Is going in-house development the new black?

I remember reading an article that said it could be as equally dangerous for a start-up to have too much money than to have too little. In fact, there was potentially more value in not having enough: it forces strategic deployment of capital.

In other words, when you don’t have enough, you need to think carefully about your priorities and be smart about executing because you need to get the most bang for your buck.

Target’s CIO, Mike McNamara, must have been read the same article because one of the first things he did as CIO of Target was to reduce his own budget.

In addition to that, he identified three key weaknesses for Target:

  1. Too much outsourcing
  2. Unstable systems
  3. Too many projects

I find #2 is more of a result of #1 and #3. Why?

  1. Too much outsourcing means that you lack control over what may be your core functions. Systems and processes tend to reflect culture and if you have something that has been hodge-podged together, well…
  2. I am a firm believer that you can do 1 thing perfectly, 5 things particularly great, 15 things okay, maybe, and anything more than that is a recipe for failure. Target had 800 active projects.

But, I titled this article “Is going in-house development the new black?” because this idea is certainly a reversal in terms of trend and attitude for large corporates.

The chase for “shareholder value” by pushing down costs at any cost has led to a massive uptick in outsourcing across all major corporations in the US. The story often sounds great on paper and on an analyst call:

  • “We’re focusing on our core competencies”
  • “It costs x dollars to do it here, and 0.25x to do it there: it just makes sense”
  • “The long-term value we think we derive from this is 5x versus a mere 2x if we do it ourselves”

However, mass outsourcing (and I’ve seen it myself and heard it from a wide variety of people in a wide variety of industries) has proven the on-paper cost savings tend not be realized. In fact, it tends to turn into losses in multiple ways! Some examples:

  • Data breaches. The breach happens at the outsourcer but the corporate client ends up paying the reputational cost and/or regulatory fine.
  • System failures. An SLA (service level agreement) is a promise that is too often not met.
  • Long-term maintenance / operational issues. Knowledge transfer between in-house and outsourced teams is either non-existent or insufficient.
  • Short-term thinking and execution. You literally get what you pay for. That’s in the contract, so if it’s not explicitly there, I don’t have to do it, right?
  • Talent drain. Why invest in a company long-term if you expect to be divested?
  • Cultural division. What is a group identity when there is no longer a real ‘group’?

Those are heavy points, but it is worthwhile to state and not pull any punches. You know who doesn’t have a majority of the problems above? You know who doesn’t outsource development if they can help it? Tech start-ups. Why? Because they recognize that the engine of their company is their code. Why would anyone give up control of that?

Most companies today, regardless of their industry or their activity within that industry, are in the same boat: the engine of their company is their software because software has already eaten the world. Add on to the fact that your technology infrastructure is a reflection of your organization’s values and culture: if you have outsourced the majority of it (Target was at 70%!) you have pretty much said you lack control over your culture, your values, and your ability to execute.

Target’s CIO got the picture: 700 engineers hired in-house last year and 800 open IT positions right now.

Big corporates out there: what’s your plan to take back control of your technology and of your ability to execute on your core competencies?

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