Innovation and Outsourcing

Risk:

The CEO of Air New Zealand had this to say on their supplier:

“We were left high and dry and this is simply unacceptable. My expectations of IBM were far higher than the amateur results that were delivered yesterday, and I have been left with no option but to ask the IT team to review the full range of options available to us to ensure we have an IT supplier whom we have confidence in and one who understands and is fully committed to our business and the needs of our customers.”

Reward:

Fake Steve Jobs had this to say:

See, those outsourcing deals always sounded so good: Why do you want to run a messy old data center anyway? We can do it for less than it costs you to do it yourself, and you can focus on your real core competence, which is running an airline.
Except, um, no. An airline’s core competence is running computers. I mean, think about it. Duh

Thing is, these guys did think about it. They knew the deal, but they did it anyway. You know why? Because they got to take a bunch of assets off their balance sheet and send a few hundred IT employees to IBM. It was an accounting maneuver, a way to dress up their financial reports, and it was especially appealing to weak companies. IBM takes your data center off your hands — and in some cases even pays you some money — and then sells it back to you as a service over the next decade.

If you are outsourcing, your cost advantage is lost, and not only is your cost advantage going to go away, there are some things that you are never going to be able to do. One can argue that it would make the most sense for someone like Google to focus on their core competency, not waste time building servers.  But not only are they building servers, the fact that they viewed it as a core competency allowed them to make things better by optimizing the system, including on-board batteries which enabled datacenters without centralized UPS’s.

People define core competencies far too narrowly. It is not simply that someone chose to view building servers as a core competency, it is that they saw the massive advantage to all their efforts of controlling their infrastructure destiny as an enabler and thus took it as a core competency.

Those leaps of innovation are just not going to happen if you are focusing on your “core competencies” while letting others build your infrastructure. It can be argued that at Google’s scale, servers are a core competency – for example no one is going to argue that if you need a 1000 servers, you are better off  using a reverse auction, but if you are a global service provider, you are not building 1000 servers, you are in fact, working on your core competency, a point which does not seem as clear as it perhaps may appear.  How are you going to avoid being a dumb pipe if you can’t even control your own infrastructure at scale?

Edit: Benjamin Black added clarification

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2 Responses to Innovation and Outsourcing

  1. rob rodgers says:

    The “automatically generated” link to “Reinventing Innovation: The Next Level of Outsourcing” is comedy gold.

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