To outsource, or not to outsource, that is the question

One of the countries that have taken serious steps to tackle the coronavirus pandemic is India. In response, the world’s second-most populous country effectively relegated all of its citizens to their homes to stem the spread of the disease. 

Whilst the curfews themselves were widely reported, the knock-on effect to the rest of the planet was less visible in the media. Of particular relevance to a reader of this blog will be what happened in the UK as a result; a paralysing effect on even the most basic operations. 

In order to explain how such a chilling set of circumstances came to be, there are three data points to consider;

  1. The historic role of British Telecommunications plc (BT) as the statutory monopolist is the first. The UK, whilst at the vanguard of number portability in the early 1990s, hasn’t moved on since and still uses an onward routeing process. At the start of the market liberalisation in the 1980s, BT was the allocatee of 100% of numbers and is still the range holder of the record for the majority, despite a declining retail market share. With the legacy onward routeing still in place, it means BT remains involved in many (one Exonia client estimated 80%) of fixed number ports, even between two third parties, such as between Sky and Virgin Media. 
  2. By any quantitative or subjective measure, BT remains the ubiquitous final mile infrastructure provider with the majority of broadband and Ethernet circuits consuming some of BT’s assets.
  3. BT transferred many of its back-office functions to India.  

I think it’s already clear where this is headed…

An interruption to BT’s back-office functions would be difficult to manage at the best of times. This isn’t just new circuits to home-movers we are talking about; the universality of BT’s position in the value chain, even to this day, means that a business wanting to move its switchboard number to a cloud-based system that uses staff’s mobiles in a hunt group for calls, can’t be achieved. It means a laboratory merely wanting to upgrade the bandwidth on its data circuit is limited in its ability to do so. 

Repairs and escalations are impacted too.

It is a remarkable situation to be in, especially for an industry whose very existence demands contingency planning and resilience. 

You would be forgiven for thinking that this is a BT bashing piece. Granted, it is partially so – I mean, c’mon, to have no Plan B since knowing there was at least a chance of a pandemic since early January? It isn’t BT bashing its entirety. Firstly, we should note that BT is far from being the only communications provider with operations in India, secondly this piece is also about defending outsourcing and offshoring.

Prior to their various self-imposed quarantines, MBA students in lecture halls around the world were learning about Porter’s Value Chain. You could spend a lifetime on the subject (and indeed, Professor Michael Porter did – fun fact; he names his cats after the five forces) but suffice to say, outsourcing of non-core functions is a good thing.

The theory goes that businesses should focus on areas in which they are specialists, areas where they add value. Non-core activities can be outsourced to an expert in that field who is perhaps more efficient and may also be able to deliver both a better outcome and a saving over and above that realised by simply removing the distraction. 

Extreme non-core outsourcing includes Nike; as a company, the global shoe organisation is nothing more than an R&D, design and marketing operation – everything else (we are taught in those venerable lecture theatres) is outsourced.

Where the waters are muddied, so to speak, is where outsourcing in the manner envisaged by Porter and the business schools is confused with a form wage arbitrage; offshoring. 

India is full of some very educated people that don’t demand a huge salary for doing various technical jobs and therefore it is cheaper to transfer the processes lock, stock and barrel geographically.

In both cases, it should be apparent that there are cost savings involved; these cost savings generate a competitive advantage, either by generating a surplus for reinvestment or distribution to shareholders or by reducing costs to drive volume in the market place. 

The UK has some of the most competitive retail telecommunications offerings in the world and, in part, the prices enjoyed by families up and down the country have come about as a result of BT and others offshoring. 

This should be music to the ears of the UK’s regulator, Ofcom. However, in the myriad of rules and regulations governing operators there, there often appears the words “reasonable” or “shortest possible time” or “as soon as reasonably practicable” etc. 

While we understand that residential provisioning and changes of communications provider are at record lows during the COVID-19 situation, the demand from businesses has waned little, if at all. 

And that is part of the nub of the issue; business-grade services dependent upon offshored processes designed for high-volume, low-complexity residential consumer products. 

Had BT (and others) outsourced, in the classic Michael Porter sense, to an entity experienced in telecommunications provisioning & repair back-office functions, there may have been a Plan B within that organisation.

Had they maintained the functions themselves in the UK, the key worker designation may have limited the impacts of the UK’s own lockdown. Had BT only offshored the more price-sensitive residential consumer work, we may be in a different place. 

Had the regulator listened to stakeholders increasingly warning about policies homogenising the business market with the domestic consumer raise to the bottom on price, perhaps not all the relevant back-office functions would now be shuttered. 

But it was offshored, and here we are. We wait in the coming days to see what the rapidly drafted Plan B is.

What we do know is that certain back-office functions are critical for the proper functioning of a vibrant telecommunications industry – of course, this suggests that perhaps it wasn’t a non-core activity after all. The tension between razor-sharp retail prices and the cost of appropriate contingency planning is certainly going to be debated in the coming months; indeed, it is likely that the resulting measures to avoid a repeat of the situation may lead to consumer inflation.  

There is an upside though. When we are all released from our domestic prisons and the world returns to a semblance of normality, and the impacted business providers out there start filing formal actions with Ofcom accusing BT (and others) of being in breach of their obligations, we may finally something the industry has been requesting for years.

Ofcom will finally have to decide, formally, what a reasonable timeframe is for number portability and various other functions and, heaven forfend, we may see renewed motivation to overhaul 1980s systems and processes. 

Update

We understand that as of 31st March 2019, the situation was improving with some business continuity measures being put in place.

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