I recently had lunch with a CIO who declared that "achieving innovation from outsourcing is impossible... suppliers simply do what is written in the contract – it’s as simple as that..."
While I don’t share this rather bleak view, I do empathise.
IT leaders often find themselves in outsourcing relationships where service providers fail to deliver innovation as expected and, as a result, feel short-changed.
The irony is that outsourcing does provide access to much deeper, expansive bodies of knowledge and expertise – which suggests that innovation should be readily available.
So why do so many people share the view that getting innovation from outsourcing is so difficult?
To keep things simple, let’s assume that in general, innovation is good. Typically, it benefits clients by reducing cost, transforming performance and helping to lower risk.
However, with many organisations in their third or fourth generation of outsourcing, the option to deliver significant benefits through innovation has diminished. Labour arbitrage is complete, processes transformed and technology thoroughly ‘-ised’ – rationalised, optimised, standardised and virtualised.
As such, service providers need to take a different route to delivering value.
The CEO of a leading service provider told me: "We are increasingly focusing on how we generate wealth for our clients", reflecting a step up the value chain. In simple terms, helping clients sell more widgets in addition to helping them produce them (at lower unit cost) is a positive differentiator.
So assuming innovation is good, we need to understand why obtaining innovation from outsourcing is so difficult and how to make it easier.
Not an optional extra: Traditional contracts typically contain clauses that require service providers to be innovative, often accompanied by an innovation fund which the service provider accesses at pre-determined times.
This approach — viewing innovation as an optional extra and assuming that it can be delivered in proportion to the depth of the client’s pockets — is a staggeringly effective way of stifling long-term value creation.
Forcing innovation by contracting for it and hoping for the best simply doesn’t work.
Innovation shouldn’t solve non-existent problems: Reading an in-flight gadget catalogue, I found these genuine products that solve problems I never knew existed:
- Have you ever wanted to make or receive a phone call underwater? Get the Underwater Cellular Phone system...
- Do you have little trouble keeping track of the hour and even the date — but the day always eludes you? Solve this problem with the innovative Day Clock, which clearly displays the days of the week
Unfortunately, innovation is all too often offered in ways that do little to solve client business issues.
When faced with contractual obligations to keep churning out innovation, service providers often take the path of least resistance and propose lazy or poor ideas that, at best, add marginal value.
Of course they may meet their contractual requirements — but completely fail to deliver real business value.
1 Don’t contract for innovation, reward it: Eschew traditional contracting for innovation and communicate that innovation is expected as standard. Don’t waste resources developing detailed innovation schedules or funding plans — but do agree how the benefits that innovation brings will be realised and apportioned.
Get the service provider to take the risk — but be prepared to share (significantly) the gains. If the service provider has an opportunity to deliver innovation that creates significant, quantifiable bottom-line benefit, why shouldn’t they receive a healthy return?
2 Focus on wealth generation as well as cost reduction: Focus on motivating and guiding service providers into proposing exceptional ideas that deliver real bottom-line benefit.
Provide clarity on how each innovation business case will be evaluated. Get the service provider closely aligned to the business and give them the opportunity to propose radical ideas to increase your revenue, not just lower costs.
3 Trust, share, listen: Clients who share their business vision with trusted service providers often find that great ideas are much more forthcoming.
Both parties need to be frank, open and honest; secrets and one-upmanship are remarkably effective at stifling innovation.
4 Don’t force innovation — encourage it: Create opportunities for deep engagement between service provider and client staff of all levels.
Enable trials and opportunities to experiment and manage the risks in partnership. Encourage the service provider to think radically and let them know that experimental failure is an option.
Innovation and outsourcing are not mutually exclusive. Exceptional ideas that generate tangible benefits can be achieved through taking a modern approach — nurturing ideas in a collaborative environment that rewards success rather than punishes failure.
Combine this with a transparent and equitable means of sharing the gains and you have the perfect formula for long-term value creation.
Andy Palfrey is founding partner at sourcing specialists This Partners