How Outsourcing Killed Innovation
Suppose your company wanted to build an entirely new digital experience for customers. It’s a complex project though, so you decide to remove some things to simplify the rollout.
First thing to go is responsive design. Why would making a website accessible for different devices and screen sizes be so important anyway? Let’s throw out extensibility and modularity since global or organizational considerations don’t really matter. How about code quality or security testing? Nah, because what could possibly go wrong.
For this leading edge digital experience, you only have to pay the low cost of $32 million, face massive reputational risk, and destroy all customer trust. How do you sign up your company for such an awesome program?
Let me introduce you to Accenture, the firm being sued by Hertz for perpetrating such an epic disaster. There will likely be lots of blame to go around, but ultimately it’s yet another story of one company putting its full trust in another company to deliver on a highly strategic project.
Why would any company put such a critical initiative in the hands of outsiders? It may be instructive to understand how we got here and why IT has been so readily outsourced by companies in the past couple of decades.
The golden age of IT was in the 70’s, a time when companies poured significant resources into digitizing their organizations. Executives recognized the value and power of harnessing data and eliminating wasteful manual work. By the 90’s, the focus was on streamlining processes and reducing operational overhead through reengineering.
Once much of the operational waste was accounted for and processes were documented, the next step was outsourcing. The biggest cost in any company is labor. By chopping cost centers deemed non-core to the business, executives could further boost shareholder value.
IT was seen as a fat and juicy target to eliminate. As most corporate executives have little idea how IT works, it seemed sensible to hand it over to a much more capable firm focused on technology to handle the business as usual, run the company stuff. Think ERP, SCM, CRM and core back office functions. At some point though, outsourcing also managed to take in all technology work, including innovative and cutting edge projects.
We tend to think of innovation as something we can harness if we have enough smart people generating wild ideas. Companies pour millions into captive “Innovation Hubs” or “Digital Factories” that have hip startup vibes and free snacks. But most ideas are terrible or so minimal that they produce little in the way of substantive change or business results.
In the same way, outsourcing innovation is a failed strategy. Innovation from outside the core organization tends to be rejected just like the human body rejects foreign tissue or an organ transplant. The tissue is not of the same DNA.
Innovation must be a core competency woven into the culture of companies that seek to remain competitive. Just look at what happens to companies that do not embrace new ideas like Kodak, Xerox, or every retail chain that has gone out of business recently.
There is a Chinese proverb that goes:
“When the winds of change blow,
some people build walls,
and others build windmills.”
Companies that build walls eventually become irrelevant. Of Fortune 500 companies, 88% of listed firms in 1955 are not in the latest Fortune 500 list. They never adapted to the changing market.
The change of pace is happening even faster and led by technology. When a company has gutted their ability to leverage technology as a means of innovating, they create a self-imposed competitive impediment allowing others to jump ahead, especially tech startups that have software embedded in their DNA and can build windmills quickly and at scale.
Companies have started to recognize the strategic mistake in treating IT as a cost-center, to a point. Many have launched insourcing as a means to bolster developer talent and build up tech capabilities. Yet these same organizations are still playing the labor cost arbitration game, outsourcing large parts of their IT group or building up captive offshore delivery centers.
You may say this makes sense, those things not innovative or strategic can be offloaded. But that would presume that there are areas of business that never change. By outsourcing, those areas of the company become ossified silos that become culturally resistant to change. Do this enough and most of the company becomes hostile to innovation.
Outsourcing is not all terrible. In tactical and short-term ways, outsourcing can accelerate delivery or scale parts of the business. But the massive, multiyear, all-encompassing programs are heading for extinction. Technology is too strategic to put into the hands of another firm that has neither the skin in the game or faces the consequences of failure.
What has been your experience with outsourcing? In what ways have you seen outsourcing provide value and conversely in what ways has it hindered innovation?
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