The Perils of Contracting

English: Artist impression of Boeing 787-9 Dre...

Artist impression of Boeing 787-9 Dreamliner. (Photo credit: Wikipedia)

The Boeing 787 is providing a vivid illustration of the hazards of concentrating on your “core competency” and outsourcing everything else.  As of today (February 7, 2013), the 787 is grounded after a number of fires that broke out onboard.  It has taken some time, but it turns out that the problem can be traced to a defect in the auxiliary battery system that can, you know, burst into flames.  The problem, unsurprisingly in my view, can be traced to a system that was subcontracted out.  The most interesting thing about this isn’t that it happened, it’s that it was so predictable.  For years we’ve been treated to stories about how the heavily contracted-out construction of the Dreamliner was leading to severe delays, cost overruns, and quality control issues.  This one, for example, is from exactly two years ago.

Furthermore, in the somewhat-connected field of public services the record of contracting has not only been clearly demonstrated but has been so for a long time.  It’s been well-demonstrated that contracting out core government duties is cost-ineffective and doesn’t produce particularly great results.  Contractors in Afghanistan and Iraq are not only costly, but have engaged in what seem an awful lot like war crimes.  Even narrowly within the aerospace industry, Boeing is facing the exact same problem that has bedeviled Lockheed Martin on the F-35 Lightning: excessive contracting-out leading to severe delays, cost overruns, and quality control issues.

Vertical integration is a pretty hotly contested topic at all times, but it’s worth reflecting that it sure seems to be proving superior in the current technological environment.  Apple is the most notable example, and it’s worth noting that both Microsoft (from the software end) and HP/Dell (from the hardware end) are looking to move in that direction.  In the very different semiconductor industry, vertical integration was contentious – Intel stuck with its vertically integrated model while AMD decided to spin off its manufacturing operations.  And today Intel has healthy and stable margins while AMD is riding a malfunctioning train through Strugglesville.  In the retail industry, the biggest success stories right now (besides Apple, natch) are the vertically integrated “fast fashion” chains like Zara and Uniqlo.

Will the increasing penetration of rapid prototyping and the application of “agile development” to actual physical objects increase the returns to vertical integration or to contracting out?  It’s a question worth considering further, because it’s a trillion-dollar question for entire global industries.

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