Is IT outsourcing ruining your agility?

One of the main reasons companies outsource is to gain more flexibility. Outsourcing gives them access to a larger talent pool that can be scaled up or down with relative ease based on the organization’s changing needs. However, it is less well-known that outsourcing also can work in the opposite direction – reducing the ability of your company to adapt and respond to changing business demands rapidly.

How can outsourcing destroy your business agility?

Information technology is becoming increasingly important for companies as they undergo digital transformation. It is therefore natural that it needs to become an increasingly integral part of the business.

There are several key success factors which can contribute to achieving deeper integration between business and IT which can be negatively impacted by outsourcing:

• Communication and collaboration. Outsourcing can reduce the quality of communication. Our studies show that communication is typically better between the business and in-house development teams than with outsourced teams. Also, co-located business and IT teams are seen as important by both business and IT leaders in order to create true agile teams.

• Commitment. Outsourcing can have a negative effect on commitment and company culture. In-house developers, for example, might reduce their commitment and become discouraged if they know they might be replaced at any given time.

• Business knowledge. It becomes increasingly important for IT staff to have intimate business knowledge in order to be agile and proactive. This is rarely the case among outsourced staff because they lack incentive to gain such knowledge - they can at any time be rotated out to another client. They therefore mostly focus on the technical aspects of the work. This hampers the provider’s ability to gain deep and lasting knowledge of the company’s business and its processes.

Are you outsourcing your core business?

Another oft-stated benefit of outsourcing is to allow the company to focus on its core business. However, outsourcing can instead result in the company losing focus on the core business. You might not view information technology to be part of your core business because your main products or services are not digital ones such as apps or other software tools. Think again! IT is becoming an increasingly interwoven part of the fabric of all organizations regardless of the field or industry in which they operate. The distinction between IT and the core business is rapidly becoming less and less meaningful. IT now has a core role to play in practically all business processes.

“Our studies show that local staff generally are seen by business leaders as not only better able to understand the business and its needs but also as more skilled in general.”

The development of new business processes can therefore no longer easily be separated from the IT services that are needed to enable them. For that reason, business processes can often not be designed adequately without the IT function being involved right from the beginning of projects. In fact, Waagstein Research studies show that the IT function itself often expresses the wish to be involved earlier in the business planning process than is currently typically the case. Major changes in business processes often require big changes in the IT architecture to accommodate them. These changes often take a long time to plan and implement. This is another reason for the importance of early involvement of a committed IT team in new projects.

Our studies show that local staff generally are seen by business leaders as not only better able to understand the business and its needs but also as more skilled in general – probably because they can better anticipate business needs and because they know the systems better.

Should you stop outsourcing altogether?

An effective way to remove the risk of outsourcing something that forms a core part of the business would be to stop outsourcing altogether. This is of course not feasible as cost pressures and lack of talent in the market remain, which is something that outsourcing can quickly address. Instead, companies need to find ways to better separate out that which can be cleanly outsourced without affecting the agility of the organization and only outsource those parts that can be clearly delineated and with confidence determined to be non-core to the company’s business.

So, what is core and what is non-core?

There are several ways to determine whether a function is part of the company’s core business:

• Determine whether it can give your business a significant edge over the competition. The function should have a significant impact on the overall performance of the business. Such a function should be kept in-house, even if it incurs higher costs initially. Over time though the company’s learning curve will cause costs to decrease.
• Survey your stakeholders. Business leaders, IT users and IT leaders are the people that know your business best. They are therefore the most suited candidates to determine what is core and what is not core to the business and how outsourcing would impact the business agility. For example, how communication and collaboration between IT and business are impacted. They are also the best situated to determine how important business knowledge is among outsourcing providers staff for various tasks. The surveying of these groups should be repeated regularly to take into account how the situation changes over time and the findings should be used for regularly calibrating what is outsourced.
• Complexity of the deliverables. How well can the project be divided into small and simpler tasks that require only a small degree of cooperation between the business and provider’s staff? The less clear the dividing lines are the less likely outsourcing is to be a good option.
• New development or maintenance of a current system. Strong communication is required for good software development. If you need a custom software tool for your business, then you're creating something that is new that needs to match your vision. This requires extensive discussion with IT about what the business actually needs. Meanwhile, maintaining a current system is easier as the boundaries of the task are more defined and less input from the business is needed. The latter one is therefore more likely to be a good candidate for outsourcing than the former one.