Does Outsourcing Destroy IT Innovation?

Andy Grove penned a fascinating commentary about the impact of outsourcing on American job creation, and the subsequent ability to innovate in the sectors that have been outsourced. He challenges the belief that as long as knowledge work stays in the United States, it doesn't matter what happens to factory jobs. Grove believes that, "not only did we lose an untold number of jobs, we broke the chain of experience that is important for technological evolution." Grove makes a good argument that, over time, companies lose the ability to innovate in the sectors they outsource.

Does this argument apply at a lower level to IT outsourcing? Consider whether or not this statement has merit: With extensive outsourcing, over time, companies lose the ability to innovate IT.

Successful outsourcing requires strong internal leadership. Question is, how can an organization attract, develop and retain IT-smart leaders in an environment where many of the developmental assignments are outsourced? In the case study outlined in the last blog, the organization needed leaders with expertise if they had any hope of realizing:

  1. The project was buried under too many layers of management.
  2. Even though there were multiple managers involved, the project lacked the level of management expertise and clear delineation of accountabilities and authorities.
  3. The process for defining requirements consisted of too much paper and not enough hands-on prototyping.
  4. The project team did not have any practical way to manage scope given that success factors were not defined.
  5. The recommended technology approaches were too risky.
  6. In spite of strong senior level commitment, the level of front line organizational churn and user dissatisfaction necessitated cancelling and restarting the project.

Relying solely on external service providers for this expertise isn't the answer. Even if our case study vendor knew everything listed above (and, believe me, they did not), vendors often don't know how to be heard and are conflicted about the messages they should send in light of the fact that these messages could negatively impact their relationships and, potentially, their revenue.

Some researchers are questioning the value of broad-based outsourcing. Research on IT management practices within the banking industry found that top-performing companies outsource less, and those that outsource IT on a wholesale basis "struggle to use IT to drive value and have limited strategic flexibility as the business context evolves and hardware prices plummet."

What do you think? Is it possible that large scale outsourcing not only limits strategic flexibility but also the capability to innovate with IT and therefore use IT as a strategic asset?

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