W I N T E R 2 0 1 6 Ning Su Natalia Levina Jeanne W. Ross The Long-Tail Strategy for IT Outsourcing IT outsourcing used to be driven by cost savings. Today, it’s also driven by a need for innovation — and some leading companies are reinventing their supplier portfolios to achieve that goal. Vol. 57, No. 2 Reprint #57206

WINTER 2016 MIT SLOAN MANAGEMENT REVIEW 81 TODAY’S RAPID PACE of technological change has fundamentally transformed global IT outsourcing. Traditionally viewed as a cost-saving measure, IT outsourcing is increasingly lever- aged as a strategic tool for acquiring cutting-edge innovation. Many companies are expanding their portfolios of IT suppliers to include smaller, highly innovative companies. This pursuit of emerging technologies and capabilities, however, has elevated the complexity of managing sup- plier portfolios. The outsourcing practices that companies have been maturing in the past decade are under a new level of duress. Today, organizations need to reimagine IT outsourcing strategies in increasingly turbulent business environments. The Downside to Traditional Outsourcing In the past, companies have been advised to op- timize their portfolios of IT service providers by relying on several major partners with extensive technology and industry experience 1 while lim- iting the number of ad hoc suppliers. To mitigate the significant lock-in risk associated with such a portfolio, companies have been advised to use shorter-term contracts with well-designed in- centives. Collectively, this limited set of partners could offer a comprehensive and complemen- tary set of capabilities, while competition among partners could motivate them to invest time and resources in the client. By centrally managing this “optimized” portfolio, a company could achieve the economies of scale necessary for low cost and high efficiency. Although this approach to outsourcing was designed to ensure economies of scale and gain efficiency, 2 companies also hoped that their out- sourcing partners would introduce innovative technologies and associated services. 3 Few The Long-Tail Strategy for IT Outsourcing IT outsourcing used to be driven by cost savings. Today, it’s also driven by a need for innovation — and some leading companies are reinventing their supplier portfolios to achieve that goal. BY NING SU, NATALIA LEVINA, AND JEANNE W. ROSS I N F O R M AT I O N T E C H N O L O G Y THE LEADING QUESTION How can companies structure IT outsourcing to deliver innovation? FINDINGS Combine a few key partnerships with many smaller contracts. Create incentives for new niche suppliers. Pay attention to governance of the supplier portfolio. PLEASE NOTE THAT GRAY AREAS REFLECT ARTWORK THAT HAS BEEN INTENTIONALLY REMOVED.