“If you let an IT company do all your analytics for you, you are going to fall behind” said Jeff Immelt recently, speaking to LinkedIn’s Dan Roth. In his view, digital capabilities are core to driving productivity and competitive advantage, so need to be built in-house. But take a look at the financial performance of digital service providers, and you see a different picture, with robust growth in sourcing. So how should executives think about sourcing of digital capabilities such as user interface design, data science, and software engineering? Inevitably, the topic demands more than a simple yes-no answer. Digital capabilities are critical to driving competitive advantage in most industries, so firms will need deep digital capabilities in-house. In steady-state, each company will need digital leadership in strength and depth, and the capabilities to drive digital strategy, innovation and execution.
However, few firms will be able to reach a steady-state without some exteral support along the way. Building a strong digital team from scratch takes too long – longer than the changing customer and competitor context allows. And the initial phases of digital transformation often drives a spike in resource levels that isn’t sustainable. So it makes sense to augment the internal team with external resources during transitional phases.
Crucially, a different type of sourcing is required – bearing little resemblance to traditional creative agency or turnkey IT arrangements. What’s needed is a suite of flexible arrangements with a fluid network of third parties. Needs change frequently and no provider can lay claim to a strong position across the full gamut of digital capabilities. Other changes to the sourcing model are needed too. Agile development is difficult (although not impossible) to pull off across distributed locations, so local sourcing is preferred for engineering talent.
In summary then, some digital capabilities can be outsourced, some of the time, but only under a markedly different sourcing model.