Outsourcing innovation

In the 1990s and 2000s, the focus of enterprise IT investment was the automation of internal business processes.

 Outsourcing innovation

In the 1990s and 2000s, the focus of enterprise IT investment was the automation of internal business processes.

By dint of its aim to improve efficiency, this strategy encouraged standardisation: of business processes themselves, of the software used to support them, and of the development practices required to maintain and upgrade that software.

This standardisation in turn enabled a degree of outsourcing – if software development work was well-defined and predictable, companies could simply outsource it to the cheapest supplier.

Now, though, IT investment is increasingly focused on the external environment. Modern society is saturated with Internet-connected devices, and today’s marketing channels, payment systems, and customer interaction platforms are all digital in nature.

This has arguably changed the cadence of enterprise IT investment, placing greater importance on access to innovation. In the ERP days, adopting new functionality before one’s competitors meant gaining an efficiency advantage. When it comes to customer-facing digital systems, it could mean capturing and dominating an untapped market opportunity

In this context, organisations looking for outside assistance in technology investment are not interested in scale, measurability and cost effectiveness – they want early access to the latest, potentially disruptive ideas.

This may explain the growing interest in digital technology start-ups among large corporations.

In December 2012, engineering giant General Electric announced a $1 billion investment programme in what it calls the ‘Industrial Internet’. The company believes that embedding digital systems into its electrical and industrial equipment, and offering analytical software and services to process the data that produces, will unlock a new wave of productivity for its customers.

“The melding of the global industrial system that was made possible as a result of the Industrial Revolution, with the open computing and communication systems developed as part of the Internet Revolution, opens up new frontiers to accelerate productivity, reduce inefficiency and waste, and enhance the human work experience,” GE said in a report.

GE said that as part of the strategy, it will invest up to $100 million in Silicon Valley start-ups. CEO Jeffrey Immelt said that the company uses its investment strategy to access disruptive technologies before it they disrupt GE itself. The electrical grid, he said by way of example, has “tremendous opportunities for application of both software and analytics. And we’re better off being paranoid about that.”

Closer to home, Anglo-Dutch consumer goods giant Unilever has also been courting start-ups to gain access to innovation. In the UK, it is supporting two start-up incubator programmes; one focused on digital media, the other on the Internet of things.

“We’re very keen to understand the trends of the future that are going to be important to companies like us,” Phil Giesler, vice president at Unilever’s new business unit told Information Age. “And while it’s great to be able to talk to the Facebooks of this world, we know this is a very rapidly changing field, and that start-ups can be below the radar until they suddenly take off.”

So what does this trend mean for IT? That depends. In GE’s case, the ‘Industrial Internet’ strategy coincides with a reduction in its use of outsourced IT resources. Having been a pioneer of offshore outsourcing in the 1980s, last year GE announced a plan to bring 1,100 IT jobs back in-house, in part to regain technical expertise that it had lost.

“About 50% of [our] IT work was being done by non-GE employees,” said CIO Cherlene Begley at the time. “That strategy may have had its time, but there was a lot of downside. We lost a lot of the technical capabilities that we have to own.”

Unilever, however, is extending its use of offshore, outsourced resources. In early December, it inaugurated a new 1,400-head IT resource centre in Bangalore, India. The company said 500 of the staff at the facility will be in-house staff, the remaining 1,100 coming from outsourcing providers including Accenture and Infosys.

This follows a plan, approved by shareholders earlier this year, to close various sites in the UK and cut around 500 jobs.

Just as businesses will need to support both internal automation systems and external ‘engagement’ systems, they may also use external sourcing to access both cost efficiency and scale, and innovation and future-proofing.

There is an opportunity for IT executives to demonstrate leadership by identifying how to strike that balance.

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