You Cannot Outsource or Acquire a Digital Transformation

Originally published as part of, “The Day Before Digital Transformation” by Phil Perkins and Cheryl Smith

Many organizations start by deciding to outsource their digital transformation efforts. Because it is difficult to change a culture and existing investments quickly, organizations look for easy answers.  They bring in consultants or venture capital firms with a compelling sales pitch.  The major perceived advantage of outsourcing the digital transformation is that your organization does not have to go through the somewhat painful, typically frustrating, often time-consuming, process of attempting to change.  You can keep the same leaders and the current staff and skill sets.  No changes are needed to the existing products and services.   Organizations considering outsourcing their digital efforts see an easy way out of a challenging, multi-year internal change process.

We have witnessed several variations on digital transformation outsourcing:

• Acquire a new digital product/service organization in your industry, operate it independently, receive a percentage of the profits. (external, with separate funding sources)
• Establish a separate digital subsidiary. (external, with internal funding)
• Create a new autonomous digital start-up business unit within the existing organization. (internal but operate as an autonomous business unit)
• Hire a consulting firm with multi-disciplines and experience in the digital technologies to develop the new digitized products and services; move deployment and maintenance responsibilities back inside the organization when the products or services are ready to be deployed. (external development and start-up, internal short-term support)
• Contract with a studio to manage the new digital products and service efforts, whether development is performed inside or outside current organization structures. (externally managed with some overlap with internal staff)

However, there are many problems with such outsourcing (e.g., hiring Accenture or establishing a Newco), most of which are obvious.

Sales problems:

• Established product or service sales will be cannibalized over time.  Survival in the Digital Age requires incorporating the digital technologies into your products and services and operations.  If those activities are taking place outside the organization, then the current product and service sales will be cannibalized over time and eventually will be gone.  The current organization will, over time, continually shrink until it eventually closes its doors.

Employee problems:

• The outsourcer walks away with most of the learning.  At the end of the transformation effort the outsourcer gained the knowledge and experience leaving the organization even less capable of moving forward. 
• Employees are not exposed to or trained on new skills.  Every job is impacted by digital transformation—not just the affected business units, but also legal, procurement, HR, IT, etc. The current teams will not acquire the critical knowledge and skills to be successful, and they will be far behind other colleagues in the industry.
• The business expertise needed by the outsourcer usually comes from the current experts inside the organization.  Watching an outside organization absorb your experience and expertise without receiving any direct benefit in return has led to many types of behaviors on the part of the current staff, most of them negative, including an outflow of employee talent to organizations where they, too, can learn and grow.
• The organization will not have developed the skills to effectively oversee the external effort.  The funding may be coming from the existing organization, but how it is spent often remains a black box.  We have seen external digitization efforts that were guaranteed delivery in a year go on for five or more years and millions of dollars over budget.  The current organization then hires another external organization to oversee the outsourcer.  The new oversight firm reports back on the problems and abuses, is hired to take over the effort, and the cycle continues.

Funding/budget problems:

• The funds allocated to the outside firm often come from the same budget that is funding current products and services.  An organization’s internal processes are designed to protect its existing investments from disruption, so any outside initiatives attempting to operate either within or around those processes will be subject to the whims of the executives controlling those investments. Outside parties will struggle to align executives across the organization to simultaneously change their approaches.  Outside investments in digital technologies almost always lose in a leadership battle for dollars, often starving the effort at critical times.
• Alternatively, requests for investment dollars to continue development of current products and services will be denied if the organization’s leadership team is united in the goal of making a major investment in the new products and services.  This competition for funds causes resentment not only between the internal and the external organizations, but even within the internal organization teams themselves since funding dollars are greatly limited and competition for the dollars that remain becomes fierce.

The negatives of conducting your digital efforts outside your organization are substantial.  In most cases, the pain and frustration of working to change the internal culture typically is less than dealing with the unintended consequences of deciding to outsource your digital transformation efforts.