It has been something of a fad for managers of service organisations to outsource work on the basis of transaction costs.

When call centres first arrived in the Eighties, much the same argument was used for building call centres where the ‘cheaper’ people could be hired.

These ‘strategies’ are based on the idea that managers should focus on cheaper transaction costs. If people are ‘cheaper’ in Ireland, we’ll move the work there; if an outsource provider offers to do the same work for lower transaction costs, we’ll move the work to them.

But the true costs of service are the total number of transactions it takes to get a service. For example, Vanguard’s private-sector clients have learned that one cheaper call in a low-cost economy can actually drive up the number of calls it takes for the customer to get a service.

The bulk of these ‘extra’ calls are failure demand.

But, of course, conventional managers are oblivious to failure demand, as is exemplified by the number of outsource contracts in IT help-desks which ignore the phenomenon. If, as is common, failure demand is running at 80% in your help desk (indicating that it doesn’t ‘help’), and you outsource it, you will lock in those costs forever.

Moreover, it is in the outsource-provider’s interest for call volumes to rise, that’s how they earn more money.

Just think about that. As the service worsens, failure demand rises and the outsourcer earns more. You couldn’t make it up.