Outsourcing in the 21st century ambient organization

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In the never-ending battle of ‘build’ versus ‘buy,’ IT may have evolved to the point where the cheaper option is always ‘buy.’ But is it just another form of outsourcing?

Information technology continues to be exploited successfully to create or enhance products and services, thereby increasing top-line growth, as well as to lower costs through greater efficiencies.

But another significant value of IT is its power to lower transaction costs to the point at which it becomes more advantageous to buy services from external providers than to produce those services within the traditional organization structure.

We can foresee the future through current forerunners of what Niels Bjorn-Andersen of the Copenhagen Business School calls ambient organizations, a term he takes from the concept of ambient intelligence, where humans are surrounded by unobtrusively embedded computing and networking technologies. Bjorn-Andersen described emerging ambient organizations at the recent SIM Advanced Practices Council (APC) meeting. Forerunners range from a 50-person Danish start-up to Fortune 100 global enterprises.

Goodbye traditional wisdom

Unlike traditional outsourcing that most organizations continue to leverage for such functions as facilities management, modern outsourcing is partial, includes multiple vendors and is short-term. Contracts offer a flexible framework for relationships as well as collaborative management. Despite vast differences in size, reach and industry, these forerunner organizations tend to rely on multiple outsourcing arrangements. In the process, they have upset traditional wisdom on where activities should be performed.

[ Related: 10 outsourcing trends to watch in 2016]

Procter and Gamble, for example, has established a global shared service center for finance, accounting, HR and IT. Alibaba offers an outsourcing platform that performs 6 million concurrent transactions for businesses in such activities as accounting, e-invoicing and supply-chain solutions. Accenture provides HR functions for Unilever. Bestseller outsourced supply chain and logistics, clearly primary activities, as well as its web shop. VW outsourced its assembly to DHL because it was convinced that DHL could provide worldwide support, high quality and innovation. Dropbox outsources storage, its core business, to Amazon.

Bang & Olufsen, renowned for its stereo system design, outsources product design to others. Lego also outsources innovation, in its case through contests and interactive crowdsourcing.

Crowdsourcing meets outsourcing

In fact, crowdsourcing is a growing method of acquiring workers. A recent McKinsey Quarterly reported that several pioneering companies are even crowdsourcing their strategies. For example, HP uses Amazon's Mechanical Turk, a crowdsourcing site, to test its prediction model for Hollywood box office sales. The crowd was 95 percent accurate in predicting sales on films like "Dear John" and "The Crazies" before the premieres of those movies, and despite lack of media reviews.

Aegon Insurance identified 200 licensed insurance agents to work in their telemarketing unit through crowdsourcing. Yelp developed a competition for data scientists in the crowd and then hired the best ones. Microsoft used crowdsourcing to test its security suite, using local and regional testing sites and paying by the number of bugs found (aka, a “bug bounty”). Goldcorp used crowdsourcing to help it find gold by putting 400 MB of its geological data online and offering a competition to prospectors. This yielded 110 targets, 80 percent of which had gold. It yielded 8 million ounces worth more than $3 billion and reduced exploration time by two to three years.

Bjorn-Andersen asked APC members if there was anyone better prepared to deal with the challenges of evolving ambient organizations than they are. As more activities are sourced from outside the traditional firm, successfully managing this variety of sourcing arrangements becomes essential. No one has more experience in doing so than the CIO, who has acquired expertise in identifying the best suppliers, developing and negotiating contracts, monitoring and enforcing service level agreements and key performance indicators, and handling exit strategies.

Bjorn-Andersen also suggested that APC members assist other business leaders in expanding their thinking to explore opportunities for outsourcing activities in core and such non-traditional areas as HR, supply chain and logistics, predictive analytics, innovation, design and strategy.

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