's imagine the same business has an in-house catering department and you can be sure that all the catering employees will have all those HR needs as the folks on the shop floor. So HR will spend time as will the CEO and other CxO's and don't be surprised to find eventually a Vice President of Catering who will need time to discuss the menu for next week at review meetings while the CFO questions why all those extra bags of vegetables perished and need to be written off and how auditors would object ! Replace the catering function with any other non-core outsourced function like call center,software, and you can visualize how managements separate an activity because of the problems of managing the perishability of that service. If you don't own the call center your HR is not sleepless over training and employee attrition and instead is thinking about training the folks at the core of your business for innovation and growth.

In other words, the hassles of managing perishability in services makes outsourcing attractive.Outsourcing transfers the perishability risk to the provider. The providers have their own industry and very highly specialized skills in that industry. Thus a company that provides cafeteria services belongs to an industry which really knows how to provide the right food at the hospital, in the factory night shift or at the college cafeteria. And unless you decide to get back to catering when you are in manufacturing your company will not create more jobs. What happens when the provider is overseas will be the subject of a later post. Contact StratoServe.

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