Buyers want their outsourcing providers to innovate, particularly on the software front, but they also want innovation to be low-risk while leveraging economies of scale. The challenge is to find a way to ensure cost-effective innovation within outsourcing engagements, and for results to be measurable. One way to do that is to link innovation with objectives.
“Innovation is what teams talk about when they address value, but there is no common understanding of what innovation looks like unless it is tied to results,” says Jimit Arora, a Vice President with Everest Group. “At the most basic level there are three layers: continuous improvement; industry best practices; and transformation, which is where technology plays a big role.”
In the first example innovation is delivered in the context of improvements in day-to-day delivery, and in the second knowledge can be transferred across a client base to create economies of scale. However, it is the third category where all eyes are on innovation as the new frontier for competitive advantage.
“Now most innovation is in process improvements, Agile software development, and moving to platform-as-a-service,”says Arora. “When it comes to optimizing people and locations, that has largely been accomplished and has a limited impact.”
Wolfgang Benkel, Principal Analyst at Forrester Research, has noted that innovation has to be understood as a management process. This involves having scheduled communication and defined responsibilities between providers and client stakeholders on both the business and technology fronts. It also means that innovation projects are funded and have defined expectations, including ROI targets and rules for ownership of intellectual property.
Looking for Innovation
Research sponsored by Cognizant and conducted by the Warwick Business School (WBS) at the end of 2011 found that two thirds of CIOs expected outsourcers to innovate, but only half of them actually measured process improvements. Interestingly, these same IT leaders said they were willing to pay the providers to do the measuring themselves. But this disconnect can’t last, because traditional outsourcers are now being put up against the capabilities of global IT firms and consultancies.
“If you look at the number of patents going to outsourcers compared to global IT firms you can see the challenge,” says Arora. “The problem is that the top talent is not joining service companies; it is joining product companies.”
That said, providers are moving to embrace innovation, hoping for critical mass that will drive transformational innovation in such areas as software-as-a-service in multi-tenant data centers. But in order to get there, they need to change more than technology processes – they need a new culture, too.
“Service providers do not necessarily have the right mind-set or talent base to create the kind of solutions people want today,” says Arora. “Partly this is because the most efficient delivery model has involved leveraging junior level IT resources to write code. They weren’t talking to the top of the class.”
That said, the WBS study would suggest things have been changing, with two-thirds of participants having reported they were spending more on outsourcing, and with these buyers looking for innovation to be part of a provider’s value proposition.
Innovation or Bust
The problem is that many buyers are getting lost in the weeds, spending much of their time tracking SLAs to ensure that deals stay on track. The same is true of service providers, most of whom are preoccupied with basic services – the source of most of their cash flow – and devoting limited time and resources to innovation.
“This is not to say that providers are n’t making investments,” says Arora. “Some are buying software companies as part of the convergence between traditional software products and services. This is the ‘productization’ of services.”
There is no denying the increased demand for innovation, with research from Accenture and the Outsourcing Unit of the London School of Economics confirming that innovation increasingly separates higher performing BPO relationships with more typical engagements. In Accenture’s view, innovation is most valuable when it is dynamic, meaning ongoing and cumulative, as opposed to disruptive or incremental – two common terms on the BPO landscape. But dynamic innovation is hard to achieve given the traditional structure of provider organizations.
“Delivery teams tend to be in their own silos,” says Arora. “A lot of these teams are good at taking an order and executing against it, but they aren’t so good at being proactive, even though that’s what the clients want. Meanwhile, providers are waiting for clients to say what an initiative might look like.”
This is one reason why Accenture sees dynamic innovation as being “an intensely collaborative endeavor”. The value has to be understood and shared on both sides, with providers able to leverage innovation to enhance their own competitiveness. If the value is only specific to the client, then providers will have less incentive to provide push back. Accenture has found that one way around this is to use innovation funds and to participate in gain sharing.
“There is great opportunity for companies to look for innovation from the big consultancies,” says Arora. “But they have to realize there is a cost associated with this. Innovation comes with a price, and if you are only evaluating based on the lowest bid, you will get what everyone else is getting. At some point best practice becomes common practice, and no longer offers an advantage.”