The Long-Tail Strategy for IT Outsourcing

IT outsourcing used to be driven by cost savings. Today, it’s also driven by a need for innovation — and some leading companies are reinventing their supplier portfolios to achieve that goal.

Today’s rapid pace of technological change has fundamentally transformed global IT outsourcing. Traditionally viewed as a cost-saving measure, IT outsourcing is increasingly leveraged as a strategic tool for acquiring cutting-edge innovation. Many companies are expanding their portfolios of IT suppliers to include smaller, highly innovative companies. This pursuit of emerging technologies and capabilities, however, has elevated the complexity of managing supplier portfolios. The outsourcing practices that companies have been maturing in the past decade are under a new level of duress. Today, organizations need to reimagine IT outsourcing strategies in increasingly turbulent business environments.

The Downside to Traditional Outsourcing

In the past, companies have been advised to optimize their portfolios of IT service providers by relying on several major partners with extensive technology and industry experience1 while limiting the number of ad hoc suppliers. To mitigate the significant lock-in risk associated with such a portfolio, companies have been advised to use shorter-term contracts with well-designed incentives. Collectively, this limited set of partners could offer a comprehensive and complementary set of capabilities, while competition among partners could motivate them to invest time and resources in the client. By centrally managing this “optimized” portfolio, a company could achieve the economies of scale necessary for low cost and high efficiency.

Although this approach to outsourcing was designed to ensure economies of scale and gain efficiency,2 companies also hoped that their outsourcing partners would introduce innovative technologies and associated services.3 Few business and IT leaders, however, are satisfied with the level of innovation introduced by their suppliers.4 Yet today, more than ever, as rapid technological changes disrupt industries, established companies need access to fresh ideas, new technologies, and cutting-edge expertise. In IT, these capabilities are often found among smaller, more agile suppliers.5 This is not surprising, as the very idea behind disruptive innovation is that many established players tend to ignore disruptive changes to their business until newer companies replace their products and services by providing better value to customers.

References

1. F.W. McFarlan and R.L. Nolan, “How to Manage an IT Outsourcing Alliance,” Sloan Management Review 36, no. 2 (winter 1995): 9-23.

2. M.C. Lacity, L.P. Willcocks, and D.F. Feeny, “IT Outsourcing: Maximize Flexibility and Control,” Harvard Business Review 73, no. 3 (May-June 1995): 84-93.

3.N. Levina and N. Su, “Global Multisourcing Strategy: The Emergence of a Supplier Portfolio in Services Offshoring,” Decision Sciences 39, no. 3 (August 2008): 541-570.

4. D. Brown and P. Fersht, “Executive Report: The State of Services and Outsourcing in 2014,” September 2014, www.kpmg-institutes.com.

5. D. Fogarty and P.C. Bell, “Should You Outsource Analytics?” MIT Sloan Management Review 55, no. 2 (winter 2014): 41-45.

6. C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston, Massachusetts: Harvard Business School Press, 1997).

7. N. Su and N. Levina, “Global Multisourcing Strategy: Integrating Learning From Manufacturing Into IT Service Outsourcing,” IEEE Transactions on Engineering Management 58, no. 4 (November 2011): 717-729.

8. P. Betancourt, J.G. Mooney, and J.W. Ross, “Digital Innovation at Toyota Motor North America: Revamping the Role of IT,” working paper 403, MIT Sloan School of Management Center for Information Systems Research, Cambridge, Massachusetts, October 2015, http://cisr.mit.edu.

9. Management scholars Martin Wiener and Carol Saunders found that in offshore IT outsourcing, some companies could rely on three strategic partners. See M. Wiener and C. Saunders, “Forced Coopetition in IT Multi-Sourcing,” Journal of Strategic Information Systems 23, no. 3 (September 2014): 210-225.

10. P. Weill and J. Ross, “IT Governance: How Top Performers Manage IT Decision Rights for Superior Results” (Boston, Massachusetts: Harvard Business Review Press, 2004).

11. As this article was going to press in October 2015, Dell Inc. agreed to acquire EMC Corp. See, for example, B. Womack and D. Bass, “Dell to Buy EMC in Deal Worth About $67 Billion,” Bloomberg Business, October 12, 2015, www.bloomberg.com.

12. Su and Levina, “Global Multisourcing Strategy.”

13. Su and Levina, “Global Multisourcing Strategy”; and L. Cohen and A. Young, “Multisourcing: Moving Beyond Outsourcing to Achieve Growth and Agility” (Boston, Massachusetts: Harvard Business School Press, 2006).

14. H. Chesbrough, “Why Companies Should Have Open Business Models,” MIT Sloan Management Review 48, no. 2 (winter 2007): 22-28.

15. S. Kaplan and W. Orlikowski, “Beyond Forecasting: Creating New Strategic Narratives,” MIT Sloan Management Review 56, no. 1 (fall 2014): 23-28.

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