Recently, Jim – not the real name of one of my mentees – asked, “Why can we not just outsource all the development to a tech company and have them develop our platform. I don’t want to have to bother with all those nuts and bolts. I read online though, that you cannot outsource innovation. Is that true”
You cannot outsource innovation
Brian Quin of McKinsey states in a Forbes article that you cannot outsource innovation. “When management starts over-investing in external innovation, that can be a symptom of that missing foundation. There’s no end to the variety of business processes a firm can outsource today, and indeed, there’s even elements of innovation that may be best pursued through external means. But you can’t outsource your vision for what needs to happen next —for your customers, your company and your industry”
I would go a step further, while you cannot outsource your vision for what needs to happen next, you also cannot outsource the development of the key differentiator that is the core idea of your invention. Let me explain.
Core and non-core parts
You can outsource the non-core parts, but you cannot outsource the core-parts. What does that mean?
For example, if you are a lawyer and you want to develop a portal, you can outsource the development of this portal to a tech company, because the value is not in the technology. The value of the new service is in the content the platform provides and the follow up that you deliver as a lawyer. Perhaps, you can even use an off-the-shelf solution! The less risk you take when developing a new service the better!
However, if you are a legal tech firm like LegalZoom, you cannot outsource the development of your platform to a third party, as your competitive advantage is the platform. It is your differentiator.
So, to get back to Jim’s question. I suggested he could outsource the development of his platform, as the platform was to support his services, not to replace them.
However, he disagreed, he insisted that the platform was the differentiator of this new service offering.
The core-part as your differentiator
According to Jim, the platform was his differentiator. In which case, he should develop it in-house.
Because if Jim was right about this and the platform would give him the competitive advantage, the possibility that he could outsource it would create a substitution risk.
If another party can make what differentiates you, they probably can replace you too.
If another party can make what differentiates you, they probably can replace you too.
Below is a scheme by A.T. Kearney, that explains what you can and cannot outsource when it comes to the core differentiator of your new service.
As A.T. Kearney explains it, “The ideas that provide a company with differentiation in the marketplace will have to originate from within. But implementing those ideas could be done by anybody. The design of the new features of the redesigned iPod–that had to be done by Apple itself. The actual manufacturing of the iPod could be outsourced. But the process of designing, the process of looking at what the market wants, the process of coming out with the first prototype of the video iPod, that has to be done by Apple.” A.T. Kearney
You cannot outsource finding a novel solution
I asked Jim, “what makes this platform unique?”. He started explaining about the specific problem it would solve in his area of expertise. What he described, sounded like a big, pressing, and hairy problem.
I then asked, “What is the current solution? What are the current alternatives?”. He then explained that it is problem to which there is no good solution at the moment. Proudly he said, “that is exactly what we will be addressing with this new platform. It will enable us to create a new service offering that solves this problem in a way that nobody else can”.
I followed up, asking and how are you going to do that? Jim answered, “Well, not 100% sure but from what I read about AI, it should be possible to solve this through machine learning”.
Since Jim is a lawyer, I asked him how much he knew about machine learning. He honestly answered, “not much. I am an expert in the legal domain, not computer science. That is why I want to outsource the development of the platform”.
I politely explained to Jim, that if that was the case, you have a problem. “You can never ‘engineer- away’ finding a solution if that is what makes your new service offering unique.”
“Don’t expect a technology to do miracles for you. If you rely on a technology – in this case machine learning – to solve your problem, you must understand how that is going to work. Otherwise, you engage in wishful thinking.”
At a minimum, I expected Jim to be able to explain how machine learning would solve the current problem and why it would do it better than the available alternatives.
The core differentiator of service providers
The more we talked about the problem Jim was trying to solve and the platform he tried to develop, the more I became convinced that this platform was not going to be the key differentiator.
I suggested that instead, at least for the time being, he would try to solve the problem manually without a platform. Or perhaps use off-the-shelve software to mimic what he was trying to do and get a first version of his new service going. Such a minimum viable solution would require a lot of manual labor, but it should be good enough to test the need and willingness to pay, before developing and outsourcing the platform.
That was not what Jim wanted to hear.
My suggestion did not land well. I had not only told him his baby was perhaps not viable. Worse, I now asked him to parent another toddler – to see how that would work out. While all he asked for was if he could use a surrogate mother to deliver him his baby, so that he only would have to nurture it once it was born!
He remained convinced that the platform was key to his new service. He could not do without.
I suspected that Jim was overvaluing the contribution of having a platform as part of his new service offering.
I told him, “Jim, if you expect this platform to be your key differentiator, then you have another problem. Regardless of whether you can outsource the development or not.”
It is difficult to protect IT solutions like your platform. What more, even if you could apply and obtain a patent, it is really easy to create a copycat. Large technology giants, like Google, LinkedIn, Facebook or Amazon, are on the lookout for such opportunities. If they see something that works, they will recreate a version that is better. They don’t need your solution. While they will love you for showing them that this is an opportunity.
Meantime, what most service providers undervalue, as I suspected Jim did too, is their network and experience. These are two aspects that make a new service offering extremely difficult to copy by others.
Why are these so often overlooked and undervalued? Because to Jim, those aspects of the new service did not seem difficult at all. Those came naturally to him, because of his years of experience.
Take for instance McKinsey. They excel using this very same principle. What they do – the 2×2 matrixes they come up with – are in essence not that difficult to copy. Potentially, anyone can provide these management consulting services. You even can find many of their tools online. What makes their services unique, is their experience and network at the board level. That part of their reputation and brand are unparalleled and extremely difficult to replicate or copy.
Jim now started to understand, that he probably should hold off with the development of the platform altogether, till he had a much better idea of what he was getting himself into. His first priority, should be to get the new service off the ground and show he could solve this problem for his clients.
Delivering the new service without a platform was certainly an option, he just never had considered because it had not looked like an attractive or sustainable solution to him.
Jim now understood it was a necessary first step, before even considering outsourcing the development of the platform. He even started to look forward to getting into the nuts and bolds, not of the software and machine learning, but of his new service offering.
What other parts of the innovation process can you outsource?
Related to Jim’s question, there is another aspect that often gets overlooked as part of his “can innovation be outsourced” question.
While you cannot outsource the execution of the development of the core aspects of your innovation project, Jim has to figure that out himself – he and his firm can outsource the management of the innovation process itself.
Compare it with HR support. As a company, you cannot outsource the hiring and recruiting of your employees, as that is core to your business. However, that does not mean that you cannot outsource HR support services, such as the onboarding process, tax requirements, healthcare, retirement plans, etc.. Issues, that come on your path only occasionally, whereas the companies that offer HR support, deal with these issues routinely and can handle them far more efficiently and effectively than you ever can.
The same holds for innovation. If you don’t innovate on a regular basis or only have a small number of innovation projects in your portfolio, it is probably wise to outsource the training, tracking, and the mentoring of your innovation teams to a specialized company like Organizing4Innovation.
While Jim cannot outsource the development of his new service offering, we certainly can help Jim address issues like outsourcing and help him develop a highly valued new service offering in the most efficient and effective way.