The Long-Tail Strategy for IT Outsourcing

  • Ning Su, Natalia Levina, and Jeanne W. Ross
  • November 17, 2015

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.