Andy Grove penned a fascinating commentary about the impact of outsourcing on American job creation, and the subsequent ability to innovate in the sectors that have been outsourced. He challenges the belief that as long as knowledge work stays in the United States, it doesn't matter what happens to factory jobs. Grove believes that "not only did we lose an untold number of jobs, we broke the chain of experience that is important for technological evolution." Grove makes a good argument that, over time, companies lose the ability to innovate in the sectors they outsource.

Does this argument apply at a lower level to IT outsourcing? Consider whether or not this statement has merit: With extensive outsourcing, over time, companies lose the ability to innovate IT.

Successful outsourcing requires strong internal leadership. Question is, how can an organisation attract, develop and retain IT-smart leaders in an environment where many of the developmental assignments are outsourced? In the case study outlined in my last blog, the organisation needed leaders with expertise if they had any hope of realising:

1. The project was buried under too many layers of management.

2. Even though there were multiple managers involved, the project lacked the level of management expertise and clear delineation of accountabilities and authorities.

3. The process for defining requirements consisted of too much paper and not enough hands-on prototyping.

4. The project team did not have any practical way to manage scope given that success factors were not defined.

5. The recommended technology approaches were too risky.

6. In spite of strong senior level commitment, the level of front line organisational churn and user dissatisfaction necessitated cancelling and restarting the project.

Relying solely on external service providers for this expertise isn't the answer. Even if our case study vendor knew everything listed above (and, believe me, they did not), vendors often don't know how to be heard and are conflicted about the messages they should send in light of the fact that these messages could negatively impact their relationships and, potentially, their revenue.

Some researchers are questioning the value of broad-based outsourcing. Research on IT management practices within the banking industry found that top-performing companies outsource less, and those that outsource IT on a wholesale basis "struggle to use IT to drive value and have limited strategic flexibility as the business context evolves and hardware prices plummet."

What do you think? Is it possible that large scale outsourcing not only limits strategic flexibility but also the capability to innovate with IT and therefore use IT as a strategic asset?

Outsource the Work, Not the Leadership
Think outsourcing eases leadership burdens? Think again.

A company decides to implement some packaged software to streamline their financing operations. They decide to outsource the work. The company does a great job working through a disciplined process to define requirements, solicit bids, evaluate vendors, finalise the scope of work, and negotiate the contract. They hire a brand name consulting company to make it happen. The project seems to be humming along when it hits a wall, in what they thought were its final two months. It turns out that the users hate the software and for the next eight months, the project devolves into senior leaders "encouraging" the users to accept the software through education and some minor modifications. The project is eventually delivered but not without a significant amount of organisational angst — it exists today and will continue for the foreseeable future.

The software is late and not accepted by its users. The search for the guilty party settles on the vendor. Everyone agrees they are at fault and resolves to pick a better one next time. Clarify the scope of work and relative responsibilities, they chant. Hold them accountable.

Lessons learned? Case closed?
Hardly. This is an all-too-typical case of the difficulties inherent in outsourcing. Outsourcers have specialised expertise, but they don't have perfect expertise. After all, they are hiring from the same pool that you do.

When outsourcing, you can't manage through the contract, you have to manage through the people. Delegating to a vendor is no different, on a day-by-day basis, than delegating internally. You have to stay close in the beginning to ensure that objectives and success measurements are well understood, the approach makes sense, accountabilities and roles are clarified and the team jells. Then you have to stay close enough throughout the project to see what others aren't seeing, catalyse the right conversations, and ensure that the right midcourse corrections occur.

In the project above, internal leadership believed that their work was done when the vendor walked in the door. They assumed that the vendor knew what they didn't know — about how the business and IT operated the legacy systems, the packaged software, and the new technology platforms. And they were completely dumbfounded when the users revolted against the software.

When internal leaders outsourced the work, they made the mistake of outsourcing the leadership of the work as well.

This is a common outsourcing fallacy, but a crucial one to recognise, because it has led many to believe that there's little need for senior leadership expertise within IT. That is, since IT is outsourced, leadership can be, too. While it's true that IT organisations that operate with an extensive network of outsourcing relationships have fewer employees, those that remain have to be much more sophisticated in their ability to exert indirect — versus direct — influence.

Is your internal leadership sophisticated enough to make outsourcing work for you rather than against you?

—This article was originally published on HBR.org and is reprinted with the prior permission from HBR Blog. For more articles you can log on to www.blogs.hbr.org