How to avoid the outsourcing trap

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Outsourcing R&D has been a very popular activity over the last 15 years. And it makes sense. As companies are struggling to acquire top talent essential to technology innovation and development, they are looking to parts of the world where there are larger pools of resources and the cost of labour is lower. And it is quite easy to outsource. All you need is a good internet connection, a few desktops and maybe a server room. And you are all set. At least so they say. But if you put software development under the loupe you will notice that it requires much more than just a few desktops; otherwise a company can get into “the outsourcing trap”.

Software development is different from other businesses. It is a knowledge-based business, where the complexity of work is higher than in many other businesses which are limited by the boundaries of the physical world. In software development, the value generation is far less visible. Measuring value and productivity is extremely difficult. The problem gets worse when the traditional approach of supply chain management is applied to managing outsourcing. This is when companies get into a dangerous trap, which is characterised by the following:

• External campuses are treated as a second tier supplier whose main function is to reduce costs
• The value creation process is not understood and is therefore disrupted. Costs can be put into Excel sheets, value cannot
• Dissatisfaction on both sides (supplier and demand), which only makes the situation worse
• Many dysfunctional systems where companies are realising savings at the expense of destroying all the value

This trap becomes even bigger as technology becomes an essential and inseparable component of key business processes. Trends such as mobility, cloud, Internet of Things and big data are causing a technology revolution in which the digital world is becoming a platform where business and leisure activities are performed. Companies all over the world are competing to take advantage of the new markets and new opportunities. The race is on and the name of the game is Speed of Innovation. However, the innovation itself is now becoming more complex as it is difficult to make a distinction between technology innovation and business innovation. Today, the winners are those companies that are the first to combine the best technology solution with the best business model. Just one part of the equation is not enough.

Software development is different from other businesses. It is a knowledge-based business, where the complexity of work is higher than in many other businesses which are limited by the boundaries of the physical world

The two are very much related and directly influence each other.

Innovation slowed
In today’s highly competitive business environment, it can be lethal if a company’s technology innovation process is hindered by the classical outsourcing trap. The innovation process will be slowed down tremendously and huge market opportunities will be overlooked because of the inability to apply a holistic approach to innovation. This is where small start-ups with very limited funding can easily overtake wealthy giants. And this is exactly what is happening in the technology arena — almost all digital platforms are being led by start-ups, which are now valued in billions of dollars.

The Agile manifesto has shown that managing software projects is simply not the same as managing projects in the physical world. Because the complexity is higher, we need to approach software projects differently. Essentially, the culture of work needs to change. The command and control-oriented approach needs to be replaced by a trust and autonomy based culture that nurtures intrinsic motivation and high performance of knowledge workers.

Now, a similar challenge is awaiting the outsourcing industry. What is the best way to structure the work process so it does not slow down technology innovation? How do you create partnerships that are not based on command and control principles? How do you prepare for the unpredictable disruptive challenges of our everyday life? How do you outsource so that you keep and grow value? How can we avoid the outsourcing trap?

Read More: outsourcing Tech Focus