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Outsourcing: The cost equation

Outsourcing could cost some companies more, some less. Take a look at the metrics worked out. WHAT is the reason for the recent increase in outsourcing? It is the computer and information technology revolution, say Ann Bartel, Saul Lach and Nachum Sicherman in a recent research paper titled Outsourcing and technological change, from the National Bureau of Economic Research. That may seem too obvious a finding, but if you read on you'd know that the paper is supported by data to show that when the pace of technological change increases, outsourcing too rises "because it allows firms to use services based on leading-edge technologies without incurring the sunk costs of adopting these new technologies." They also argue that IT skills have become more general and portable.

As a result, the costs of outsourcing IT-based services have fallen. "Consider a firm using conventional factors of production jointly with an amount s of a service to produce an amount q of a final good," reads their model. The authors assume that the production technology is of fixed proportions and so input quantities are proportional to output, that is, "s = áq." For the math-minded, there's more to interest: The unit cost of producing in-house an amount s of the service is c(s); and the unit cost of outsourcing the service is composed of p, the price of the service in the market, and other internal costs that are firm-specific u = 0, per unit of service. Therefore, the unit cost of the service is p u. For any given service, p is the same, but u varies across firms; so, "there is heterogeneity in the cost of outsourcing." You don't take u lightly, for the authors interpret it as "an adjustment cost related to outsourcing". Behind the u lies the whole story of mismatch between the in-house workers and the external workers, "resulting in misunderstandings, frictions, delivery lags, quality differences and so on." Where the firm's technology and mode of production are `specific or idiosyncratic', u is higher; "the more `global' the firm's operation is, the lower will u be and outsourcing will be less costly." In the view of the authors, there's a `technological compatibility' between a firm and the outsource service provider, arising from the IT content. "This compatibility tends to reduce the adjustment costs of outsourcing, thereby increasing the demand for outsourced services."

Labour outsourcing will increase over time as IT becomes more pervasive in the economy, conclude the authors, but that may be disturbing to the US audience. A case for knowledge codification MIKE Bartholomaei of the University of Sussex has written about `three perspectives on the codification of knowledge' in a recent paper titled, To know is to be. It begins with a 2003 statement of Donald Rumsfeld, US Secretary of Defence: "Reports that say that something hasn't happened are always interesting to me, because as we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don't know we don't know." Bartholomaei reminds us that the quote, which won Rumsfeld the `Foot in Mouth Award' by the Plain English Campaign in 2003, talks of three knowledge categories that form the subject matter of his paper. '

His three perspectives are formed by "recent contributions in the fields of economics, business and management studies and of a group of writers who have a `relational' perspective from the field of organisational behaviour." The author's idea is not only to highlight the `epistemological boundaries' but also work on a `novel approach to studying knowledge codification'. There are enigmatic equations in the paper, such as, "information = codified knowledge" and "knowledge = tacit knowledge information". Read also about `knowledge assets' and `knowledge spiral'; and T.H. Davenport's theory of three types of `knowledge repositories'. These are "external knowledge such as competitive intelligence; structured internal knowledge such as research reports, product-oriented marketing materials, and techniques and methods; and informal internal knowledge such as discussion databases for easy retrieval." There's `capta' between data and information, as Checkland and Holwell explain (see chart above). "Attributing meaning is an inherently human act that a machine can never accomplish," they argue. Thus, "Even if the designer of a computer system aims at processing capta into a more useful form, it is highly unlikely that the presented output will yield the same information to every user." Bartholomaei points out that the economist values `codified knowledge' while much of what the management field values is "situated within the `unarticulated' or `not yet articulated' domain".

The absence of codification does not mean "the impossibility for knowledge to be codified but a failure of imagination or will to create an effective script." Perhaps that explains why "much of management literature stays rather vague on clear definitions and implementation advice." For relational writers, "Knowledge is inseparably bound to knowing," and therefore "highly context-dependent and practice-specific". So, they refute the economists' theory that knowledge is an entity that can be traded. Thus, these two are at the extremes on knowledge codification. To bridge the gap, the author suggests the use of tools and research into `different forms for articulation', for storage and transfer of different knowledge types. "Codified knowledge can be accessed through portals and databases, the World Wide Web, books and networks," he writes, and hints at the potential to codify what's recorded on film too.

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