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The 4x Rule and the Big Lie in Outsourcing

January 30, 2014

90% of mid-sized companies outsource one or more job functions (starting with HR & IT).   And it is predicted that by 2020, the current 16 million freelancers, consultants and other independent workers in the US, will become the majority, not the minority, of the workforce.  In just 6 short years down the road, over 50% of the workers in America will be independent or freelancers.  That means if you aren’t already outsourcing some of your work, you will be soon.  The typical reason for outsourcing is that it will save time and money.  But what if, as some suggest, that’s a big lie!  If so, how do you avoid the “4x Rule” and the hidden costs of outsourcing?  Let’s start with defining the 4x rule and the hidden gotcha’s inherent in outsourcing.

The Problems in Outsourcing to Freelancers, Independents & Consultants:

Mark Hall wrote an interesting article on the Pro’s and Con’s of outsourcing, and it was the first time I saw someone call out the “4x Rule”.  Let me pull a short quote, “ The one thing that you will quickly learn when working with outsourced labor is what I (and many others call) the ‘4x Rule’.  This general rule, which seems to inevitably apply to most outsourced projects and employees, refers to the fact that it will take four times as long to complete the project, assignment or duty than what you estimate or are quoted.”

That’s quite a different take on outsourcing than the standard numbers you hear.  Let me pull another quote, “For many companies, the cost savings alone—through reduced overhead and paperwork and other efficiency gains—can range from 10 percent to 40 percent.”

Here’s a thought. What if both (conflicting) numbers are accurate?

Although they appear to contradict, they just reflect looking at the elephant of outsourcing from different end points.  On the front end, you have this reduced labor cost, and on the back end you have this series of incurred costs that usually don’t find their way easily to the bottom line, especially when it means calculating the cost of having a project completion delayed.

There are several solutions you can put in place to make the outsourcing process work well for you, and I’ll go over those just a bit further down the page.  But first, let me do a short list of the more or less hidden gotcha’s in outsourcing, so we are both on the same page.  No sense trying to solve something when we’re not clear on what the problem is or can be.

Contributors to the 4x Rule and other interesting data points experienced when outsourcing include:

1.  50% of outsourced projects fail outright or fail to meet expectations.  (Aberdeen Group)

2. 76% of companies reported that managing vendors and independents was an effort and cost that was much higher than anticipated

3. 51% of those same companies reported that the outsourced person or organization was not performing to expectations

4. Intellectual property & privacy concerns represent another risk, especially when the country the independent worker lives in doesn’t have IP protection similar to the country you work in… and when you face up to what the costs would be to pursue legal resolution internationally, the risk gets even higher.

5. Loss of control and a lack of focus or priority on your project, given that your freelancer is juggling a number of priorities, with likely competing deadlines is another contributor to poor outcomes.

6. Language Challenges in communicating throughout the course of a project in written exchanges or English as a second language.  Here’s a good quote: “…be prepared to encounter at least a few challenges when it comes to translating project instructions across boundaries.  Although foreign workers may be educated in basic English, they may not grasp the subtleties and complexities associated with U.S. slang or industry-specific business jargon… Even if your remote employees speak perfect, fluent English, get ready to face yet another communications challenge – the trouble associated with giving instructions for Internet-based work. When interacting with in-person employees, you’re able to provide clarifications, examples and further details on your project-based expectations. When all of your communications occur via email or online video or Web chat, some of these explanations may be misunderstood, leading to project delays and/or extra costs.”

7. Time challenges:  If someone at your office gets stuck, they can ping you or walk over to your office.  If someone 9-12.5 hours away get’s stuck, they will basically need to wait until you come back on to make progress.  Depending on the complexity and degree of innovation of the task, that can represent major delays.  Here’s another related time challenge.  If someone is working in your similar time zone you can check in easily to see if they are on track.  If they work a significantly different time zone then you, that means you can’t check in, so if they are heading down the wrong path, you won’t know until the next day, e.g. you’ve just lost another day, not to mention paid for work that needs to be undone and/or redone.  So how do you create a highly efficient, agile work process?

8. “You don’t know what you don’t know” when it comes to contract writing.  Even when you and the independent agree to a fixed fee, the contractor can charge additionally for any work not specified in the original contract.  How hard is it to write a contract that covers every eventuality?… Whatever you just said in your head, it get’s more problematic as soon as the work becomes non-standard or iterative in nature.  Mid sized companies contribute to this problem even more than large companies by often having no performance metrics in the contract for deliverables, further opening the door to the “this contract doesn’t cover that” complaint.

9. Supply chain costs cover quite a list, let me name just a few: cost of outdated outsourcing strategy, subpar inventory performance, unplanned logistics activities and/or premium freight, inappropriate sales and operational planning, poor or substandard quality, warranty returns and allowances.

10.  Finally there’s the cost to your personal time, your family time, because of late night, early morning and weekend conference calls.  Look at this brief quote:
For the past 30 months, my day (Sunday through Thursday) has ended spending from 30 minutes to two hours on Skype orchestrating progress for FullContact with guys in a timezone an awkward 12.5 hours ahead of mine. I’ve conservatively spent 750 hours of my life (early morning or late night) on Skype with India in the past two and-a-half years, with the only real break being holidays or vacation.”

Bottom Line:
When you look at all the potential challenges incurred when outsourcing work to independent contractors, freelancers and consultants, it’s apparent why the 4x Rule is so apparent, and that the promise of time and money savings can turn out to be not the norm.   So, what do you do?  There’s actually several things that you can do, and interestingly, it’s some of the same things that work really well when integrating acquired companies.  Let me put those in front of you on the next blog, which I promise to push out tomorrow.  Until then.


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