July 2011

Innovation in IT Outsourcing – Myth or Reality?   

What is innovation in outsourcing?

Innovation in outsourcing means different things to different people, but broadly it is initiatives that can bring business change and business benefit. It is important as it bucks the trend of users being stuck with a service for the term of a contract when the business needs evolve over that contract term. 

The views of end users and suppliers

A recent survey undertaken by the NOA in conjunction with KPMG of end users and suppliers highlighted some mixed views on innovation in outsourcing leading to some interesting dilemmas. The following initial conclusions have been presented:

• Suppliers are more interested in the inclusion of innovation in the outsourcing    relationship than end users.

• Where innovation is a key driver, suppliers are keen to have innovation included as part of the core service offering, whereas users want to pay as you go for innovation.

• Where innovation is part of the relationship it is still not embedded in the operational model – more often it is a quarterly agenda item.

• Although users acknowledge that it is very important to measure innovation, the vast majority do not perform any sort of measurement. 

So should we all be interested in innovation?

The answer to this, in the best politicians’ style, is that it depends on what type of outsourcing deal you have and on what your definition of innovation is.

Innovation can be both radical and incremental but is not continuous improvement and by it’s nature should drive new ways of working to achieve business benefit.

Therefore the type of outsourcing will dictate the level of desire for innovation. A more commodity service will not be appropriate for innovation. 

What benefits will it bring me?

One thing is clear from all the research, supplier and user feedback and Grange’s experience; you will only get as much business benefit from innovation collaboration as the amount of effort that is input. 

As evidenced by the survey undertaken by the NOA and KPMG, not many users measure the benefits of innovation. However, organisations that have embraced this concept, such as the BBC and United Biscuits, have all acknowledged it’s benefits and are working hard at measuring it’s success.

The measurement of innovation is not easy but some simple measures will help you evaluate this in terms of achieving business benefit. Grange recommends that the measurement of benefits should cover:

• Financial benefits – return on investment etc

• Service quality improvement

• Business process improvement  

• Customer/User satisfaction improvement

These can be built into a simple innovation balanced scorecard to monitor and manage the relationship with your outsourcing suppliers. The key is to know what you want and agree that with your suppliers. 

How can I be successful?

Unfortunately, there is no single silver bullet to succeeding in embedding innovation in your relationship with outsourcing suppliers. However, there are three key areas to address for success:

1. Strong processes, governance, measurement, reporting and a good contract
Although these things seem counter-intuitive to blue sky thinking and ideas generation, without some sort of structure and contractual agreement with your suppliers, innovation will not even get off the ground.

2. Financial investment
Many users and suppliers quote the lack of funding for innovation as a key inhibitor and therefore ring fencing investment funds for innovation may be something you want to consider.

3. People and relationships
Many commentators argue that this is the most important consideration and strong relationships can make innovation a success without 1 and 2 above.

However, strong relationships must be supported by clear leadership in the form of a user champion otherwise it will lack focus and momentum. This equally needs to be supported by people in both Supplier and User organisations with strong skills to consider and deliver innovation to the business.

Remember that ideas for ideas sake are useless; delivery of real business benefit is the end goal. 

Grange helps customers to successfully incorporate innovation into outsourcing…… 

Innovation benefit is a key standard deliverable of the Grange outsourcing model and a number of our customers live and breathe this approach.

Examples:

Automotive Industry
Grange implemented an innovation framework to support the business excellence programme. This has delivered real business benefits over a number of years including new channels to market.

Utility
Innovation was included in the evaluation criteria for supplier selection in an outsourcing tender. Innovation was written into the contract to ensure regular review and a process for investment.