Innovation Outsourcing: Trends, Benefits & Challenges in 2024
Global competition is fierce, forcing companies to constantly improve their business processes through innovation. However, innovation can be costly and it is difficult to find skilled labor and new ideas. As a result, many companies prefer to outsource innovation rather than develop it from scratch. This article explores what makes outsourcing innovation an optimal strategy and provides a guide to selecting the right provider.
Why is innovation outsourcing important?
70% of companies either already have a digital transformation strategy or are planning one. On the other hand, US companies have a budget of around $14 million per company in 2018. Such a budget is not enough to build large-scale digitization projects from scratch. Internal innovation requires time, highly skilled people, tools, lots of experimentation, effort-time, and after all, it pays only a 30% success rate.
These facts show that outsourcing innovation is the only way forward for many companies for the following reasons:
- Time: Many companies need digital solutions quickly in order to survive in the competitive market. Therefore, they don’t want to lose time through a lot of trial and error and prefer to put the development process in experienced hands that specialize in digital development.
- Human capital: According to Gartner, 54% of executives see the skills shortage as the biggest challenge for their company. The shortage of talented workers increases the demand for them, leading to high wages and reputational expectations. This situation has led to the accumulation of highly skilled workers in large, global companies.
- Financial capital: The long duration of development and shortage of highly skilled workers force companies to set rich budgets for internal digital transformation strategies. However, many SMEs and startups do not have this opportunity.
- Relevant experience: Even though some companies may have the above capabilities, they may not have experience in developing specific technologies. A company might have developed its own custom mobile app, but blockchain development requires a different skill set and might require the company to outsource its blockchain development initiative.
What are the advantages of outsourcing innovation?
- Reduced development time and costs: Outsourcing technology projects to experienced professionals can speed up the development process. Technology outsourcing companies tend to focus on specific industries and applications. Thus, there is a good chance that they have already developed similar products and possess the necessary experience and resources. This saves companies from having to experiment and build resources with internal teams.
- Access to the talent pool: There is a shortage of highly skilled IT professionals, engineers and data scientists. In addition, training these employees and providing the necessary resources internally is very costly. However, third-party technology companies regularly build and deploy technology solutions. Therefore, they can train employees internally and provide a richer talent pool for companies pursuing an outsourcing innovation strategy.
- Minimize risk: Companies naturally afraid to fail when it comes to innovation. This is understandable since 70% of innovation fails as mentioned above. Failing innovation costs tend to be greater for the in-house projects. Therefore, to mitigate risk, it makes sense to outsource innovation.
- Mitigating organizational risk: According to Harvard Business Rewiew, one of the most important reasons for the failure of digital transformation is organizational reasons such as corporate governance and culture. HBR also highlighted the fact that innovation involves replacing workers, so internal teams can slow down the development process knowingly or unknowingly.
- Strategy for gaining competitive advantage: When small companies try to develop innovations in-house, they cannot possibly compete with large companies that invest millions of dollars every year. Therefore, the option of outsourcing could be a suitable solution for SMEs that want to gain market share.
What are the disadvantages of outsourcing innovation?
- Building know-how: Even though internal technology development is costly, companies can gain invaluable experience and know-how at the end of the process. In the case of outsourcing, you want your internal and external teams to share ideas and learn from each other. Still, such a collection of know-how cannot match the fully internal experience.
- Imitability: If your company develops its own technological product, it is more difficult for competitors to copy it. However, in the case of outsourcing, a third-party company can develop a similar tool for other companies.
- Control: Compared to in-house projects your control over outsourced projects naturally tend to be lower.
- Data Security: When you outsource ML development or the data labeling process, your company is sharing data with third parties. This increases the risk of data breaches or data loss.
How to choose partners for outsourcing innovation?
- Define your goals clearly: Understand your business problem, define a tool that can solve it, and set budget and deadlines for the investment.
- Professional and technical expertise: As mentioned above, different vendors have different areas of expertise. Therefore, it is advisable to find a vendor that has experience in developing technologies in your sector or to find a vendor that has already developed similar technologies.
- Certifications: It is important to compare vendors’ certificates that evaluate their data security protocols and product quality.
- References: The vendor should be able to provide case studies from previous projects.
- Quality of Customer Support: Depending on the quality of your IT team, the quality of customer support can be an important factor for your organization when selecting a vendor.
For more on choosing the right vendor, you can check our article on outsourcing best practices.
You can also read our technology outsourcing for startups article.
If you still have questions about outsourcing innovation, we would like to answer them:
Cem has been the principal analyst at AIMultiple since 2017. AIMultiple informs hundreds of thousands of businesses (as per similarWeb) including 60% of Fortune 500 every month.
Cem's work has been cited by leading global publications including Business Insider, Forbes, Washington Post, global firms like Deloitte, HPE, NGOs like World Economic Forum and supranational organizations like European Commission. You can see more reputable companies and media that referenced AIMultiple.
Throughout his career, Cem served as a tech consultant, tech buyer and tech entrepreneur. He advised businesses on their enterprise software, automation, cloud, AI / ML and other technology related decisions at McKinsey & Company and Altman Solon for more than a decade. He also published a McKinsey report on digitalization.
He led technology strategy and procurement of a telco while reporting to the CEO. He has also led commercial growth of deep tech company Hypatos that reached a 7 digit annual recurring revenue and a 9 digit valuation from 0 within 2 years. Cem's work in Hypatos was covered by leading technology publications like TechCrunch and Business Insider.
Cem regularly speaks at international technology conferences. He graduated from Bogazici University as a computer engineer and holds an MBA from Columbia Business School.
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