Offshore outsourcing killing innovation? Time to change that record, please Professors…

Top outsourcing correspondent, Stephanie Overby, last week ran a lively discussion over at CIO.com with a couple of Harvard academics, Professors David Pisano and Willy Shih, on that fine vintage topic “How Offshoring Can Kill Innovation”.  However, unlike that case of ’86 Margaux in your cellar, we rather fear this argument is beginning to take on a tinge of vinegar.  Time to change that ol’ record?  Let’s ask HfS COO, Esteban Herrera

Esteban Herrera (click for bio) may not have got into Harvard, but he sure knows more about outsourcing than them

Esteban Herrera’s take on whether offshore outsourcing is really killing innovation

The provocative interview of two Harvard Business School intellectuals in CIO Magazine is making the rounds and generating some interesting discussion. It will undoubtedly stoke the already heated fires of the sensationalist anti-outsourcing crowd and provide fodder to those who say that offshore outsourcing detracts from the “client” companies’ and countries’ competitiveness.

The problem is that the argument being made, that outsourcing higher-end, higher value business processes will lead to erosion of the ability to innovate is at once obvious and flawed. Professors Pisano and Shih promote the concept of the “industrial commons”, the ecosystem of companies that collaborate and compete in any given industry,  I failed to get into Harvard, but I can tell you beyond shadow of doubt that if you outsource, say, R&D,  over time your company will cease to be good at R&D. The professors themselves say they are not anti-outsourcing, just cautioning companies not to outsource the wrong things. Well, we wholeheartedly agree, and we also agree on something very simple, which the interview does not make clear: what you can and cannot outsource successfully depends entirely on your strategy! If you want to compete on manufacturing prowess, then you probably should not outsource manufacturing. If you really believe the way you pay your bills is key to that sky-high valuation, then you better stay away from F&A BPO. We at HfS would never advise any of our clients to outsource anything that is fundamentally and uniquely tied to their strategic success.

But the argument falls down pretty quickly, and Dr. Pisano himself provides the evidence: He remarks that because US PC manufacturers outsourced both design and manufacturing, they were left vulnerable to the Apple iPad—no tablet has been as commercially successful as the iPad. True. The problem, of course, is that Apple also outsources BOTH design and manufacturing, making it no different than its would-be competitors. That is because Apple’s strategy is not to win with superior devices (often their products are over-priced and under-featured), but to provide the platform, and thus be the infamous toll-taker, in which consumers can lead their digitally connected lives. Apple writes very little software for its devices. Apple does not write or record the music on iTunes. Apple does not provide the network for its iPhones. What apple does very well is provide me (and you) with the platform in which I can acquire and store my music, organize my personal and business lifestyle, play Words with Friends, write this blog post, watch movies and shows, etc. The remaining competitors fail not because their devices are inferior, but because they see themselves as device companies, not as content delivery companies. It has nothing to do with outsourcing and everything to do with sticking to a successful strategy—one which, in this case, fully embraces the outsourcing of some very high end activities.

P&G, one of the most innovative companies in the world (and one of the most admired for being well managed), deliberately outsources innovation. P&G understands that individuals and other companies will have infinitely greater ability to develop new ideas than themselves, even if they are quite good at new ideas. There’s just much more capacity to innovate outside the walls than inside, and P&G gets that. By being open to external innovation, P&G delivers on more innovations than any of its competitors, in part because it has ceased to see itself as a CPG company, and started to develop a core competency on harnessing and capitalizing on a broad network of innovations. One can use the exact same argument Professors Pisano and Shih make to describe their success. P&G believes so deeply in the concept of industrial commons that it has chose to expand its ecosystem globally, leveraging lots of partners and individuals to bring more (not less) innovation to its products and markets.

In the end, what strikes me about this argument is that it seems to give too much weight to geopolitical boundaries that have been eroding with globalization for three decades. The “industrial commons” need not be limited, today, to one country or one group of companies. The network effect of having suppliers give you room to innovate effectively, or even innovate on your behalf, in combination with embracing a sound strategy, generates more value, more wealth, and more benefits for all parties involved.  I am very concerned that the Professors are lending their weight to an argument that erects artificial and unnecessary walls, stifling true innovation and growth.

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11 Comments

  1. Federico
    Posted July 26, 2011 at 1:21 am | Permalink

    The closest I ever got to Harvard was being cataloged as the black sheep to a promising middle class Argentinean family, with a father and a sister that did manage to spent some time there. But the advantage of such reputation and no degrees to defend make it very easy for me to say that Esteban is totally right.

    Outsourcing without a clear understanding of what will set you apart is just as dangerous as not outsourcing at all: so dangerous that the most likely outcome is marketplace failure. This doesn’t mean companies need to offshore. It only means that your business strategy determines when, what, where and how to source from third parties, and that paying too much attention to professors can quickly send you in the wrong direction. Moreover, there is evidence that limiting your choices is in fact a critical factor determining competitiveness. That’s why closed economies are always low performers.

  2. Graham
    Posted July 26, 2011 at 9:29 am | Permalink

    Insightful response to their original discussion.

    Am inclined to agree that our professorial friends from Harvard are somewhat dated with their views. While you can see their point with the demise of US manufacturing, we operate in a different world now where you outsource where it makes business sense to do so, and it doesn’t impact a firm’s strategic goals.

    One other point of note: is there really a lot less “innovation” in Mumbai versus Michigan, in any case? One could argue that we’ve already been overtaken in this areas and having smart offshore support is actually helping innovation in IT!

    Graham

  3. Kevin Coolidge
    Posted July 26, 2011 at 10:17 am | Permalink

    Esteban,

    Great post.

    I’d love to know how outsourcing low-end IT support and development is stifling innovation. To your point, how many US enterprise view their IT back office as “strategic” or core to their business?

    It’s a concern when our leading academics have such a dated, myopic view of today’s business who are still living in the ’80s. Are we entrusting our young minds to these academics to mould the next generation of leading-edge innovative minds?

    The mind boggles,

    Kevin Coolidge

  4. Posted July 26, 2011 at 11:04 am | Permalink

    I’m not insensitive to the loss of jobs that outsourcing creates, but even with manufacturing, very little of the innovation was taking place on the shop floor, and just as much can take place today offhsore as it did when manufacturing was largely here, to Graham’s point.

    Federico highlights one of my biggest fears in the argument: that it could be interpreted as a knock on open economies and global trade.

    @Kevin, I think the Professors were directing their words of caution at higher-end processes closer to the front office, KPO, etc. but your point is valid. You don’t necessarily have to outsource everything you don’t really compete on, but why should it be off the table?

    Lots of companies are proving that they can drive more and better innovation by harnessing global, external capability. This may create a long-term economic problem for developed nations, but that’s very different from saying that outsourcing stifles innovation.

  5. Jan Erik Aase
    Posted July 26, 2011 at 6:49 pm | Permalink

    Esteban
    Great post. Totally agree with you. Research I’m doing at Forrester right now on this topic has countless examples of Fortune 500 and middle America companies receiving great innovation from their offshore vendors. The common characteristics are clients with an Eco-system primed to receive, consider and implement the innovative ideas coming from the vendors, and vendors engaged in more than T&M contracts and a culture that encourages, facilitates and rewards innovation. Most of these vendors are also taking valuable advice from Clayton Christensen’s books on Innovation. Obviously our two Harvard professors aren’t reading the books in their own library or forgetting their own contributions to those books.

  6. Posted August 1, 2011 at 7:21 am | Permalink

    What the Professors David Pisano and Willy Shih should elaborate on is ; whether it is possible for enterprises to drive innovation from within, is Apple the harbinger of innovation? I don’t think so. In my opinion for enterprises to be truly innovative; they should be open to disruptive ideas emerging from anywhere in the globe, and the more inward looking an enterprise the higher the chances of it not being ahead on the innovation curve.

    United states remains the hub of innovation, driven by world class educational institutions attracting the brightest minds to ease of funds availability for small enterprises because of a vibrant Venture Capital industry, but where it lacks is the true ability of leveraging some of the innovation that is driven from within it and an inability of enterprise of thinking long term.

    Mrinal Singh

    twitter: mrinalasingh

    Blog: blogs.ittoolbox.com/emergingtech/trends/

    LinkedIn: http://www.linkedin.com/in/mrinalsingha

  7. Bill Payne
    Posted August 3, 2011 at 5:54 am | Permalink

    The Strategy is the key…you are absolutely correct , there is no right /wrong solution; there is no insource /outsource conundrum that cant be solved by looking at how to exeute on each individual companies strategy…I would add however the dimension of common sense innovation…something that many folk look over as being dull or irrelevant.
    Common sense innovation (in or outsourced ) comes from the use and implementation of Business Process Management tools….which can reveal staggering degrees of process inefficiency and fairly easy ways to take out traunches of associated cost….but we wouldnt want to do that….because its not innovative…right ?

  8. Stan
    Posted August 3, 2011 at 8:10 am | Permalink

    Key is to not outsource making profitable revenue.

  9. Posted August 11, 2011 at 2:04 am | Permalink

    @Jan Erik Aase The research you’re doing sounds very interesting, what’s the timeline on that?
    Every outsourcing vendor will be different. I think there is a stigma that outsourcing has to be a cheap labor, monotonous work type solution. Some of the examples, like P&G, show that innovation can come from places other than the main office. What if outsourcing grows into the role of strategic partner? If the right process and people are in place, there could be some good insights into new projects and enhancements. Leveraging minds and ideas from across the globe seems like the perfect platform for innovation.

  10. Sajan
    Posted August 25, 2011 at 11:52 am | Permalink

    Kevin, I don’t think the article is anywhere remotely referring to low end IT Support functions.

    It’s actually referring to the new found rad idea of outsourcing a new product development without being wary of the erstwhile fears of designs getting leaked to being pretty successful in this low cost mode of enabling innovation.

    The professors are trying to deliberate whether such outsourcing will lead to the loss of the unique ability to crack the innovation nut.

    What I feel is an idea is something that cannot cranked out of an educational assemblies like school and universities. Its requires a certain unreasonable style of thinking which is usually stymied as one goes through school and college since the emphasis in education is structure. However only when the structure is dared to be broken the innovation begins.

    As far as the current method of new product development is concerned to my mind it posses no threat. Take the example of Apple- the idea is certainly American, the design could be Indian and the assembly could be Chinese.

    As the old adage that goes by Ralph Waldo Emerson – “Nothing is more powerful than an idea who’s time has come” is very apt in the current context of the article.

    Design, assemblies can be substituted,but the moot point is there such a substitute to an original pristine idea ???????????

  11. Posted January 21, 2014 at 1:50 am | Permalink

    Offshore outsourcing is not killing innovation Even I must say that offshore outsourcing is a way to get new innovation. And how you can go with http://www.newtrendstech.com/

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