The unavoidable downside of your outdated Outsourcing Strategy - Symptom and Cure

The past year I’ve met numerous organisations suffering from outdated outsourcing strategies. Either very business critical areas or the entire IT has been outsourced. The typical symptom one meet from this are lacking support of new business strategies, a general lack of control of IT decisions, frustration due to differentiation of incentives and drivers between buyer and supplier. Also the vendor lock-in situation is common, leading to lack of gain of a healthy multi-vendor competition in terms of cost, skills and innovation management. In other words your business is getting hurt. 

As a consultant in different roles such as strategic advisor, manager (Manager/Team Manager/Project Manager) or Enterprise Architect, I meet many organisations and people in many different situations; different cultures, different levels of maturity and different industries. However one thing they all have in common, they are all working with business where IT is business critical.

Irrespective of where the discussion starts with a new company or organisation, so many times we end up discussing the same thing; build, buy or outsource parts or the entirity.

To outsource or not to outsource - that is the question

Outsourcing your IT completely can be one of your best decisions ever - you don't have to worry about IT and all technical issues that come with it. Probably you can have full overview of your IT costs through contracts and SLAs, right? Basically you can spend your precious time developing your business instead of discussing coding practices, architecture, firewalls and hosting, not to mention all the people you don’t have to hire and manage.

But outsourcing your entire IT might be your worst decision ever. Your business might run between your fingers as your competitors pass you by.

So, how to think and what to do? Outsource or not?

Well, it depends, of course.

A couple of questions worth thinking about and trying to answer are: To your business, do you see IT as a support process or is it a vital part of your core business? Are the business requirements you need your IT to fulfil fairly static and will seldom change? Do you have minor needs to differentiate from the remaining market, so common off-the-shelf products or applications will fulfil your need. Will your Business and IT strategy not likely change over the next 2-3 years? 

If your answer is yes to the questions above, for either parts or your IT environment or as an entirety, then outsourcing might be a good idea! But still you need to keep responsibility clear and dependencies healthy. In the relation with your suppliers, try your best to keep their incentives in line with yours - or you will have gravity working against you. Also remember that “new development”, “maintenance” and “IT operations” are three very separate areas that require different competence and skills and hence should be evaluated and tendered separately. Don't fall for a three-for-one offer from the same supplier, unless you really know what you are getting yourself into. The main reason for this is, as said, that it's very different kind of services we're looking at here, requiring different skills, experience and commercial agreements. But also that one supplier managing all parts really increase the risk of eventually ending up in unhealthy system dependencies (force of gravity) and you will find yourself locked-in with your supplier and only your supplier will have full control. Unfortunately very often your application landscape will be in a mess. Consequently you will then lose the gain of a healthy market competition, in terms of cost, competence and innovation management.

BUT if your answers to the questions above are not all yes, I advise you to read the remaining of the post and think twice before you set your outsourcing strategy.

Actually, I'm quite surprised how many organisations I meet with a culture of outsourcing major parts of their IT. Don't get me wrong, here, I'm not blaming anybody or saying anyone have made incorrect decisions, I really think outsourcing might have been a good and correct decision, based on the questions stated above, back in time. But today, in the 21st century, we have the IT-era behind us. During the IT-era, IT was needed to support our business. But today we've passed the IT-era and are now in the Digital-era. IT is no longer to support business but is a vital part of and in our business.

Today I know that many companies have businesses suffering from outdated outsourcing strategies that make huge hurdles for their new and today very obvious strategies where agility, flexibility, TTM lay the basis for evolving in areas such as UX, improved user data utilisation, system integration utilisation, e-commerce, mobile first, social media strategy, omnichannel etc. etc. Today IT is so much bigger and more complex than five years ago. Today IT can't be seen as a monolith where the same strategy applies to all areas. Today one has to differentiate between "common", "different" and "new". "Common" is where you are in common with you competitors or the market; no need to differentiate and any off-the-shelf product should do. "Different" is where you know you want to differentiate from the market, and you know how you want to differentiate. "New" is your business development, your innovation playground, where you try out your new ideas, theories and products.

As we all understand, the three areas differ very much in the characteristics and required support needed from your IT application and system architecture.    

Ok, but how to deal with my own organisation, outsource or not?

First of all, what I always ask about, and need to understand, is of course the business strategy (today and the near future). How IT extensive is it and what will it require from IT? Secondly you need to understand the market in which the company operates within, as well as the competition. Which are the main drivers and USPs? Thirdly, what is your current situation, which major challenges and opportunities do you have? (Pretty much a normal SWAT and market analysis) And fourthly, what kind of company do you want to build, what is the culture and values you want to emphasise?

Based on the analysis above and one’s experience (from all the companies and situations I've met with Netlight. All CEOs, CTOs, CIOs, Heads of Dev, POs, architects and teams) one get a fairly good picture of what to improve and how to design the IT organisation, processes and IT strategy to really support the business strategy. But the hard thing is not to see what needs to be done; the hard thing is to really do it, to put down the work and the effort.

How high do you want to aim? Do you really need a state-of-the-art IT organisation? And what you are prepared to invest?; what kind of risks are you willing to take and how much work and dedication you are prepared and willing to put down?

So what is the cure, is it really to build my own state-of-the-art IT organisation? What do I gain from that?

When IT is business critical, then you really need to have it close. I’m not saying it’s impossible to outsource business critical IT, but many aspects (discussed below) will always work against you so you will have to work really hard in several aspects to make it successful. As law of gravity will work against you, your work will be like Sisyphus pushing his boulder in Hades, you will get nothing for free.  

So building your own state-of-the-art IT organisation might be the cure for you. Foremost, I would say that you and your own organisation are, for once, in total control, which is one of the most elementary parts of creating your own inspiring working climate and having people working together for real, business and IT together - not in parallel. When in control you can do anything you want whenever you want it. When a business opportunity comes up you can react immediately and, for yourself, have full overview of total impact when reprioritizing amongst your initiatives. Of course you will meet new challenges building up your own state-of-the-art IT organisation, but instead of bureaucracy and spending time discussing contracts and SLAs with outsourcing partners you can invest your time in developing and empowering your own organisation and business, in an agile manner.

But to build your own state-of-the-art IT organisation you need not only to see the real value out of it, i.e. see it as an important strategic investment, also you and your organisation must be ready. You must have the competence required to integrate the IT organisation into your business organisation; to build ONE organisation that work and create together. That is the big trend of successful companies today. Upper management and business managers must understand and engage in IT as well as IT must understand and engage in business.

How to do it? What would I recommend?

Divide your IT landscape into areas of responsibility (responsible for supporting business needs) and identify required characteristics for the areas. I always recommend defining your Service Catalogue/Service Portfolio and use it as the structure for defining and linking responsibility. The catalogue is a very helpful tool to be used throughout the planning, designing and maintaining your IT system and application landscape. It will make sure everything is driven from your Business Services (i.e. business value driven), put on the very top of the catalogue. It will be a valuable and uniting tool for both businesses and IT stakeholders since it is possible to grasp and use for both sides.

Soon you will find areas that are very business crucial that you should consider keeping very close to yourself; having very agile, having full control over and where it’s worth investing in in-house competence. You will also find areas that are less crucial to your business. A clear responsibility where outsourcing, buying as a service “AAS” or buying as an off-the-shelf product should be considered. However irrespective if you chose to buy, build yourself or outsource, always keep your system landscape healthy. Base it on components or systems of clear business responsibility. This will make sure you’re well positioned for the future. You will be flexible and will be able to reconsider decisions and new strategies in the future without too large of investments. For example a component based on one specific product or provider can be exchanged or it can be developed in-house instead. So always keep your IT landscape totally based on your business needs for every specific area and component, instead of the whole landscape as a big static monolith.

Also consider the three areas “new development”, “maintenance” and “IT operations” separately.

As always, I recommend using good Genuine Consultants to do the work together with you. In this you get good experience, competence and the very healthy from-the-outside perspective. They will also help you develop and empower your teams and organisation.

  

Ok, what about the symptoms experienced from outdated outsourcing strategies?

Unhealthy incentives – unfortunately it’s very hard to get incentives of a supplier to really be aligned with your own incentives. Your incentives; to have an IT environment that supports a blooming business. The incentive of the supplier; to keep as many FTEs as possible busy or delver the features asked for at the fastest (and often cheapest) possible pace. 
Since the incentives differ the law of gravity will drift you apart, little by little and you will always be forced to fight it.  

Lock-in situation – very commonly growing unhealthy dependencies will lead to an unhealthy system landscape and the lock-in situation will soon be a fact. You will lose control and knowledge yourself, in the favour of your supplier. Soon you will be so dependent on your supplier that breaking lose is no longer feasible due to the risk and the workload/cost. In this situation you will no longer be able to gain from a healthy and open multi-vendor competition; you will miss the free market competition of pricing, quality, competence and innovation management.

Lack of inspiring working climate and frustration – due to the friction, of latency and bureaucracy, in working with an external provider, people will get frustrated and the innovative and entrepreneurial spirit will be oppressed. The inspiring working climate will be hurt and you will not be able to utilise the full potential and energy of your employees. As an employer you might have a hard time retaining your current star employees as well as attracting new.

Not in control – you don’t have it all in your hands, but share responsibility with an external provider through static commercial agreements and SLAs. To get full overview you need the input from your external provider, that unfortunately doesn’t fully share the same incentives and goals and hence have the same understanding. When it comes down to people they often have a hard time understanding each other; they run different agendas, use different vocabulary and have a “we-and-them” mindset. 
Planning becomes tedious and bureaucratic, not to mention working out projects and deliveries together.

Lack of own responsibility and engagement – we see it all the time, this “law of gravity”; because “somebody else” is accountable I don’t really care and engage within the area myself. 

Any final words?

Would you outsource your core business? Then maybe you should consider not outsourcing your business critical IT either.
Would you spend precious time on areas outside your core business? Then maybe you should consider outsourcing your IT supporting non-core business as well.

"Core Business" and "Business Critical IT" working together for real, equals "Success"

As always, I'm very happy to hear about your experience...

 Folllow me on twitter: @mandus_engman