BP oil spill: Outsourcing versus subcontracting

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Since the explosion onboard Transocean’s Deepwater Horizon drilling rig in the US Gulf of Mexico on the 20th of April 2010, we have been witness to daily reports of the far-reaching catastrophic effects that the disaster is having, both environmental and economic.

It seems that the immediate reaction of the three parties involved, BP, Transocean and Halliburton, was to point the finger of blame, instead of accepting responsibility and immediately leaping into action to gain control of the situation and, therefore, attempt to mitigate the effects of the disaster, as much as possible.

The presence of multiple players has raised the issue of accountability. Should BP be solely responsible? Transocean? Halliburton? Should all parties accept some of the responsibility and, if so, to what degree should each party be liable?

To answer these questions, we need to understand the relationships between the three parties. Unfortunately, it has been due to a lack of understanding of these relationships which has unjustly dragged our industry’s name and its reputation through the mud during this tragedy.

Shortly after the Deepwater explosion, many hailed the incident as not only an environmental disaster, but also an outsourcing one. However, ‘outsourcing’ did not play any role in the equation.

According to BP, its relationship with Transocean and Halliburton which operated and maintained the offshore rig was of a subcontractual nature – not an outsourcing one.

When subcontracting, the end user, so BP in this instance, provides the details and exact specifications of the service (or product) that it needs delivered, including the quality standards, pricing, timeframe, etc. that the subcontractor needs to adhere to. These are often called ‘input contracts’, because every detail is specified.

It may be easier to understand subcontracting in relation to the car industry which uses many subcontractors. For example, a body panel, say a wing, might be constructed by a subcontractor but its specification (once agreed) will be detailed to the smallest degree because that wing not only has to fit in with the rest of the car, but it also has to meet the requirements of the manufacturer’s automation systems.

If the car manufacturer decides to outsource car production, then it would give the supplier a specification of what the car should look like, its performance levels and cost, relying on the supplier’s expertise to construct and fit the wing in line with the overall requirement.

Meanwhile, in an outsourcing arrangement, the end user looks to the supplier to deliver an output or outcome and is not normally concerned about how this is done exactly, provided the specified output or outcome is delivered. So, there is a significant and clear distinction between outsourcing and sub-contracting.

Though the BP case was not even one of outsourcing, I find it frustrating that the wider public almost never hears about the numerous examples where outsourcing is positively affecting industry, and instead we hear only about isolated instances where it has not gone smoothly. I suspect that good news doesn’t sell…

Remember, the key to any successful relationship is clearly defining and agreeing the desired outcomes at the outset and having a clear understanding of the roles of each party.

However, this is not enough. Whether a business partnership involves subcontracting or outsourcing, it is also necessary to have contingency plans in place.

As we’ve seen most with BP, should the unforeseen arise, as it inevitably does, an established crisis procedure should help limit the repercussions when things do go wrong, with all parties knowing their exact roles and responsibilities. This can only help to improve outsourcing partnerships and the reputation of our industry.


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