Outsourcing IT Innovation

As a long-time IT journalist, I’ve heard over and over—and have come to believe—that IT drives innovation. It’s the IT systems, networks and data that create the foundation and build the bridges on which companies innovate, by enabling them to gather, process and leverage knowledge and ideas more easily, accurately, and quickly, and share all that with a variety of entities, from internal groups to business partners across the world. So turning over any portion of your IT infrastructure and management to an outsourcing services provider is a bit like handing someone the keys to the engine of your innovation. (Needless to say, that why companies need to be smart about their IT outsourcing initiatives and continually review them.)

But imagine actually outsourcing your company’s innovation initiatives. Product development, for example, can be outsourced. So can research and development. Companies actually do this.

Honestly, I hadn’t really heard of such practices, so I was particularly interested when I came across an article I found on the Wall Street Journal’s site about outsourcing innovation.

The article says the challenge is finding the right balance between outsourcing innovation and innovating in-house; i.e. how much outsourcing is too much or too little, and wherein lies the most effective amount? (IT managers — does this sound familiar?)

The authors say they studied 359 U.S. companies, their outsourcing habits, and how well they innovated by measuring the number of patents they produced. The authors also reviewed existing research on outsourcing innovation.

The article says companies should stick to four main reasons for outsourcing innovation: instead of hiring a bunch of specialists with specific knowledge about something, outsource work to a company with the expertise already at hand; instead of buying into high-tech that’s necessary for R&D projects, outsource to a company that has the high-tech in-house; when dealing with intellectual property that isn’t well-protected; and finally, when a company already has had lots of experience with outsourcing and thus are better equipped to manage the outsourcing gig to produce favorable, and effective, results.

So these reasons make sense. But there’s one statistic that really piqued my interest. The article says that when companies outsourced based on one of the four main reasons cited above—and when they struck the right balance of outsourcing versus in-house initiatives—they generally developed more patents, and that those patents were more often used or cited in subsequent patents. But for those that either outsourced to much or too little, even by just 1%, the article states, they experienced an 11% decrease in the expected number and influence of their patents. Wow.

So it made me start thinking about the basic reasons for outsourcing IT operations and in particular, of striking that balance. Companies may want to consider outsourcing IT operations rather than hiring a bunch of new employees that not only need salaries but health care, vacation, on-going training, etc. And clearly, if a company needs a high-tech tracking technology, such as Radio Frequency Identification (RFID), to keep tabs on the goods they move through an expansive supply chain, they may be better off outsourcing that technology to an RFID expert. And definitely tread carefully if your company has never outsourced IT but is now starting; experience does matter.

Most importantly, though, is finding the outsourcing balance that works best for your company. Outsourcing too much of your IT operations, or too little, could damage the engine that drives your company’s innovation.