Digital Shift & Accelerated Disruption. Episode 1: IT outsourcing or in-house development, the battle.

The big trend in the 1990’s and 2000’s for companies was to outsource their IT, as IT was considered by lots of companies as a cost center. Often, IT teams were thus attached to the Chief Finance Officer as a “support” function for the company. Outsourcing IT meant that companies and C-suite didn’t have to bother any more to manage people and technical issues that sound like coming from Mars to them, they just had to follow the bottom line in the budget. But by adopting this approach, they lost any chance to master their systems and identify how to generate value from their systems instead of just considering them as expenditures. Companies that chose to follow this path clearly missed out the technological revolution and opportunities to create value from the use of technologies itself in the past few years. So companies should take a step back and think about their strategy of outsourcing or developing in-house, not only with a cost approach (which is all the more often incomplete because of hidden associate costs).

In my own experience, I had to deal with different kind of situations in terms of development teams. It turned out that while having outsourced development is fine for software applications that are not critical for your business or that have a rather slow evolution cycle (around 2-3 releases a year), it didn’t prove to be a good option for sofware applications dealing with the core business. In that case, evolution cycles that are needed are much shorter, and the problem is that as you don’t have your own people who struggle with day to day difficulties (lack of industrialisation, technical debts, etc…), you and your teams won’t be able to make a deep dive in all the problems. Even if you have IT architects, projects managers… as a “front line” in your teams to manage your oustsourcing contractor, you won’t have the expertise needed to be in control of your systems because your own people won’t really put their hands on the code itself. On the contractor’s side, even though they may try to address the difficulties, they won’t feel the problems with their guts, and at the end of the day, they’ll still receive their check. People working on the contractor’s side will clearly not have the same committment than internal people at your company and will not own your vision / strategy as internal staff will, making it more difficult to translate it into right execution.

In their digital transformation, companies should thus think about their outsourcing strategy by evaluating in their information systems what serves their core business and what doesn’t.
Dilbert and outsourcing
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Information systems serving the core business should be mastered in-house, with internal IT staff developing and maintaining these systems. Because if you want to leverage your IT and create value, innovate in your business such as your pure digital competitors, you need people who will be engaged, committed to the goals of your company and who completely take part in the strategy. And that can only happens with people who work in your company and share its values. Of course, it doesn’t prevent you to have in-house contractors along with your internal staff. Actually, having a good ratio between internal staff and in-house contractors may be valuable as contractors also bring with them external expertise seen in different situations that can also help your staff to improve / renew themselves. From my experience, a good ratio may somewhere be around “2/3 internal staff, 1/3 in-house contractors” to “80 / 20”.

Yes, a consulting firm may point out that on the paper this should be more costly to manage that internally than outsourcing the whole thing, but in the long run, even this economic assumption may prove wrong: as time passes by, your internal frontline to manage your contractors will probably grow because of the growing difficulty to master systems more and more complex developped outside. And the most important thing is that you should consider the value created in terms of time to market and profits generated faster than before by turning IT into your core business.

As a whole, mastering internally your IT operating your core business seems to me a strategic choice. Of course, from time to time, you may outsource a whole IT project for tactical reasons (temporary difficulty to scale up internally, etc…) but by keeping in mind what will be your next steps. It goes without saying but I will say it anyway, of course you need to know what your core business is. If you take the example of Amazon, you may for example consider that their logistics system is part of their core business because it is critical for their operations and for their customers’ satisfaction (you’re sure to get delivered even at last minute).

An information system is of course much wider than just applications operating your core business. There are lots of applications which are oriented towards the internal operations of a company: ERPs for payroll / accountability, HR management tools, communication tools (emails, messaging, collaborative tools..), etc… If they are not oriented towards your core business, then this IT part of the information system may well be considered as a commodity and treated as such, in a logic of cost control and efficiency rather than innovation and creation of value. No need to have huge internal staff, no need to master the inside intricacy of these systems.

Often, a SaaS (Software as a Service) approach may be relevant, everything being managed externally by the software provider and you pay the use of the tools by your employees. No wonder that Salesforce continues to witness a double digit growth in income in 2016, or that SAP is focusing its efforts on its cloud solutions (13% of its income in 2015). In this context, where IT is not operating your core business, I would say that outsourcing it with SaaS solutions would be a way to go.

To come back to the IT operating your core business. You may have noticed that I’ve been talking mainly about outsourcing or having in-house people so far. To go a bit further, some other questions that will rise around your core business software applications are: should you use software packages from editors or make specific development? Should you master in-house the hosting of your applications or not, etc…? Of course, there is no straight answer, all the more that existing companies already have existing legacy IT systems with their specificities. But if you read Episode 0, you remember that new-born startups fully take advantage of opensource, cloud, specific development fitted to customers’ need with very fast TTM, etc… In a way or another, when talking about the information system which motorizes the core business, I think that companies should think with their enterprise architects on a path that includes progressive adoption of opensource tools, specific development, IT skills who can master the chain from development to operations, etc… to match with their more agile competitors.

It doesn’t mean that you’ll do specific development on every part of your core business information systems. For example, in many cases, managing content for the e-commerce platform of a company may very well be based on opensource solutions like WordPress, Drupal… which offer an amazing base to accelerate your projects, while you may focus your specific development on your core engine or other features, or even have your teams contributing in opensource mode to these solutions if needed. This will have different benefits: bringing the opensource solutions closer to your exact need, ensure your solution can be maintained in the long run (if you contributed in opensource, the community will accept your contribution only if it’s not crap!), and also motivate your teams, which is not the least of the benefits. How contribution to opensource is a factor of motivation, this I will talk about in another episode to come around people in the company: human ressources, assets, or…?

Thanks for reading this episode 1 of “Digital Shift and Accelerated Disruption”, next episode coming soon!

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