From Harvard Business Review · Jana Werner · · 4m
Outsourcing Can't Fix a Broken Organization
A $3.2 billion Daimler-Infosys deal promised efficiency but delivered complexity. The real problem was never the vendor.
In brief
A $3.2 billion Daimler-Infosys deal promised efficiency but delivered complexity. The real problem was never the vendor. Outsourcing cannot solve organizational dysfunction. Companies that hand off core capabilities to vendors lose control, knowledge, and adaptability, making problems worse, not better. Originally…
The deal that promised everything
In December 2020, Daimler AG and Infosys announced an eight-year IT infrastructure transformation deal reported to be worth around $3.2 billion. Daimler would focus on software engineering while Infosys took over IT operations.
The hidden motivation
Beneath the surface, Daimler hoped to escape a function burdened by legacy systems, administrative overhead, endless approval layers, and little transparency into costs or assets. Insiders said the IT department fit that description perfectly.
The structural problem
Contracts of this scale frequently lack the clarity, operational detail, and commercial safeguards needed to hold either party accountable. When vendor structures cannot keep pace, frontline teams respond by quietly rebuilding their own shadow IT.
Shadow IT as immune response
Shadow IT is not only a compliance breach. It is an organizational immune response, a natural, adaptive reaction to sluggish external structures that fail to keep the business running.
“Shadow IT is not only a compliance breach, it's an organizational immune response, a natural, adaptive reaction to sluggish external structures.”
The deal unravels
By early 2026, Daimler had split into Mercedes-Benz Group AG and Daimler Truck. Both companies began moving major parts of the work to other providers, abandoning the Infosys arrangement.
New vendors, same problems
Cognizant won the Daimler Truck contract away from Infosys. Mercedes-Benz reportedly awarded a $1.14 billion successor deal to HCLTech. Rather than creating efficiency, the deal introduced new complexity.
An antipattern, not unique
What happened between Daimler and Infosys was unfortunate but far from unique. These situations are antipatterns: well-intentioned but counterproductive responses to complex challenges that repeatedly undermine the outcomes they aim to achieve.
The real value of outsourcing
Outsourcing and consulting can create enormous value. Labor arbitrage, scale, and standardization can take a meaningful share out of run costs in the early years of a deal.
The hidden costs arrive later
The trouble is what never appears in the business case: knowledge that leaves with transferred staff, slower decisions as every change becomes a contract negotiation, and loss of leverage at renewal.
Problems don't disappear
Organizations often treat an outsourcing agreement as if it will resolve years of accumulated complexity, weak governance, and unclear accountabilities. It won't. Those problems simply change hands, often becoming harder to solve.
“Those problems don't disappear when they're handed to someone else. They simply change hands, often becoming even harder to solve.”
Japan's cautionary tale
For decades, Japanese corporations delegated technology wholesale to systems integrators through three or four tiers of subcontracting.
Japan's legacy system crisis
Japan's Ministry of Economy, Trade and Industry estimated that roughly 80% of Japanese enterprises were running legacy black-box systems built by systems integrators.
The warning proved accurate
In 2025, a follow-up government committee concluded that legacy systems were still holding back digital transformation across Japanese industry.
AI makes outsourcing worse
AI should have been the way out of legacy systems, yet instead it makes outsourcing issues more apparent.Companies with too few technologists depend on systems integrators.
The Tin Man trap
Outsourcing often makes organizations slower, not faster. Every additional supplier introduces another coordination point, another dependency, another contract to interpret. Decision-making becomes fragmented and responsiveness declines.
Losing the talent pipeline
In pursuit of leaner organizations, the first roles to disappear are often those that build future capability: junior accountants, business analysts, marketing researchers. These people accumulate institutional knowledge and develop the next generation of leaders.
The Octopus approach
An Octopus Organization distinguishes core from commodity, retains ownership over core competitive capabilities, and selectively outsources commodity functions. It pays for outcomes, not hours, and protects the talent pipeline.
Own the automation
When a vendor automates your processes, the contract should assign you the resulting assets: the data, the prompts, the agent workflows, the fine-tuned AI models, and the automation logic.
Don't outsource the sensing
Two-thirds of an octopus's neurons sit in its arms, which is why each arm can taste, touch, and act on its own.Organizations work the same way.
“An octopus that handed its arms to someone else would not be leaner. It would be numb.”
The bottom line
Outsourcing cannot solve organizational dysfunction. Companies that hand off core capabilities to vendors lose control, knowledge, and adaptability, making problems worse, not better.
