Outsourcing and innovation: a contradiction or not?

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Outsourcing IT to improve the capabilities of the IT to innovate and improve speed-to-market looks at first a contradiction. Typically outsourcing is used to reduce IT cost, with standardization and less responsiveness regarding new business demand as a side effect.

However, outsourcing can actually help an IT organization to improve their speed-to-market and ability to deliver new services that add value to the business. A business that wants to grow again after a period of economic downturn and expects IT to act accordingly. There are two basic keys to achieving this goal.

First key

The first part is understanding that the dynamics to manage on speed-to-market and innovation is fundamentally different from delivering reliable (standard) solutions at high availability levels. The first type of service requires agility, flexibility and a general focus on benefits. The second type focuses on reducing the change of an operational risk materializing. In other words: solid build, test, acceptance and operation procedures, checklist, manuals etc. Not an approach that facilities innovation…

Realizing the required differentiation starts with a better understanding of the dynamics of the services provided by the IT organization. Classification based on the portfolio model of Ward et al (1996) can help this. This model maps services to four quadrants accordingly to their contribution to the primary business objectives and the extent to which business processes are dependent on them for their day-to-day operation (illustration).

  • Strategic. These services are critical to maintain the existing competitive advantages and to develop them further. IT investments in this quadrant are used for innovation that contributes to the maintaining and developing the current competitive advantage.
  • High Potential. In this quadrant are services that have in most cases no yet yielded a positive contribution to the financial result, but show a lot of potential. The services in this quadrant have a high level of investment risk and should be managed as such. In this quadrant focus is on innovation and speed to market.
  • Key Operational. In this quadrant are the services that are crucial for running the current operations of the business. The underlying IT systems enable the organization to execute its business processes in an effective and efficient manner. The focus in this quadrant is on reliability and availability.
  • Support. The added value in this quadrant is limited to the automation of business processes in order to execute them more efficiently.

The dynamics between the quadrant High Potential on one side and the quadrants Key Operational and Support on the other side differs fundamentally. Within the High Potential quadrant, the speed-to-market of new features and innovations the primary focus. Within the quadrants Key Operational and Support, the emphasis is on high reliability and availability figures.

Second key

From business perspective, the services in the Support quadrant add the least value, so the trick is to minimize the budget of this quadrant and transfer the achieved reduction to the quadrant High Potential (= the innovation quadrant). In short, source standard solutions for the Support quadrant, which are build and operated by external vendors.

outsourcing and business differentiation Additional financial room can be created by applying specific sourcing strategies to the other quadrants. The outline of these sourcing strategies could be as follows.

Financial room (both CAPEX and OPEX) can be unlocked by deploying cloud-based solutions for the services in the High Potential quadrant. An additional advantage of using cloud services in this quadrant is it reduces the investment risk. Not every service in this quadrant will reach ‘adulthood’ and move to another quadrant. For many another exit strategy will be necessary. Another reason to work more with external parties for services in this quadrant is the disruption caused by the dynamic of innovation on building and managing systems in the Key Operational quadrant.

In the Key Operational quadrant there are possibilities to outsource parts of the infrastructure layer, provided they are not too intertwined with the application layer. Suppliers will have the least work in the Strategic quadrant, given the importance to the organization. Here is would be best to work only with hiring of capacity where necessary.

The approach outlined here gives only part of the puzzle. The difference in dynamics among the different quadrants impacts also aspects like HR management, processes, architecture and the like. Only from a holistic approach, the IT organization will be able to actually roll out new innovations faster.

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