Shih: If outsourcing improves your numbers over the short term, sometimes it is difficult to take those savings and reinvest them. That was one of the drivers behind improving the numbers in the first place -- bringing more to the bottom line. This is driven by the pursuit of profit, which is a good thing. I'm not being critical of that. But it highlights the importance of being thoughtful about outsourcing capabilities or damaging the commons.
Pisano: This is partly about having too short of a time perspective, but there is also something deeper. It's rooted in how many management teams have come to view their source of advantage. For many, it seems, the name of the game is arbitrage. The key is to be a good "trader." You find good opportunities to buy stuff less than you can do it your self, and you capture the value on your brand. They do not see having unique capabilities as the true source of competitive advantage.
CIO.com: Many CIOs have also embraced offshoring and are moving more complex and higher-value tasks abroad. What can they take away from your research?
Shih: It is a cautionary tale about the importance of understanding the long-term capability strategy in your company and understanding where the needs for capabilities in your company and your industry are going. The tricky thing is capabilities that seem unimportant today could turn out to be very important in the future because of the differing rates of improvement.
Pisano: Be aware. At the margin, it always seems to make sense to outsource the next highest source of value-added activity. But, over time, those capabilities erode, and you are at the mercy of those few suppliers with capabilities.
CIO.com: Innovation is inextricably tied to IT in many industries today. Will the increasing offshoring of internal technology operations further erode American competitiveness?
Shih: A lot of IT outsourcing has resulted in the development of strong software capabilities in other parts of the world. It has accelerated the diffusion of this capability. The strong software commons in India and, increasingly, China bodes well for products for which software is an important component.
Pisano: Yes, no question about it. But, I don't want CIOs to come away with the message that we are against outsourcing -- or that they should never outsource. That's not what we are saying at all. There is a lot of great IT capability in many different corners of the world, and it would be crazy for a CIO not to be thinking about how to take advantage of those. At the same time, they need to think about what they really need to have geographically close. It is clear that for IT professionals, the world is becoming a much more competitive place. If you are in that field, you are going to have to be continually improving your skill sets. And, if you are company in that space, you have to be innovating. You can't compete on cost.
CIO.com: What advice would you offer CIOs and IT decision makers on striking the right balance between insourcing, outsourcing, and offshoring?
Shih: One global head of IT of a large airline company once told me, "You can't outsource your thinking." I think that captures one of the essences of what we're saying. It's important to understand where your capabilities come from, and how you sustain them.
CIO.com: The focus in many companies -- in terms of IT investment -- continues to be cost savings. Can you give CIOs a financially based argument that they can take to their executive teams and boards against offshoring higher value capabilities?