Patrick Naef explores how CIOs in today's world must reconsider the value of IT outsourcing vs. in-house competencies
Reversing the outsourcing madness => back-sourcing, or “How much IT to keep in-house?”
We currently see two diverging trends with respect to keeping technology competence inside the companies versus outsourcing or using IT as a service from a cloud provider. Nearly 20 years ago, in his article “IT doesn’t matter”, Nicholas Carr claimed that IT was merely a commodity with no strategic value to the business and that a third party specialised on providing IT services (including software development) would do it better and cheaper than in-house IT professionals.
In the meantime, things have changed significantly and with digitalisation having become a strategic topic, companies were confronted with the fact that information technology is defining the future of their businesses and therefore IT has become a key strategic asset. However, many companies who had followed the outsourcing trend today realise that they went too far, outsourced too much of their technology competence to third parties and with it, lost their IT skills and knowledge. Consequently, today they lack the much-needed technical competence and rely heavily on their IT and software development suppliers. As a result, many large companies today are working hard to rebuild these IT competencies in-house, as the alleged “commodity” has now become a strategic asset to their business.
This is one side of the story. On the other hand, more services can easily be consumed as cloud services, making a large part of the physical infrastructure and bespoke software development obsolete. Today it is very easy for a start-up company to purchase and combine all kinds of services from the cloud without much investment and in a very short time, without ever having to own a physical server or writing a single line of code. Only two decades ago this was completely unthinkable.
The question whether to own or outsource the hardware and data centres is becoming almost obsolete. For most services and applications, this has become irrelevant as the services can simply be consumed from the cloud. The traditional horizontal layering of technology stacks (hardware, storage, operating system, middleware, application, etc.) has been replaced by vertical siloes of fully integrated services, where the underlying technology is mostly invisible to the consumer of the service. However, to be able to fully leverage the technical capabilities of such services, one still needs to understand the different underlying technologies.
Virtualisation (dematerialisation) of “things” leads to the situation that physical objects are being replaced by software. For most companies and industries, a significant part of their future products and services have or will become “software defined”. Software has become such an essential part of the business offerings and products and thus has become one of the most strategic components of every business. Therefore the “make or buy” question on software is very much back on the table.
An often-used example is Tesla, which considers itself to be more of a technology company than a car maker. A large part of the features of a Tesla vehicle is defined and controlled by software. A new Tesla model is often “just” a software upgrade and customers can buy new features or enhancements (i.e., better performance) by simply downloading and installing a software upgrade on their vehicle, “over the air”, without having to take it to a service centre or a garage.
Since the customer’s vehicles need to be constantly connected to Tesla’s product lifecycle management (PLM) system and linking it to the production planning and ERP system, Tesla realised that these systems would be the core of their business and therefore would be developed and managed in-house. Tesla defined its ERP and PLM systems as key strategic assets: they are key components to constantly update their products (the cars) with new functionalities and therefore directly represent a competitive advantage.
Companies like Tesla realised that IT is strategic and needs to be kept in-house. To effectively use technology as a strategic asset, companies will bring outsourced components back in-house as these are used to achieve competitive advantages such as agility and speed-to-market, product innovation and a personalised service offering for their customers.
Modern CIOs will have to carefully rethink the strategic value of IT before blindly following the cost-driven outsourcing path and ensure they have the necessary technology competences and skills in-house to drive the strategic digital agenda for their companies.