I never really did buy into the idea of outsourcing. It is usually done to hand off a problem to somewhere else.
All too often the "problem" is that the service being outsourced is just too expensive. There are sometimes other reasons, but just being too expensive is the most common.
In the parlance of the Risk Management profession, the outsourcer passes uncertainty of outcome (i.e. risk) to the outsourcing company and gains from a slight reduction in cost and a perceived reduction in risk.
Unfortunately both large companies and government bodies take the view that they should deal only with outsourcing providers of size and substance - thus putting a lot of pressure to reduce cost, and a lot of risk in a relatively small number of providers.
These large service providers are generally formed (my observation) by combining a number of smaller companies, This is achieved by the dominant one buying the others, always for a bit more than they are actually worth on their own.
This is "important" in the sense only of the way that the finances of the new, enlarged outsourcing company will appear. The surplus paid for the small companies is shown in the balance sheet of the large company as an asset called "goodwill" by accountants.
The new outsourcer is essentially taking on a large number of contracts that will offer, long term, fairly marginal returns, guaranteed by the tendering process by which the contracts are awarded. The outsourcer is also taking on the risk.
Accounting for long term contracts (outsourcing is typically ~ 5 years) has always been a headache for accountants (like me). The major tension is between the desire (of management and shareholders) to recognise profits early in the contract cycle and the need to wait until later to see whether the profits ever materialise in the cold light of day.
Sadly, the tendency is to imagine profits in the early years of contracts that never materialise.
When the time comes to "reckon up" in the outsourcers books there are two problems - writing off the fictitious profits booked too early in the contracting cycle, and much worse! The realisation that the asset called goodwill is actually destitute of any value and needs to be written off.
It is this "accounting" black-hole that makes the fall of the outsourcing companies seem so precipitous and dramatic.
But really, if your economic systems concentrate risk in a small number of intrinsically very large and very marginal economic entities, something is going to go very wrong, very certainly and fairly soon.
