Leading Economists, Thinkers and Outsourcing – Part 3: Robert M. Solow

More than 50 years ago Robert M. Solow, a professor at MIT and the next in my mini-series of the seminal economic thinkers that have impacted modern outsourcing, showed us that technology is the driving factor behind economic growth.

Solow’s growth model was first presented in a 1956 article, A Contribution to the Theory of Economic Growth. His premise was that without “technological progress” growth rates for capital, labor and total production would all remain about the same.

In fact, he found that about four-fifths of the growth in U.S. output per worker was attributable directly to technological progress.

His work included a mathematical model that showed “technological change” would be the motor for economic growth over the long haul. Solow’s growth model presented a framework that formed the basis of modern macroeconomic theory.

Solow won the Nobel Prize Economic Sciences for his work in 1987 in recognition of its groundbreaking significance. In his precise and often aphoristic prize lecture, he said:  “Insiders are sometimes the slaves of silly ideas,” which to me is an early take on the value of thinking outside the box.  “You never know if you have gone as far as you can until you try to go further,” he continued.

For today’s outsourcing firms, what I frequently observe is that most outsourcing agreements are transaction-based, meaning that a service provider gets paid for each activity, whether it’s the number of held desk calls, applying patches to 1200 hundred servers, or a body in a seat providing xx hours of rote application maintenance.

If economic growth is achieved through “technical change” it follows that companies that outsource should focus their efforts on paying suppliers for their brainpower, their technological expertise and not their brawn, or simply to perform an outsourced activity. My point is that if companies outsource because they believe that another company can do the work better, faster or cheaper, why are today’s deals so focused on simply doing activities?

Even more problematic is something called The Outsourcing Paradox, an ailment described in Vested Outsourcing, where a company that decides to outsource can’t really let go and feels it has to define requirements and control work scope so rigidly that the outsource provider ends up executing the same old inefficient, transaction-based processes. In other words, ‘Do my mess for less.’

That’s really a perversion of what vested, collaborative and mutually beneficial outsourcing is all about.

And that’s not progress, technological or economic.