In the current business climate, a new S&P 500 company is being replaced every two weeks and the pace of casualties is accelerating. Businesses in every major industry today find themselves competing with trailblazing, risk-taking startups that have technology bred into their bones and tech giants who leverage unrivaled scale and distribution to upend traditional brands. Companies now face a dire choice: become a software company or fade into history.
But becoming a tech company requires highly sought-after employees, which poses a challenge for companies that struggle to attract candidates on the vanguard of tech. The challenge is that if you aren’t known as an innovative company you can’t attract the people you need to become one – and this will remain the case as the talent shortage continues to play out on a global scale. It’s a vicious cycle.
To break the cycle, many companies have turned to outsourcing; in fact, more than half of those surveyed by Coding Sans in 2018 said they have outsourced software development. While outsourcing can help solve well-understood operational problems like sales pipelines, taxes, and expenses, more complex problems that break new ground require faster implementations of lean techniques and work best with teams in close physical and cultural proximity. Despite the prospects of cost-savings, flexibility, and on-demand access to a talent pool that can be appealing to some companies, outsourcing introduces a fundamental misalignment in your company objectives and takes away valuable learning and culture-forming experiences from your full-time staff, significantly reducing the company’s long-term competitiveness. In order to continuously differentiate your company in the crowded marketplace, you must invest in your in-house talent and find a way to inject the culture of innovation across your entire organization. Simply put, you can’t outsource the fabric of what makes you better.
Strategic and tactical alignment is key
One of the common traits of successful companies is a high level of strategic and tactical alignment. That means that every employee is clear on the company’s strategic direction as well as the tactical steps required to execute the strategy. This includes an in-depth understanding of the strategy, why it’s critical, and how each employee fits into the implementation. Without alignment, designing and deploying truly integrated solutions for clients can be a daunting challenge. TEKsystems‘ 2019 IT forecast found that the biggest challenge organizations face in meeting their goals is a lack of operational alignment. This is especially critical for companies that are undergoing a digital transformation and building out a previously non-existent function. Adding outsourcing to that equation creates a risk of strategic and tactical misalignment that could leave your digital transformation effort dead in the water – before it even gets started.
On a strategic level, outsourcing software development can cause misalignment by creating different and sometimes conflicting sets of goals. By virtue of how outsourcing offerings work, they place the onus on a party that wants to get paid for their deliverable in a timely and cost-efficient manner. At the same time, software development, if successful, is an iterative process that requires a long-term user-centered mindset, often foregoing short-term gain for long-term potential. This means shifting the focus of the development from delivery to outcome and measuring against the macro goal the company is trying to achieve, rather than gauging the outputs on timeline and schedule, which is how most outsourcing projects are evaluated.
From a tactical perspective, outsourcing software development can be detrimental to long-term success because it further disconnects your software developers from the rest of the company, which then disrupts cross-departmental collaboration. Not only does this affect the trust inside the company, but it can also lead to operational inefficiencies by creating data silos between different departments. This is especially detrimental as companies produce and collect more data than ever before. By 2020, we’ll be creating more gigabytes of data than grains of sand on every beach across the entire planet. With every click, every search, every app tap – companies get an opportunity to better understand consumer patterns, better streamline user experiences, and ultimately make it easier for customers to find (and buy and rent and use) what they want when they want it. Successful companies build an efficient, self-fulfilling cycle that drives new behaviors in both organizations and consumers. Today’s organizations are forced to think differently about how they bring digital experiences to life. And that means utilizing every data point they have access to. While your freelancers, coders, and app developers don’t have to simultaneously be designers and marketers, they must be operating within the context of all the other departments and make sure they have ongoing access to all the data being collected. Given the central role that cross-departmental data-sharing is playing in product development, outsourcing just no longer fits the bill, especially if you plan to deliver industry-leading products.
Cultivating sustainable disruption
But let’s assume for a moment that the best-case scenario occurs: your outsourcing project turns out to be a hit, the software works flawlessly, and you’re generating strong traction with your early customers. Everything’s great – except for the fact that the process of outsourcing, in and of itself, has already done damage to your organization. You just don’t know it yet. When you decide to outsource something as important as software development, you hand over not only a mission-critical function, but also every benefit that your company could have gained by keeping it in-house.
Many aspects of software development are unpredictable: at the onset, it’s often unclear what tasks they’ll require and how long it will take workers who’ve never tackled such tasks before to complete them. So, delays are almost guaranteed. That’s a normal part of the product development cycle and can prove a valuable teaching tool for your employees. Just think about the commonly accepted 70-20-10 rule: on average, 70% of a person’s learning at work is internal and experience-based, 20% comes from interacting with fellow employees, and 10% is the result of formal training and reading. Within that paradigm, outsourcing can mean foregoing nearly 90% of your employee’s learning, which significantly reduces the growth of your in-house expertise and curbs your team’s ability to continue improving the product. That is especially detrimental as the time to market for new technologies continues to shrink. Customers today expect V1 to be quickly followed by V2, V3, V4, etc. This is how great experiences stay relevant over time and that’s why you need your in-house team to have the capacity to continuously and iteratively improve the product. If they were on the sidelines for the most important part of the work, they’ll lack the in-depth visibility into all stages of product development and miss the necessary skills required to build Industry-leading products.
In addition to missing out on skill development opportunities, outsourcing also affects every aspect of your corporate culture. Building an innovative product in-house is valuable to the culture you are building. Fast-evolving companies typically feature cultures that foster creative thinking, risk-taking, and experimentation as a part of their daily routines. This kind of vision – one that establishes a pattern and expectation of continuous innovation rather than a singular focus on ONE innovation – is the kind that creates sustainable and healthy disruption.
How to build innovative products without outsourcing
So how does your company become a software company if you lack the in-house skills? The first step is to start thinking like a tech company. While this may sound obvious, the change in mindset has very wide and deep implications. You have to decide that as a Midwestern insurance company, car wash chain, or oil and gas pipeline maker, your company is getting into the software business – this means coming to terms with the fact that it’s the talent that’s a scarce resource, not the market opportunity. It’s a profound mental shift where companies need to realize that their competitors are no longer just the companies in their immediate or adjacent industries, but everyone who’s competing for the world-class tech talent. This shift changes everything – from how you present yourself to potential customers and internal stakeholders to how you make corporate governance decisions.
Once your organization has transformed its thinking into a technology company’s mindset, you can start addressing the in-house skills shortage. Generally speaking, you have two options. In the best-case scenario, you fill the whole native software capability by aggressively hiring senior tech executives and engineers or acquiring a startup that already has the capability you need. This is by far the quickest and most expensive route and therefore is mostly reserved for large enterprises that have the cash to fund these initiatives. The remaining companies will need to fill out a subcomponent of the in-house software capability and rely on trusted partners for the rest. Often this entails hiring a veteran tech executive and a small but scrappy team of software developers that can work in close physical proximity with trusted advisors to move the needle on the digital transformation projects. When you proceed with that route you need to be extremely selective with the partners you choose. You must ensure that your in-house team is not just receiving the support it needs but getting in-depth visibility into all stages of product development and picking up the crucial skills along the way. These kinds of partnerships tend to create lasting cultural changes in your company and help establish the technology tracks necessary to continuously innovate.
Forging the path to disruption
For the past 20 years, companies seeking to digitally transform have relied on outsourcing as a quick fix for deficiencies in the talent and skills required to get the job done. Outsourcing can be beneficial for generic projects that solve well-understood operational problems as they do not require an in-depth understanding of the company context. That said, outsourcing is not the right choice for companies working on digital transformation projects. Those looking to truly disrupt their industries must be aligned from the top down and run on the momentum present across their organizations. Thriving companies will look for ways to build out in-house software development capacity to continuously iterate on the product. Because after all, product development is the most critical avenue to disruption.
