Jan 272013
outsourcing is a way of throwing your problems away

I first heard the term “throwing the problem over the fence” from a telco project manager a few years ago, it describes how modern organisations shift risk to others.

Throwing the problem over the fence usually involves contracting out a task, the philosophy is once the contract is signed delivery is no longer management’s problem, it’s now the responsibility of the contractor. Once the job is over the fence it’s out of sight and out of mind.

Governments, financial institutions and most corporations have become very good at throwing their problems over the fence.

Contracting away your worries

A core tenet of 1980s management thinking is contracting out; freeing executives from the tedious task of actually doing their jobs lets them focus on the important things in life, like securing performance bonuses.

Of course you can’t contract out risk – risk is like toothpaste, squeeze it in one place and it oozes out somewhere else.

Unlike toothpaste, risks have a habit of growing if they are ignored. Which becomes a problem for whoever is unwittingly on the other side of the fence.

Railways and risk

In “The Crash That Stopped Britain” author Ian Jack looked at the causes of the October 2000 Hatfield train accident which threw the nation’s railway network into chaos.

Jack correctly predicted that no-one would be found responsible as the tangle of rail operators, maintenance companies, financiers, labour hire firms and regulators made it almost impossible to determine exactly where responsibility for a fatal failure lay.

Diffusing responsibility is partly by design although originally the idea was to save costs, the theory being that tendering work previously done in house to the lowest cost provider would save money.

Instead its caused an escalation in costs as contracting out meant an increase in middlemen as financiers, lawyers, project managers, contract administrators – of which I was once one – and many others are drafted in to manage the outsourced contracts.

Throughout the Anglosphere – the US, UK, Canada, Australia and New Zealand – the results of embracing this mentality has meant skyrocketing costs and delays in public work projects, a good example being the Southern Sydney Freight Line which was three years late and 250% over budget.

Naturally no-one is held responsible for the delays, cost over-runs or lousy initial planning and estimating on that project, which is a happy result for everyone except the taxpayer who foots the bill.

The Global Financial Crisis

While the cost of building railways, schools and motorways is a chronic problem, a far more bigger issue is the role of “throwing problems over the fence” in the financial industry.

Securitisation was seen as a magic bullet for the banking industry in the 1990s, the Basel Accords allowed banks to bundle up their entire home loan portfolios and throw them over the fence to fund managers and their unwitting investors.

When the inevitable happened with the Global Financial Crisis in 2008, it was difficult to attribute exactly who held the mortgages, let alone who was responsible for the losses among the mass of brokers, ratings agencies, fund managers and bankers who’d profited so well from the boom.

The only thing we could be sure of was that it was the taxpayer – you, your children and grand-children – who ended up holding the problem when the GFC’s bills were hurled over the last fence.

On the other side of the fence

Risk isn’t something that can be thrown over a fence, eventually it comes back in a bigger and nastier way. The question is who ends up dealing with it.

The genius of political and business leaders in the last 30 years has been in how they’ve thrown their responsibilities over the fence while retaining the perks and privilege of holding responsible positions.

Generally it’s taxpayers and shareholders sitting on the other side of the fence who have to deal with the costs and they aren’t getting cheaper.

  11 Responses to “Throwing your problems over the fence”

  1. How many more GFC bailouts will have to be endured before we realise that Western financial systems are outsourcing ‘democracy’ to meet their bottom lines, Paul?

    Lance Armstrong won seven Tours de France and had retired before he was called for cheating. I hope it doesn’t take us that long!

    • Phil, you could argue that democracy was ‘outsourced’ a generation ago. The big question with the ongoing Global Financial Crisis is just how far the cans can be kicked down the road, I suspect when people realise the real costs being incurred by government will see nations default on the debts they’ve assumed. Don’t expect this to be a painless process.

  2. Instead of using the government’s large security firms they used for overseas danger zones, the Obama Administration entrusted security tasks for their Embassy in Libya to a little-known British company

    Federal contract data shows the Benghazi security contract, worth up to USD 783,284, was listed as a “miscellaneous” award, not as part of the large master State Department contract that covers protection for overseas embassies.

    While this took place on her watch, Secretary of State Hillary Clinton in the recent congressional hearings, said, “what difference does it make now…”

    While the liberal media claim Clinton’s critics over reach, or use this statement out of context, anyone with any objectivity who watched the hearings, understand statements of that nature reveal the corruption within the government. Madam Secretary claims she takes responsibility, but the public know no one will be held accountable.

    Double standard ‘reporting’ by the media makes them equally culpable. While fawning over their favourite progressive leaders, and by extension promoting their own agenda, the media are culpable in respect to corruption.

    And yet Australia continues to subscribe to the USA’s failed foreign policy. Or is that merely an example of Australia outsourcing their own security? Why do we naively believe the divided States of America will come to our aid, when they can’t cover the back of their own Ambassadors?

    • Hi Catherine,

      I think we should be careful about scoring political points on this, both sides of politics are just as culpable and the Bush Administration’s use of “contractors” in Iraq, dare one use the word “mercenaries”, was probably more widespread that Obama’s with similar debacles such as the killings at Fallujah.

      Whether we’re discussing Republicans or Democrats in the US, Labour or Conservative in the UK or Liberal and Labor in Australia, the truth is Anglosphere countries are firmly locked into the 1980s management ideology that contracting out is always preferable to running service in house.

      The killing of the US ambassador in Benghazi or mercenaries in Fallujah is a stark examples of what can go wrong.

  3. Outsourcing is the reason civilisation has progressed from hunter-gathering.

    How many of of bake our own bread, make our own clothes or build our own houses?

    The difference between a good outsource arrangement and a bad one is simple; how much attention did the client invest in constantly ensuring the quality and outcomes were to their requirements?

    P.J. O’Rourke said that there were four ways to spend money. I’ll let the reader find the amusing quote themselves but needless to say “your own money on someone else” practically guarantees a poor outcome and blown budget. i.e. all government spending falls into this category.

    • I totally agree TNA, none of us are experts at everything so it makes sense to outsource stuff we can’t do well ourselves.

      The problem is that modern management thought it had found the golden egg in outsourcing which they thought would relieve them of responsibility.

      Government is a good case in point. If we accept that they are going to spend money, then holding ministers and senior public servants is essential – outsourcing lets them disown problems. Which is a classic example of throwing things over the fence.

  4. “Naturally no-one is held responsible for the delays, cost over-runs or lousy initial planning and estimating on that project, which is a happy result for everyone except the taxpayer who foots the bill.”

    Don’t forget the future, the future also foots the bill, from the poor planning.

    Like with the #HS2 announcement yesterday, in Britain. Extending higher speed rail from Birmingham to Manchester and Leeds by 2032.

    What about Glasgow, Edinburgh and Bristol or Cardiff. 12 years too late and only part solves the problem, given the West coast main line is expected to reach capacity by 2020.

  5. Outsourcing an organisation’s IT function is another good example. The costs that some government departments have to pay for simple technology services is incredible.

    • IT is my classic example Jon, I always chuckle when a minister or CEO tells the press that outsourcing services will save .

      You know it will end in tears.

      The best example was the South Australian whole of government contract in the early 2000s, not only did the clueless numpties end up handing over hundreds of millions to EDS over what they would have spent but they also managed to nuke whatever remained of SA’s local IT industry.

  6. Jon, good point.

    I want to nominate Defence logistics as a classic Australian example…
    Then they’re Tax’s Change Program…

    • Noel, while the Australian Rail Track Corporation is my favourite in the utterly dribbling incompetence stakes, the Defence Materiel Organisation is up there with it.

      Sadly the DMOs capacity to piss money away is several magnitudes greater than even the ARTC.

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