November 25, 2003

Outsourcing and Entrepreneurial Error

Glenn Reynolds points out that Dell Computer is moving some of its tech support back into the U.S. because "customers weren’t satisfied with the level of support they were receiving." Because no one has perfect insight into the future, businesses have to be allowed to experiment with new ways of doing things. Dell tried outsourcing their tech support to India. It hasn't met the needs of their customers so it was brought back to the states. Maybe in the future Dell will develop ways to make Indian tech support better for customers and cheaper for the company. For now they haven't figured that out.

Experimentation like this is one way the free market better satisfies the desires of consumers (customer feedback that's really listened too is also extrememely important). The possibility to err is vital in channeling resources to their most beneficial ends.

Austrian economist Israel Kirzner writes,

In fact, the one really valuable feature of unprofitable entrepreneurial endeavor lies in its crucially important role in stimulating profitable entrepreneurship. Only in a society where entrepreneurs are free to make errors, can we expect an outpouring of entrepreneurship to lift its economy to new, hitherto unglimpsed, heights of prosperity. Only where potential entrepreneurs are free to follow the lure of profits as they see them, will there be the unleashing of entrepreneurial vision, daring, and judgment that creates profits in fact-and in so doing, creates new, more valuable ways of utilizing resources.

From errors, entrepreneuers re-evaluate how they use their resources. In Dell's case, while outsourcing tech support saved them labor costs, it wasn't keeping their corporate customers happy. With the easy substitution of computers and their life cycles being so short Dell knew unhappy customers would result in lost future sales. Based on the feedback from this failed experiment the company knows how to better allocate scarce resources to meet their customers' needs.

"From Outsourcing to Insourcing"