Digital transformation: should you outsource the whole process?

Although the term “digital transformation” has been trending for decades, it has become even more ubiquitous due to the pandemic. According to a study conducted by BCG, more than 80% of the 5,000 managers and employees surveyed feel that digitalization has helped them cope with the economic downturn caused by the pandemic.

Economic downturns and other crises are, of course, not only caused by pandemics. Other recurring and, unfortunately, sometimes cyclical factors like war, stock market crashes, etc., can play a role. Such economic transformations offer opportunities with proven advantages for businesses.

Digital transformation is a complex process that begins with defining the project, implementing best practices to ensure its success, and finally, assessing resources.

Companies have a number of ways to access the key resources and skills for their projects. Whether to tackle the labour shortage, prepare for future technological changes, focus on their specialization, increase agility or enter new markets, many solutions and people can prove useful. It’s just not always easy to choose the right ones. Here are the pros and cons of the different solutions to help you make the best decision for your company.

Digital transformation and outsourcing: pros and cons

Since information technologies emerged, enterprises in all sectors (manufacturing, pharmaceuticals, digital, transport, agri-food, etc.) have relied on technology tools internally in their own organizations. Once these technologies reached critical mass, they started to be used to help run the very core of these businesses as well. Certain economic players have preferred to outsource the entirety of their IT functions to partners offering comprehensive services. This can mean the total outsourcing of specific services like accounting, payroll services, distribution, recruiting, logistics, marketing, etc. As this trend has proven to have its limits, an intermediate solution has emerged.

1. Digital transformation without outsourcing

Some organizations continue to adopt this approach and choose to do their digital transformation internally, even when it is not their primary function. This means they must keep all functions operational, even if not part of the big 4 task types worth outsourcing: critical, complex, time-consuming, focused.

Pros:

• Feeling of total control over the company structure
• Not having to depend on external providers
• Increased security
• Minor strategic changes more quickly achievable

Cons:

• High fixed costs
• IT is very often not at the core of the organization’s business
• Difficulty keeping up with changes in technology
• High maintenance costs since external work is largely on an ad-hoc basis

Risks of relying on external providers: Low

Ability to adapt to market changes: Very low

2. Fully outsourced digital transformation

In the last decade, some companies have tried to fully outsource all activities that are not part of their core functions, including IT. Some firms have started offering outsourced services for most functions (payroll, recruitment, human resource management, marketing and communications, IT services, logistics, etc.).

Pros:

• Organization can focus on its core business
• In the event of an economic crisis, risks transferred to the service provider(s)
• Budget cuts easier to implement
• Better control of operational costs, stability and predictability
• Very effective for temporary solutions to manage needs that are likely short-lived

Cons:

• Significant reliance on the outsourcing firms
• Difficult to quickly cascade strategic changes
• Higher cost to make changes (day-to-day operations are cheaper while new projects are costlier)
• Once implemented, very hard to go back on this strategic decision
• Very difficult to have an integrated system if all functions aren’t outsourced together e.g., if you outsource payroll systems and HR to two separate external firms, it will be difficult to then integrate both into a single system
• Need good legal knowledge for managing contracts with external firms if opting for a service-level agreement (SLA)

Risks of relying on external providers: Very high

Ability to adapt to market changes: Very low

3. Hybrid digital transformation: Partial outsourcing

This third option appears to be spreading more broadly across all industries (at different levels). Generally, it involves implementing enterprise resource planning (ERP) to integrate different company functions with the help of professionals for the implementation, configuration, change management and operationalization support.

Pros:

• Organization maintains control of its IT systems without becoming fully dependent on external providers
• Organization benefits from the expertise of external consultants for specific needs
• Organization can focus on its core functions
• Strategic decisions easier to implement and, above all, to quantify
• Organization will mature in the following areas by making use of external expertise:
  • Design thinking
  • Project leadership
  • Change management
  • Supply chain
• Easier to quantify business cases when working with external firms
• New perspectives from experts with experience in similar industries (preventing any need to learn from failure and its potential high costs)
• Mitigates risk of IT labour shortages
• Keeps key resources for lengthy transformation programs within the company
• Benefit from the expertise of external firms who are more up-to-date on technological changes

Cons:

• Firm must be carefully selected to avoid unexpected delays and costs
• Executives more involved than with other outsourcing models
• Risk of failure shared between organization and external firms

Risks of relying on external providers: Moderate

Ability to adapt to market changes: Very high

The digital transition has become essential for companies who want to stay ahead of the curve and become market leaders. New technologies evolve so quickly that most internal IT teams don’t have the technological skills or professional expertise to determine the best solutions for their organization. For companies who are serious about using new technologies to transform themselves and having access to leading-edge expertise and new ways of thinking to map out a strategy for success, getting the most out of IT outsourcing and choosing the right model based on the risks they’re willing to take are the key factors to consider.

Discover how Talsom’s expertise can guide your organization through its digital transformation from start to finish.

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