Digitalization: The Role and Decisions to make about your company’s IT Capacity

In a data-driven world, companies are increasingly forced to bring digitalization at the core of their business model, reflected in form of intuitive interfaces, real-time tracking, meaningful customer-centric analytics, digitalized customer journey, etc. The quest for digitalization pushes companies in multiple industries to innovate by using the power of 21st century’s technology key words — such as Artificial Intelligence, Big Data, Internet of Things, etc. — and translate them into solutions that positively impact their business holistically.

Starbucks is a company worth highlighting as it shows that even in the most traditional business models companies are finding creative ways to reinvent themselves by integrating digitalization within their business processes. The offline, brick-based coffee shop took advantage of the mobile technology to develop a series of digital processes that combine online payment, loyalty programs and point-of-sale applications, allowing Starbucks to respond to customer’s expectations and improve customer experience. Yet, although most companies have identified the need to make use of digitalization, many companies struggle in making this a reality.

To make this discussion more concrete, a sample of 6 Dutch startups based in Rotterdam, the Netherlands, were interviewed on the importance of digitalization and the impact it has within their company. These startups have a diverse profile, from some very software-centric oriented to some selling a tangible product. In the interviews, five out of six startups mentioned digitalization to be a central part of their value proposition for mainly three reasons that are described below. I invite you to read them and think about your company: do you recognize them in your business as well?

A) Integration of Digitalization within Startups’ Business Model

1. Communication of the brand. Interviewees described the importance of having a well-designed website that clearly and effectively communicates their companies’ value proposition and their company’s identity. Interviewees described websites to be like stores that customers come to window shop. Most of the time, the website is the first contact customers have with the them, for which it is crucial to retain the customer long enough to transform his or her interest into engagement. To achieve such, collaboration is needed between the web-developer, web-designer and the marketing representatives, that make the website attractive, intuitive, and with simple and few steps for the customer to engage.
2. Sales Channel. Online sales channels are known for not bounding companies to the constraints of physical shops. Online channels allow a faster and wider geographical customer reach, especially considering the growing number of connected users worldwide and the increasing online shopping behavior. Furthermore, interviewees mentioned the cost-effectiveness of an online channel compared to the high fixed costs of physical stores, especially important for lean startups. At this point, the customer is interested in the value proposition and wants to have a piece of what the company represents or offers. Hand in hand with the website, having online sales channels allows companies to track and measure customer behavior and continuously learn about their customer.
3. Supporting Business Processes. Startups also mentioned their use of software and artificial intelligence to support their business processes in delivering their value proposition to customers. This is especially true for platform businesses, which accounted for 70% of the “unicorn” companies in 2015 according to the Center for Global Enterprise (CGE). As described in the interviews, relying on these technologies enables startups to deliver globally consistent quality that is superior compared to traditional competitors that are still struggling to compete in the scope of digitalization. In this sense, IT technology was described as part of these startups’ driving mission and an essential part of their competitive advantage.

But, to truly collect the fruits of what digitalization can offer requires a series of changes regarding the internal way people collaborate within the company. One of the main functions that must especially reinvent itself is the IT department. The IT department should no longer be seen as a low-cost, technical, isolated, and supporting service. The contrary is needed: IT functions must become integrated with the core of the company in form of cross-functional teams where the IT talent has a central role in creating real value for the organization. Concretely speaking, IT services are not only about the hard skills comprised in activities such as web and software development etc.; but about the combination of these skills with other disciplines such as design, marketing, and sales. Thus, the days where the “IT-nerds” were completely isolated from the rest of the business should be over!

In this context, an important topic to acknowledge is the dilemma many companies face: should I outsource or develop the IT capacity in-house? The same sample of Dutch startups highlighted different decision-making factors that they consider when taking this decision, which might be valuable for you to think about.

B) In-House vs Outsourcing IT

Main Motivation to Develop IT in-House: Keeping the IT Talent Close:

1. Part of the core: Those startups with IT in-house mentioned their IT to be part of their core and described the need for constant collaboration and communication within the IT department and other roles such as marketing, sales, design, etc.
2. Need for integration: The startups also mentioned the need for full integration of their IT infrastructure (e.g., software, AI, website) with the rest of the companies’ operations, such as sales, customer relationship management, marketing, etc. According to interviewees, to do these activities in-house allows for more quality control and branding consistency. To stimulate full integration, a startup mentioned that it is part of their culture to promote people to use the same tools and make smart use of their in-house software. Interviewees also mentioned working in multi-disciplinary teams.
3. Need for constant updates: Startups mentioned the need for constant communication between the IT representatives and the rest of the company. This is especially true in the context of startups that are scaling up very quickly. In this context, the IT team need to be frequently updated and aligned about the direction the company is taking.
4. Need to solve mistakes fast: If there is a mistake in the system, the IT team needs to act fast to lower the damages. For this, startups mentioned the need for constant availability of the IT team. Considering the integration of IT systems within the core of the business, companies feel more secure in having their IT near them

Decision-making factors to outsource: Complementary rather than Integrated

1. Basic IT activities: Those startups outsourcing their IT services mentioned that they do so for basic IT activities that require repetition.
2. Cost driven: Companies mentioned that their ultimate motive to outsource, especially to a different country, is because of the lower costs for the IT basic services. Interviewees mentioned the countries Ukraine, India, and Russia, which are perceived to have highly IT educated people for a lower service cost.
3. Geography is not a barrier: Companies mentioned geography not to be a barrier because it does not matter where the assignment is fulfilled but whether it is fulfilled in time. Thus, deadline setting was described as very important.
4. Large enough projects: A lot of projects are too small to outsource since the extra time needed to coordinate makes up for price differences. Thus, companies feel that to make the outsourcing worth it, there needs to be a large project.

Having looked at some decision-making factors related to IT talent, it is interesting to look at the main challenges the same startups identified for both: developing IT capacity in-house and outsourcing IT. These insights can help you take these points into account when taking your decision.

C) Main Challenges related to IT in-house and outsourced

Challenges to In-House IT

1. Finding highly talented people: Considering the relatively high cost of IT services, companies cannot afford to hire people that are not good enough. To find people with talent has been recognized as a key challenge for which startups use agencies and attend related field events to promote their opening positions to attract talent.
2. Finding the right talent: It is not only about having talented people but having the right talent. Startups have mentioned the large scope of IT activities (e.g., data analytics, AI, cloud systems, etc.) which makes it a challenge to identify the people with the right skills within these specific areas.
3. Difficult to scale up the IT personnel: Considering the challenges related to finding talent as well as the right talent, it is no surprise that startups face the challenge of scaling their IT team in line with the startups’ growth.

Challenges of outsourcing IT

1. Communication of complex information: One of the reasons supporting the claim to only outsource basic IT activities is because of the perceived difficulty in communicating complex information. In this sense, they perceive communication management as a risk.
2. Cultural differences: Interviewees have described cultural differences as a barrier when the IT team’s culture to whom the activities are being outsourced are not straight forward. It is a problem when people say “yes, we understand what we have to do” too quickly. Thus, honest and open communication is a challenge to achieve when both parties do not speak the same “cultural” language. In this context, there is a need for the IT team to adapt to the western culture to clearly manage expectations.

Top tools that startups to support their communication and ways of working:

• Skype, Google Hangouts, Podio, Slack, Help Desk.

Finally, organizations — ranging from startups to multinationals — are all trying to get the maximum out of the potential of digitalization for which IT talent is key. As demonstrated, integrating today’s technology can positively impact your company’s business model through smarted business processes and more customer-friendly solutions. Yet, as I hope to have demonstrated through the summary of the interviews with the six Dutch startups, there are many decision to make when investing in your company’s IT personnel, where one of the most critical is whether you should build your IT in-house or outsource it.

To answer this question, you must identify the role digitalization has on your company’s core. Then, you must make sure to have talented people helping your succeed in your digital strategy to truly benefit from it. According to a McKinsey investigation, technology-services companies are frequently in a better position to deliver full-slack IT services because they attract and retain talent through their diverse career paths and personal development opportunities in the IT field. This is somehow confirmed by the Dutch companies interviewed, who recognized the difficulty to attract and retain the most talented IT staff.

Lastly, I invite you to take this all in and reflect about your company: do you recognize some of these points? Have you also gone through some of these dilemmas? The answers might differ, but one thing is certain: the IT department has a growing role that is here to stay.

Having recognized the role of IT services in unlocking the potential of digitalization, it is critical for startups and companies to work with the right IT talent. This finding was traced back with a sample of 6 Dutch startups from Rotterdam. Through interviews, their decisions about IT services was discussed, where they disclosed their needs and challenges related to IT services, including whether they make their IT in-house or outsource it.

Thus, digitalization plays an important role is several spheres of these startups’ business model. It exists within the communication channels, sales channels, and in terms of business processes that make the delivery of the startups’ value proposition to the customer.

Valentine Décamps, passionate about Business Development and Innovation, Magister in Strategic Entrepreneurship at Rotterdam School of Management.