Traditional outsourcing strategies are killing the very nature of innovation and limiting the revenue growth potential of companies at the expense of cheaper operational costs. At this point, there should be no doubt that outsourcing has fundamentally changed the way in which ISVs are operating, with 84 percent of ISVs outsourcing some part of their engineering practice.
Consolidation, new technology, new business models, global recession and regional talent shortages are drivers for this outsourcing wave. The paradigm of "selling locally but developing globally" is the centerpiece of most successful ISV strategies.
But the fact remains, while outsourcing drives lower costs, innovation drives profitable growth. Recent research states that companies that are best-in-class at product portfolio management are four times more likely to achieve margin premiums of 75 percent or higher for new products. This is a very impressive return. Innovation is, therefore, confirmed as a lever of growth and value creation. Profitable growth is ensured with a repeatable pattern of innovation and execution with global operational excellence.
In this globalized ecosystem, however, decision makers are losing their confidence in engineering's ability to lead the innovation initiatives. According to one study, only 17 percent of global CEOs mention R&D when listing their source of innovations. Of those, less than three percent of CEOs consider their global development operations capable of leading enterprise business innovation. But why?
Expanding the innovation horizon
To answer this question, we must both define what innovation is and the role engineering plays in the innovation process. Unfortunately, there is no standard definition of innovation, at least one that is actionable. Some believe that innovation is the process whereby ideas for new or improved products are developed. Others see it as purely a new idea, method or device. Most are useless and very few, if any, can drive delivery.
One should view innovation as the successful implementation of an invention or idea that adds sustained value that can be measured in the form of new revenue and more profit, culminating in increased valuations. The goal, then, is to tie the process of creation with the realization of value. Both are important and measurable. With this definition as the basis of understanding, let's briefly look at why traditional outsourcing breaks the innovation process.
Software engineering is a complex system of interacting processes, people and technology, driven by market conditions and user needs. While many software development methodologies depict the process as a series of connected activities, one feeding into the other, it is in reality a complex mesh-with each node connected, in some form and weight, to all the others.
This is where the problem lies with traditional outsourcing. In traditional outsourcing, products are often defined in-house, owned by local product managers. Requirements are then created by analysts, from which an outsource team is assigned engineering tasks. Engineering activities are driven by a jointly agreed upon timetable, mostly task-based. At the end of the process, the product is delivered back to the in-house product manager and the process repeats. Albeit an over-simplified view of how traditional outsourced engineering works, the key point is that it is measured by their ability to deliver products on time.
Innovation, however, has a different interconnected life cycle. As shown above, ideas come from all phases of the software development process. When engineering takes places in-house, these natural feedback loops enable ideas to flow back to those responsible for product strategy, a form of collaborative socialization. However, when engineering is outsourced, the feedback loops are broken and the collaborative innovation process is severed.