Evaluating Core Competencies
"We started out, many years ago, that everybody needed an IT department. No one questioned why," says PricewaterhouseCoopers' Maitra. The question arising more frequently today isn't around why companies need IT departments but what those departments are supposed to do.
Over the years, IT departments have increasingly been pushed to create business value. To do so, CIOs and their teams have had to identify what some would call IT "waste"--the processes or skills unessential to setting it apart, or that an outside partner could do better.
So a simple rule of thumb is: Keep core competencies (applications, processes and systems that create market advantage against competitors) in-house, and consider outsourcing the rest. But the difference between core and non-core differs greatly from business to business, even for those in the same industry. Best Buy's Willett is one CIO who has moved to the hollowed-out model: in the past three and a half years, he has created an IT organization of about 35 in-house staffers and 1,300 or so consultants from Accenture.
At the same time, he's seen his IT spending decrease each year as a percentage of revenue.
For Willett, there are a few simple considerations when evaluating what to outsource vs. insource. The first is how to keep ahead of the competition by innovating faster and more quickly delivering new capabilities.
Once Willett determines what needs to be done on a particular project, for instance, he considers how it can be accomplished. Then he and his team evaluate whether the project falls into their core competencies, or if it's something a specialty firm or outsourcer could accomplish more readily.
In the past three years, Willett has found numerous instances in which an outside firm was better equipped than his own staff. "There are people out there who spend more money on software development than you ever could," he says. "So by definition, you're smarter to partner with them on software."
In finding an outside firm to complete the work, Willett says he opts for companies that not only offer best-of-breed capabilities but focus on delivering value to end users--for Best Buy, that means its millions of in-store customers. "You start to build partnerships with providers that are synergistic with your own values," he says. "I think that's the way to gain pace and concentrate on what you do best."
Insurance giant Chubb has sourced out its infrastructure maintenance and some business processes, but CIO June Drewry prefers to keep application development in-house. The logic? Chubb's IT personnel are business-minded and have close relationships with line-of-business executives--and consequently know what they want and need.
On top of that, Drewry says Chubb values its employees' input and contributions, and doesn't want them to be bypassed for outsourcers and then leave to join competitors. "So we've chosen not to sacrifice that for some labor arbitrage we just don't think has the same payback in terms of information capital," she says. But when it comes down to it, Drewry weighs the true competitive advantage Chubb gains from its own processes and what value it could gain from outsourcing.
"Once you separate the business rules, you say, why would I want to build a basic commodity service when I could find one outside?" she says. "A lot of people make the decision to build it because, they say, it's tailored to the process. But it's protecting their turf."
The vast majority of companies use many of the same tools, such as financial applications for general ledger and accounts receivable. Businesses used to pride themselves in building these applications in house, but the advent of customizable, packaged offerings from various vendors has diminished the need for internal development.
As vendor offerings proliferate, CIOs and executives will have to refocus their departments. "There are companies all around the world that write great applications," Maitra says. "They can do it better. In all probability, they can do it cheaper. And, usually, they have the skill sets to do it better."