In 2003, Boeing decided to use a very aggressive outsourcing strategy in order to slash the cost of developing their new 787 Dreamliner.
But last month, the Boeing Commercial Airplanes chief admitted that this strategy backfired completely — outsourcing cost far more money than it saved, and led to a three year delay in the release of the 787. “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.” Wall Street analysts have estimated that this bad move cost the company between $12 billion and $18 billion dollars, on top of the $5 billion the plane was originally predicted to cost.
What I find ironic about this is that in 1997, Boeing was able to acquire their major competitor, airplane manufacturer McDonnell Douglas, because Douglas had themselves tried their own disastrous outsourcing strategy. In fact, one of the Senior Technical Fellows from Douglas had warned Boeing in 2001 not to go down the outsourcing path that had led Douglas to virtual obsolescence by the mid-1990s, and predicting that outsourcing would cause massive additional costs.
But Boeing didn’t listen, because they were too busy chasing after a new accounting measure called RONA — return on net assets — an idea they acquired from the close-to-defunct Douglas. The RONA idea is that the less actual work you do per dollar of profit, the better. Taken to its extreme, you could maximize RONA by outsourcing everything other than a 25 cent Boeing decal that you would slap on the nose of the finished airplane.
The problem, of course, is that you lose all control over the airplane itself and increase risks when outsourcing partners are unable to perform. And as you lay off your employees, you lose your core competencies. You are in effect turning your product into a commodity, competing on price alone. As most businesses recognize, this is a very bad situation to be in. But when the outsourcing ends up costing you more money, it is a double whammy.
Boeing has now learned this lesson twice. Will other companies need to make the same mistakes? I hope not.