Thursday, October 8, 2009

Outsourcing Drawn into the Product Lifecycle Vortex

Over the past several days I've been working through a thought-process with several colleagues relating to the recent rush by product companies to "beef up their services business" through the acquisition of outsourcing service providers. I've concluded that the outsourcing industry is at a fair degree of risk by virtue of this trend.

The logic goes along these lines.

Product companies ... whether they make shaving products, MP3 devices, servers, or enterprise software ... are all beholden to their particular product development lifecycles. That is, the companies invest through research and development in bringing to market a product or service that has some defined life, during which the product is maintained and supported. The companies try to sell enough of the product to repay their investment and generate sufficient profit to allow for successive versions to be brought to market. I know, a simplistic characterization but you get the picture.

What this means is that future innovations in product capability are often deferred until the preceding version has been "wrung out" in terms of market uptake. Who here doesn't believe that the iPod Touch couldn't have come to market much earlier than it did? But, why should that occur while there was still market demand for the preceding version of the MP3 player?

What's this have to do with the outsourcing industry?

Well, it's always been the promise of outsourcing that the segue between product generations was made more efficient and effective when such transitions occured through an outsourcing relationship. Companies hired outsourcing service providers to maintain the "old" and achieve transformation to the "new."

If the service providers are beholden to a product life-cycle timeline that drags on the introduction of innovation, that's not good for enterprises that rely on technology enhancements to enable their business strategies. The beneficiaries are the service providers that get paid for longer period of time to maintain the older versions, and their parent companies that can wring the last nickel of profit from the installed base.

While there are certainly benefits to hiring the manufacturer for maintenance of the product, will that manufacturer really enable innovation that might retire the product earlier than hoped? I worry not.

There are a lot of really great innovators out there. Many of them are developing "disruptive" solutions - capabilities that can upset the status quo and bring dramatic new functionality to the market. Those companies need a channel for bringing their products to market, supporting those products in operation, and enabling innovation in product capabilities through market-based competition. I'd hate to think that the likes of EMC, cisco, SAP, NetApp, and countless others will need to be outsourcing service providers in order for their products to have a pathway to enterprise clients.

If I were a CIO, I'd really worry about being the cash cow that serves the product life-cycle ambitions of a monolithic product machine.