Busting the innovation myth

Would you like to pay now, or when we have a measurable outcome?

The “I” discussion has certainly dominated debate on the Horses these past few weeks, and one of the finest outsourcing advisors in the business has anonymously volunteered us his thoughts.

This fellow has been working on some of the largest and most challenging outsourcing engagements in recent years and lives on a plane somewhere between London, Bangalore and the US (take your pick where he was when he wrote this, and whatever fine brand of fine screw-cap Merlot he was supping). 

What I find most interesting about his anonymous submission is this following statement: 

“I’d argue that innovation has been a massive distraction in outsourcing.  Any client that pushes innovation dollars towards the back office rather than their differentiating, market-facing offerings probably needs to re-connect with its shareholders” 

Interesting point of view - some would argue that outsourcing their back office is an enabler for clients to focus innovation investment in market-facing offerings, while others hold the view that innovation in the back office isn’t an investment – it’s simply a quest to find new and creative ways to improve performance.  And then there are businesses who shun market-facing innovation and simply want to churn out their profitable products quicker, faster, cheaper… the argument goes on. 

Personally, I’d question whether innovation should even be deemed an “investment”, but more of a culture and mentality enterprises should simply have embedded in their DNA to be constantly trying to be unique and creative in their respective business.    Anyhow, take some time out to read this piece and weigh in with your views:

Busting the Innovation Myth

“Innovation” has been amongst the most used—and overused—buzzwords in outsourcing for the last three or so years. Until clients and providers can have an honest conversation about what it takes to innovate, and what to do with the results, I don’t think it will ever happen. I’ll stop short of saying it’s impossible, but entire galaxies of stars will have to line up. Here’s why:

First of all, let’s get serious about what innovation means. True innovation is new. New means “hasn’t been done before”. So implementing SAP to make accounting efficient is not innovation. Consolidating servers? Not innovation. Per-employee pricing in HRO? Sorry. Developing software ate PCMMI level 5? Please. All of these are good things, but none of them are innovative—they’ve been done before.

Second, not all innovation is good. It’s only good if it creates some kind of value. Seems fairly obvious, but all of the contracts I have seen that mandated innovation have resulted in lots of “changes” that might even be “new” but have made nothing better.

So why is it so difficult to create something new and valuable in outsourcing?

Outsourcing providers havevery little incentive to create bespoke innovation.  Their business model and brand is best supported by deploying any worthwhile innovation to as many of their clients as possible. When a provider creates something new—their instinct is to spread it around, so the innovation becomes a “best practice” and loses its differentiating value quickly. Can you call something new if all of your direct competitors could haveaccess to it? By the way, there is nothing wrong with best practices or what the industry now calls “transformation”, but neither of those is innovative.

Clients, on the other hand, have every incentive to keep innovations developed in their shop to themselves, and their attorneys generally write language into the contract to do just that. In the process, it’s likely they discourage the provider from even trying. But innovation is also a bit of a gamble—one must risk something to win. Many innovations just don’t pay off; even if they seemed like a good idea at the time (see Betamax, New Coke, motorized seatbelts, etc.) So the scary scenario facing client executives is this: to get any kind of innovation, someone must invest. Providers, most of them not interested in the not-for-profit tax filing status, aren’t likely to invest in my innovations out of the goodness of their hearts. So it’s going to cost money whether I see it or not and I am not sure whether it will yield anything good—hmmm, can’t wait to take that proposition to the boss!

Humans, regardless of which organization they work for, don’t innovate on demand. Try it: Please invent something now…

Time’s up. Ok what did you invent? See? Not that easy. Now add the complexity that most of the people on either side of the transaction are there because they know how to standardize, repeat, execute—hardly  fertile fields for game changers. But even with an Einstein or two on the team, innovation takes trial and error, failure, non-standard approaches, and one-off solutions. Imagine writing the last eleven words into an outsourcing contract!

Like anything else in outsourcing, innovation will only be successful if both sides stand to gain from it. Starting from there, providers and clients should engage in meaningful discussion about how much they want, how much it might cost, how many failures they are willing to withstand, and how they will create the environment in which game-changers—not just incremental improvements—will be conceived. Generally, when I have seen this type of conversation, one or both parties ultimately decides it is too complicated and returns to “business as usual”

I’d argue that innovation has been a massive distraction in outsourcing. Any client that pushes innovation dollars towards the back office rather than their differentiating, market-facing offerings probably needs to re-connect with its shareholders. Any outsourcer that focuses on innovating for only one of its clients is betraying the fundamental economics of its business model. Both parties’ interests are best served by pursuing broadly applicable process and efficiency improvements. That said, I am very interested to hear from the “Horses” readership—have you found an example where innovation (not process improvement) was delivered in a profitable way?

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26 Comments

  1. Debbie Brown
    Posted March 14, 2010 at 12:00 pm | Permalink

    This is provocative for sure- when you take process off the table- you are left with the enabling technology or underpinnings- the argument is a good one- in that the industry needs to provide value by leveraging a one to many model for value- the examples I have seen in the last 6-12 months are on the front end- user experience side- where the wrapper is flexible enough to not impact the one to many model, and yet each client may uniquely differentiate themselves with client facing and employee facing technologies (UI). The other , on the horizon is how firms decide to leverage BI for reporting- the provider will provide the technology enablers- the client should provide innovative ways of deployment?- and or a collabortive approach could also be innovative?
    Phil’s point is also well said in that the company culture needs to breed innovation. Google is a classic example- and yet they are so passionate about their UI they developed their HR application and run it in very innovative ways. Clearly company culture is the driver.

  2. Posted March 14, 2010 at 12:29 pm | Permalink

    I agree with Debbie – the willingness to believe and move forward really makes that much of a difference. I think it’s also worth noting that innovation is crucial, but adopting recent innovation (even if it’s no longer chic or “new”) that has a building track record is something that can build trust in your company.

    Example being – it’s one thing to move your whole company’s structure into the cloud, and totally another to sell them on one key area that SaaS can help really deliver.

  3. Aoyon Chowdhury
    Posted March 14, 2010 at 2:19 pm | Permalink

    Typically, any job that can be commoditized can be oursourced. The certain amount of loss in value is compensated by a significantly lower cost. I would think the 80:20 rule comes into play – 80% of the work done at 20% of the cost. I would assume that the outsourced team will be managed through some strict SLAs or equivalent contractual obligations, probably with significant penalties etc. So the focus of the agency that is executing the contract would be to minimize their cost and resources while finishing the project. Given that focus, there would be little point in looking at innovation for an outsourced project.

    And I would agree with the outsourcing advisor. It would make sense to spend those precious dollars in market facing offerings,

    Aoyon Chowdhury

  4. Wouter de Valk
    Posted March 14, 2010 at 4:39 pm | Permalink

    Phil,

    With the risk of over-generalization and simplification:

    “Innovation in outsourcing is a myth, when outsourcing is approached in the traditional, cost-centered, way”.

    Below is an argument for the need of innovation and some examples:

    For the need of innovation in outsourcing; it is accepted that external dynamism is increasing. With this increased dynamism comes the need for organisational flexibility. This flexibility is achieved by building internal and external capabilities to innovate. A management method allowing innovation; management-by-objectives has in the last decade or so, been supported by the deployment of balanced scorecard. This balanced scorecard has internally liberated the traditional “cost centers” to add-value to the company purpose (link 1, Harvard Business School). More recently the balanced scorecard has shown to be a valuable source of innovation for managing alliances (link 2, Harvard Business Review):

    http://www.hbs.edu/research/pdf/07-030.pdf
    http://hbr.org/2010/01/managing-alliances-with-the-balanced-scorecard/ar/1
    http://www.mckinseyquarterly.com/How_innovators_are_changing_IT_offshoring_2449

    In IT offshoring, McKinsey (link 3) has found “highest levels of satisfaction and performance” were achieved by companies aiming at few strategically relevant objectives, rather than “mostly cost-focused metrics that failed to frame their strategic objectives and achieve sustained performance improvement”.

    In reverse, if functions of an organisation are suggested to be irrelevant for innovation, one could question their overall contribution,

    Wouter de Valk

  5. Posted March 14, 2010 at 5:04 pm | Permalink

    Phil,

    I agree that many organizations start looking into outsourcing as a cost reduction driver.

    However it is arrogant – but unfortunately not uncommon – to believe that a third party that specializes in performing the outsourced processes as their core business can not also provide aditional benefit leading to potential innovation gains in your other processes.

    It is very limited to only look at innovation opportunities coming from the process that you want to innovate. Many great innovations have typically originated from supporting processes. For example the now common Track & Trace service in e-commerce that was once a key differentiator for the first to provide it online, was initially introduced in a supporting process to be able to better look into customer queries.

    If you blind yourself from looking at and taking an interest in how a supporting (and potentially outsourced) process is being executed, you lose this opportunity completely.

    A number of outsourcing contracts however are designed primarily focusing on the cost reduction focus, which makes any innovation gain difficult to achieve.

    There are however also examples of more two-way orientered outsourcing contracts that focus on both the cost reduction, but typically also scalability and flexibility, as well as shared business development,

    Flemming

  6. Padric O'Rouark
    Posted March 14, 2010 at 5:07 pm | Permalink

    Depends on the scale. For example, outsourcing in aerospace typically means a US corporation is only patriotic to the government (who purchaces their product) not the local citizens who worked and sweated to create the company. They are patriotic to their burnline and profitibility. But they also make big mistakes and lose economic viability when their new sources and partnerships prove to be technically incompetent and incapable of bringing it in under the burnline.

    Padric

  7. Posted March 14, 2010 at 9:41 pm | Permalink

    Maybe to simple for this group (K.I.S.S.) Innovation drives efficiency that produces greater productivity that drives increased margins and revenue. You drive innovation over the entire enterprise with thinking first, then process.

  8. Posted March 14, 2010 at 9:59 pm | Permalink

    Ah yes my favorite friend Innovation. Something that as you pointed out is new and not a reinvention, kudos on the observation. I believe that you cannot acquire or train to be innovative it comes from years of boundless imagination and experiment. What many won’t tell you is that it also means shouting in the face of popular opinion and be willing to also understand the pragmatic elements of social implementation.

    In outsourcing there is, beyond the BPO/ITO/KPO sectors, a fringe of operational innovation. However those same things that propelled outsourcing into prominence is begging a transformation and not a continued normalcy. Let’s see who will step up to the mark on both the buy and supply side.

  9. Raja
    Posted March 15, 2010 at 2:30 am | Permalink

    Some comments:
    1) Much of the BPO industry (more specifically, those that deal with transaction processing) primarily exists because something is not done correctly at the buy-side organizations end or at the very least something can be done at their end to reduce the scope of outsourcing, if not eliminate it altogether. From a strictly process view of things, most BPOs perform Non-Value-Adding activities. AP is performed because of lower levels of EDI. Call centers for product or billing support exist because something upstream has gone wrong.

    A BPO provider is unlikely to have either the wherewithal (exposure to upstream and downstream acitities at their client’s end) or the incentive (why would they want to reduce their business?) to address this.

    2) A BPO client can obtain ‘additional’ business value on account of one of the following approaches only:

    - Enhanced business benefits because of process transformation: I improve on one or more of the operational SLAs (turnaround times, productivity (& other cost elements) and quality) which results in business benefits for a client. Thus, when I reduce TAT for order management/ sales fulfillment, I potentially reduce the cash cycle thus reducing operating cash requirements. Another example would be reducing exposed risks or customer dissatisfaction by improving on the Quality SLAs. This argument is quite intuitive for those who understand that an organisation essentially consists of processes; improve your process to improve your business.

    - Analytics: BPOs can make sense of the data that flows through their hands to provide insights to clients that can be used to ‘change the way business is run’. Domain knowledge is useful. But the moot question is this: do clients seriously expect their BPO service providers to come up with business insights that they themselves have been unable to? An insight that would be striking to clients is more likely to be serendipitous

    - The Tail Gets Shorter: A tremendous benefit that is often overlooked by both providers and clients is what offshoring can do to an organisation’s ‘economic batch size’ and its various equivalents. A classic example is this: Service providers continue to ignore collectible amounts less than, say, $500 merely because the client had this limit before the process was outsourced. Reduce the limit to, say $100 and all the extra money you collect will now go straight to the client’s bottomline. The tail just got shorter. A huge wealth of ‘additional value’ is waiting to be tapped post offshoring. A tool that we built for an insurance client, while it reduced FTE effort by about 30%, opened our eyes. The client had a look at the tool and said, “You don’t know what you have done. We have been declining high volume-low margin business for a long time. This tool now provides us that opportunity to go after such business”. When you think through this, there are tremendous opportunities everywhere. All your ABC analysis criteria, high-value/ low value invoices, platinum/gold/ silver levels of service etc. can be reworked.

  10. Posted March 15, 2010 at 5:32 am | Permalink

    All trading relationships are formed with the expectation that at some point there will be an economic benefit. The precise source, timing and duration of those benefits will vary, but in my experience of working with customer executive teams, they place substantial value on ‘innovation’ – and indeed, it is hard to be viewed as a strategic supplier unless that is a component of the relationship.

    I think the question is more about the form that innovation typically takes. Many clients are selecting their supplier on the basis of their record for successful innovation (or in truth, often their successful commercialization of the innovations of others). Those innovations will assist in remaining competitive; and, if we partner effectively, they may even lead to break-through ideas in market-facing offerings or capabilities.

    Suppliers may be successful in proposing ways that new technology or process can be applied to improve efficiency. If it is innovation you want, then in general it depends on a robust and open approach to partnering. And that can be tough to achieve for many reasons – not least of which being the fact that no supplier promises any customer that its relationship will be monogamous.

  11. Posted March 15, 2010 at 7:38 am | Permalink

    I like one thing about this advisor, Phil, the “fine brand of fine screw-cap Merlot” bit. That’s my favorite thing on this whole earth too. But lemme see how much I agree with the argument. I think the argument is quite limited to commenting on the expectation of innovation outcomes from outsourcing engagements. Now, one thing we all know about the success of outsourcing engagements and that is, the story is likely to be as successful as the intent behind it and the governance around it.
    1) My first argument is, if you have no intent to innovate within an outsourcing engagement and do not provide for the appreciation of the same in the engagement governance most likely you are not going to get it. Even if you contract with the “most innovative” service provider and have the your best team running it. Everyone knows the Toyota vs GM folklore in automotive sourcing – that GM sources the same or more components from the same provider base as Toyota does but the Toyota product still has a higher quality and reliability than the comparable GM one. That story is all about the theory of how intent and governance of sourcing can influence the outcome of it.
    2) The second argument is outsourcing can be seen as a business/delivery model innovation, which contributes to a better/richer business outcome. Consider the following examples – a) TiVo partnered with Sony & Philips to outsource manufacturing, distribution & customer Support, while they focused entirely on product development, marketing and sales. b) Starbucks, partnered with Unisys to simplify infrastructure deployment when it planned a 6X expansion. They did not want their capabilities in IT infrastructure management come in the way of their growth. These are examples of innovation in the sourcing model itself which aided rapid growth and busted a few other myths like “what is core?”
    3) The third argument is outsourcing is not necessarily about globalizing your back office for a lower cost and maybe for higher efficiency – you may do the same as part of your strategy too – 1) create value added business Models, 2) increase capability at a lower cost 3) increase capability even at even higher cost.
    It all depends on – at what juncture of your evolution as a business, against what context and with what intent, you are looking at the vehicle called outsourcing. If the sum of all the three deliver innovation to the business at a higher or a lower cost which consequently delivers greater measureable benefits for the business, I guess your shareholders will not mind, they will be happier thinking that their assets are in smarter hands.

  12. Stacie K. Ikka
    Posted March 15, 2010 at 8:19 am | Permalink

    I think it depends on how innovation is being defined and whether the “investment” is perceived or actual, soft or hard cost, and at the expense of the client or at the expense of the outsource provider.

    Having worked as an Ops Leader for a major outsourcing firm, I can say that there were several occasions where we (the back-office) were able to demonstrate innovation that facilitated the client’s ability to better focus on their market-facing initiatives. I think, as the “top outsourcing advisor” in Phil’s post implies, the key is ensuring that the governance team at both the client organization and the outsourcing organization are aligned with the shareholders’ priorities and strategies. This will inform how and where client investment dollars are spent and where innovation would net the most gains.

    For the outsource provider, innovation should be – in my opinion – an expectation of its leaders. I can’t tell you how many times I heard a client gripe about wanting to see more innovation. Whether or not they were prepared to implement innovative solutions once presented to them is a whole other discussion, however, the point is that clients look to their outsource provider to be their subject matter expert and, as such, expect leading edge solutions, thought leadership and innovative solutions to complex business challenges,

    Stacie

  13. Posted March 15, 2010 at 8:22 am | Permalink

    Phil,

    I tlhink that it it should not be a question of whether innovation in outsourcing is a myth, because innovation depends on the people themselves and is not just limited to outsourcing per se. The value that people derive from innovation, will depend on the value that we ourselves place on it. It’s easy to say that innovation is a distraction, perhaps because for them, it holds little or no value, but then to someone who recognizes the potential, then innovation may be priceless. If the people whom you are outsourcing to, and the clients themselves believe in the potential in innovation, then innovation is possible. If all the people care about are cost and money, then it may be unlikely (although not improbable). Likewise if innovation is given little to no importance, then innovation is unlikely to happen,

    Audrey Banares

  14. Posted March 15, 2010 at 9:33 am | Permalink

    Words like ‘innovation’ and ‘transformation’ have been used in sourcing engagements to put a positive spin on the work being done. Client organizations use these words in house to sell the concept to management. Providers use the words to market to clients. I agree that innovation is rare, and I think the same is true for transformation. What most clients get from sourcing providers is process improvement. This is important in many ways: improved economics, improved time-to-market, application of advanced skills, etc., but not miraculous. Innovation is generally defined as requiring both something very new and something that can be successfully implemented – whether in house or in the market place. The famous HBR Drucker article of 1998, “The Discipline of Innovation,” may have inadvertently contributed to this confusion on innovation by saying that innovation was not a “flash of genius” but could be found through “systematic search for innovation opportunities.” Drucker was lobbying for business to be open to seeing innovative possibilities in many areas rather than isolating innovation to ivory tower research. He was not advocating the ease of innovation through sourcing engagements!

    Transformation is a word that has completely lost its definition in the current use. This is a powerful term that means a metamorphosis has taken place: something has fundamentally changed into something else, e,g, water to wine or iron to gold. Has anyone seen that happen in a sourcing engagement?

    So while outsourcing is important and valuable to many organizations, producing innovation and transformation remains the rare experience that is part of their definitions.

  15. Terry E. Hartmann
    Posted March 15, 2010 at 11:31 am | Permalink

    Phil — Wow! You seem to have “struck a nerve” in garnering so many cogent comments in the space of 24 hours. From a buyer’s point of view, I don’t care if the providers call it Innovation or Transformation or Whatever, as long as the costs decrease. Focusing on payment for outcomes and minimizing SLA’s would seem to be necessary, but probably not sufficient to enable continually reduced costs. In addition, of course, you’ll need the willingness of the buyer to accept different approaches to providing services— More e-mails & self-service instead of people-on-the-phones? “Our employees are not going to accept that and we’ve done so many things to them recently….” To echo some of the commentors, this clearly requires a partnership.
    I also agree that “innovation” per se should not be the goal. The goal is to find ways to improve the business served. In our experience the greatest value to the enterprise was in going beyond the transaction costs and identifying ways to reduce business spending in the mainline business. Call that innovation or just applying the knowledge of the business to help the business. That’s a potential opportunity where outsourcers will be continually challenged and where a true partnership is needed with a strong retained staff, beyond the governance requirements.
    My two cents, Terry

  16. Posted March 15, 2010 at 2:49 pm | Permalink

    Phil

    Great points – but let me look at this from a slightly different lens. Some of this is heavily influenced by what Marcus Buckingham says in his book “First Break All the Rules”. And no – the book is not about Outsourcing. Its about being a great manager. I think its relevant never the same.

    My interpretation of what Buckingham says : Its possible for a decently human intelligent being to walk in into any new function and find 10 new / better ways to do things. That is invention, distinct from innovation. People who have ever had fresh MBAs report to them or MBA Interns do summer projects with them might agree.

    Such inventions do not factor in all the socio-political implications of implementing the Invention may not be founded on the cornerstone of practicality. Which is why so many Inventions fail.

    Innovation on the other hand is grounded in reality. It comes from having the experience of doing the work. Hence (according to my interpretation of the book) innovation happens by people who have already squandered their youth away in doing the same thing again & again.

    That is the kind of innovation back-office can bring in. They collectively have years of experience of executing the process. Then one fine day, they see a better way of doing it. Nothing earth-shattering. I might be committing blasphemy by saying this, but as an example : Twitter is not really that earth-shatteringly different from blogging & chatting in a chat room.

    Contracts can perhaps be used to stop such Innovations from being shared across the board. But in my view what really stops these down-to-earth innovations from being shared is that each customer has his own slightly different need. Orkut, Myspace & Facebook – more or less same things, but target different customers. Don’t they?

    On a different note : if one found some wonderful way to close the books/ledger one day before month-end, the customers would definitely want to limit sharing but am not sure of how much Top Line impact it would have.

    To put it differently, while innovations do offer significant advantage both in efficiency & effectiveness, the amount of competitive edge they will offer will continue to be limited if they pertain to SG&A processes. Its the innovation in COGS processes that does matter.

    Then again – I would like to direct your attention to iPhone or iPod. They did have an advantage. How long did it really last? How much market has Apple really been able to penetrate outside of NA?

    On the other hand as a shared innovation – mp3 players have benefited many suppliers. So it might be worthwhile for a customer or provider consortium to drive the innovation rather than one individual customer fund it.

    Shyam

  17. Posted March 15, 2010 at 5:52 pm | Permalink

    maybe this all should be rolled up to one of the innovation networks! just an ‘innovative’ thought

  18. Shekar Panchapakesan
    Posted March 15, 2010 at 6:46 pm | Permalink

    Love the original comment – because I have been saying the same thing for a while, to whoever will listen! Nice to see that this writer has gotten as far as the “fine brand of fine screw-cap Merlot ” – that gives me hope!

    All that I really want from my outsourcing provider is exceptional ability to faithfully, and efficiently reproduce my processes and – if possible – do it much cheaper, faster and better, because that is what I expect them to be – specialists in process execution and improvement, not innovation.

    There is a place for people who can help us innovate – they are called ‘consultants’. It is very possible that the same outsourcing provider, wearing a different hat (and usually suit and tie!), is my consultant too. But that’s a different transaction, a different set of participants and a different set of deliverables.

    Shekar

  19. the adviser
    Posted March 16, 2010 at 12:46 am | Permalink

    Well it’s great to see I sparked such debate. A few important clarifications:

    Process improvement and even “transformation” (though I agree with Christine that the industry has rendered it meaningless) are good things. All providers can and should deliver these for their clients. They are valuable but not “new.”

    As for those that say that cost reductions in the back office bring about innovation elsewhere, I could not agree more–that ought to be the point (or at least one of them) of outsourcing the back office! But that’s a long way from saying the outsourcer brought innovation to the table–they brough efficiency which freed up cycles and funds to pursure market-facing innovation

    Also, I dont think innovation, if it were to happen, would be a bad thing. Its just unlikely to happen because of funding, priorities, business models, etc. The conditions for it to occur just aren’t there. By going for provocative, I was hoping one of you would give that concrete example of true (new) innovation that adds value taking place in the context of an outsourcing relationship. Still haven’t seen it (the examples given are either process improvements or inovations taking place outside the back office, potentially enabled by something the provider did or suggested)–but if its out there, Horses will surface it!

    Finally, and most importantly, I am more of a cabernet guy–and in its absence a gin and tonic will do nicely, thank you.

  20. Nick Chuvakhin
    Posted March 17, 2010 at 8:48 am | Permalink

    Phil,

    If you recall the original (Schumpeter’s) definition of six types of innovation, you will also recall that one of those six types is in fact innovation driven by the discovery of a new source of factors of production. So the answer to your question within Schumpeter’s framework is no; in Schumpeterian terms, outsourcing is definitely a kind of innovation.

    Note, however, that if something is by definition innovative it is not by definition useful, or economically beneficial, or free from externalities, or ethical, or legal. Slavery in colonies, for example, definitely met the Schumpeterian definition of innovation (a side note: Schumpeter’s definitions date back to early 1900s, so they weren’t known in times of colonial slavery), but it still drew widespread criticism (including armed struggle) that eventually led to its abolition… “Innovation” means that something is new; it doesn’t meat that it is good, not to mention the fact that your definition of good can be very different from mine…

    Nick

  21. Posted March 17, 2010 at 8:50 am | Permalink

    It is a big time Myth – innovation should create a huge difference from revenue enhancement or cost reduction perspective, by creating something Totally Different and New.
    We keep categorizing minor improvements as innovations. iPhone was a innovation – iTablet is an improvement.

    Ashok

  22. Posted March 17, 2010 at 6:32 pm | Permalink

    In ‘mainstream’ outsourcing, innovation is often external to the process (i.e. it does not take place within the bounds of the contracted services, but rather as an add-in contracted on a case-by-case basis, either by the incumbent provider of base services, or by other service providers. There are many reasons for this, but they boil down to three primary factors;

    (i) contract terms and obligations that are ‘fit for purpose’ for managing day-to-day service delivery act to suppress innovation;

    (ii) the people engaged in the delivery of base services are not innovators (or, if they are, then they are probably not providing world-class base services);

    and (iii) clients find it hard to take the risks (and share the rewards) needed to spark innovation with a service provider that they are engaged with in managing the daily grind of commodity services.

    However, there is innovation in outsourcing in two major areas. First, service providers are innovating in the design and delivery mechanisms for their service offerings, although this innovation occurs outside of client accounts and is most readily available to new clients (or to existing clients at major inflexion points, such as renewals). Second, there is an entire class of services known collectively as Knowledge Process Outsourcing where innovation is endemic to the services.

    Mark Robinson

  23. Posted March 17, 2010 at 7:09 pm | Permalink

    Phil: A toxic term, Innovation.

    To most Providers, they are suspicious whenever that erms is used. Too often it is interpretated as “Client wants something for free.”

    To most Clients, but not all, what it really means is, “Please give me proposals for ways to improve.”

    A sourcing relationship can be a pthway for innovation only if the parties create an environment to nurture that outcome. Nurturing includes shared investments and shared risks/rewards. Else, it’s just one element on the checklist of “what don’t you like?”

    In the new economy … innovation is a derivative benefit of a relationship that starts with solid delviery on core commitments.

    Peter Allen

  24. Posted April 6, 2010 at 11:27 am | Permalink

    Interesting views you’ve got. I will agree with you on one point: Innovation – is so cliche like my eyes or ears would bleed at the print or mention of this word. Still, innovation must be clearly defined in such a way that one separates a totally new creation from just an improvement of what is already existing out there. Just my 2 cents here.

  25. Debashis Banerji
    Posted July 7, 2010 at 12:02 pm | Permalink

    My experience in the outsourcing space is – Innovate or become history.

    I believe that the lack of innovation is one of the driving factors for the end of the mega deals in the outsourcing industry. It is human nature to take pride in a win (of a multi-year outsourcing contract) and then relax as the daily humdrum of day-to-day service delivery become routine – until contract renewal is in sight.

    This phenomenon has driven many an outsourcing client to the shores of multi-sourced outsourcing engagement models. The objective being, to maintain a healthy competitive environment within the organization – both, from the pricing and service delivery points of view.

    I believe that the definition of Innovation in the outourcing space is to identify operational issues within the outsourcing eco-system within the organization and address them by bringing in deep experience of the operating environment and thought leadership in the form of new ideas from the outside. The issues can be contractual, technology oriented, operations or cost related – just about anything – within the context of the outsourcing engagement.

    Yes – service providers like to lable innovation as something that the client expects for free – and as “not in my contract”.

    However, I see Innovation as that quintessential differentiator that enables a service provider to differentiate themselves from the pack.

    I have seen numerous instances of the fat-dumb-and-happy mega deal service provider at Fortune clients lose their share of the outsourcing pie because they refused to adopt innovation as their mantra. They stay in a “run and operate” mode through the life of the contract and expect that the client will renew the contract at the end of the term because they ran and operated the environment flawlessly – at the Service Levels delineated in the contract.

    Unfortunately, clients don’t like to keep paying money to a service provider unless they get more bang for the buck – that is just the nature of the game!

    The questions they most often ask at newwal are –

    o What more am I going to get for my money if I let you operate my environment for the next x years?
    o What more can you do for me based on the fact that you have now run my environment for the last x years?

    Innovation has the potential to change the playing field for the new player and the incumbent alike and should be treated as the cost of doing business. Additionally, innovation drives excitement into an otherwise routine day-to-day commodity service delivery environment – and provides opportunities for celebration for both, the client and service delivery vendor organizations!

  26. Posted July 8, 2010 at 1:19 pm | Permalink

    It took a year, but the comment from Debashis takes the award for the most intuitive answer. Contractual agreements will focus attention on SLA’s and processes that primarily focus around cost reductions, increased efficiencies in processes and more cost reductions. Differentiation can arise from a company that is looking to evolve, change through the experiences it collects along its journey of experienced development.

    Thinking differently or as the cliché goes Insanity is expecting the results to be different but doing things the way you have always done them” A switch from contractual and operational obligations to more of a strategic approach is the key.

    This can be started by a provider attempting to converse with executives outside the IT department. Focussing on business issues, diagnosing the root causes for those business issues bias to your capabilities. You say solution, your clients see commodity, so we need to differentiate from our competitors.

    Knowledge is power and wisdom is knowing how to use it. Prescriptive advice based on information known by being the chosen vendor will be met with scepticism. But consultative conversations based around business challenges and working together to move away from a transactional relationship towards a preferred partnership is crucial.

    It will be difficult to be viewed as a strategic supplier unless value forms a substantial part of the relationship. Innovation is part of that value, perhaps intangible at first but it is those providers that believe in evolving and believe it is possible and believe in themselves that will succeed in innovation and thus differentiation, and are on the journey to being a trusted advisor. A journey of a thousand, I’ll say no more.

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