While the general trend of more IT outsourcing (via smaller, more focused deals) continues, these engagements remain difficult to navigate. Every large IT shop that I have turned around had significant problems caused or made worse by the outsourcing arrangement, particularly large deals. While those shops performed poorly for other reasons (ineffectual leadership, process failures, talent issues), improving performance required a substantial revamp or reversal of the outsourcing arrangements.
Failed outsourcing deals, involving reputable vendors and customers, litter various industries. While formal statistics are hard to come by, in part because companies are loathe to report their failures publicly, my estimate is that at least 25% and possibly more than half of these deals fail or perform very poorly. Why do these failures occur? And what should you do to improve the probability of success?
Much depends on what you choose to outsource and how you manage the vendor and service. A common misconception is that any activity that's not "core" to a company can and should be outsourced. In The Discipline of Market Leaders, authors Michael Treacy and Fred Wiersema argued that market leaders must recognize their competency in one of three areas: product and innovation leadership, customer service and intimacy, or operational excellence. They shouldn't try to excel at all three areas.
However, IT is critical to all three areas. And because of this intrinsic linkage, IT isn't like a security guard force or a legal staff, two areas companies commonly outsource successfully. And by outsourcing intrinsic capabilities, companies put their core competency at risk.
A recent University of Utah business school article found significantly higher rates of failure at companies that had outsourced IT and other operations. The authors concluded that "companies need to retain adequate control over specialized components that differentiate their products or have unique interdependencies, or they are more likely to fail to survive."
My IT best practice: Companies must control their critical intellectual property. If your company uses outsourcing vendors to develop and deliver key features or services that differentiate its products and define its success, then those vendors can typically turn around and sell those advances to your competitors. Or you are putting your success in the hands of someone with very different goals. Be wary of those who say IT isn't a core competency. With every year that passes, there's more IT content in products in nearly every industry.
Choose instead to outsource those activities where you don't have scale or cost advantages, or capacity or competence. But ensure that you either retain or build the key design, integration, and management capabilities in-house.