Innovation through outsourcing: dream or reality?

Opinion by Carine Peeters, professor of strategy at Vlerick Business School (Source: Shared Services & Outsourcing Network (SSON) - 25/11/2015)

There are many reasons why you may decide to outsource part of a function to an external service provider. Interestingly, next to the well-known cost-related drivers, more and more managers have started looking into outsourcing as a way to do things better, or to do new things. The underlying idea is that service providers are the experts, who could help improve and innovate the processes. Why is it then that when it comes to tangible innovation outcomes, outsourcing looks more like a desert with innovation being the water: nowhere to be found?  Observing companies and talking to managers trying to achieve innovation through outsourcing, I came to conclude that there are 5 main reasons why we ended up in this innovation desert. Each and every one of those problems also leads to part of the solution.

Problem   Solution
 We do not (really) want it  Aim for it
 We do not define it  Describe it
 We do not search for it  Select for it
 We do not ask for it  Contract for it
 We do not behave for it  Govern for it

Problem # 1: We do not (really) want innovation

Innovation often remains a hidden secret because we do not dare to make it a priority. Innovation in general is difficult, uncertain, and therefore a little uncomfortable. Looking at costs, on the other hand, gives the impression of something we can easily measure, and therefore control. Cost containment also tends to be a very legitimate thing to do in most organisations. While if innovation is accepted, it often does not go beyond the techno geeks and scientists in the labs. It is hardly seen in day-to-day operations. That means innovation may be on the wish list of most managers dealing with outsourcing, but it rarely gets in the driver’s seat.

Solution: Aim for it

First, you should be clear about what you want to get out of outsourcing. And if innovation is on the list: what level of priority should it receive? Secondly, you should integrate it into the business case and run the outsourcing process accordingly - from supplier selection to contract negotiation and eventually to how you behave and manage the relation. It is much more difficult to change an existing deal, than to integrate innovation from the start. Even if you want to start small and easy, it’s a good idea to already plant the seeds of what will be needed in the next phase.

Problem # 2: We do not define it

What is it that you dream about? Is it continuous improvement through repeated, but mostly minor, modifications to make existing processes work better? Is it the suggestion of better practices that may involve a more profound redefinition of processes? Is it only the suggestion, or also the implementation of those better solutions? Is it about the development of radically new solutions that do not already exist, whether inside or outside your company? Is it innovation for your company, or with your company? Is it technology or business? As Dave Anderson from Gartner once said: “It is ultimately up to the buyer to define what is meant by innovation. If you can’t define it, you can’t expect it.”

Solution: Describe it

Innovation can be anything you want it to be, as long as it is clear. Both vis-à-vis the provider, as well as internally. Does everybody involved in the outsourcing deal agree and share the same vision of what kind of innovation you are aiming for? Does everybody understand and accept the consequences? You need a shared vision about innovation from the front lines to the top, and all across the organisation, from business to IT and procurement. The alternative is a one way ticket to guaranteed frustration, and resentment against outsourcing and the service provider. It’s a giant step forward if everyone can agree on the question “What would make us happy about the innovation outcome generated through this deal?”.

Problem # 3: We do not search for it

This is a matter of selecting service providers. Let’s say you want to buy bread. If you do not care about the type of bread, you may buy industrial bread together with your other groceries, because that is convenient and maybe cheaper. If you care about fresh bread, you may decide to add an extra stop and go to a bakery. But if you want the best bread in town you will probably start comparing bakeries and ask references. And: you may be willing to drive an extra mile, and pay a little more to make sure you get the best of the best.

Why don’t we adapt the same kind of basic behaviour when buying IT, finance or engineering services? If innovation is what you want, the innovation capabilities of the provider must be reflected in the selection criteria you use. Make sure that these criteria do not automatically lead to favour low cost over innovation. And if a provider pretends to be both the cheapest and the most innovative, you’d better think twice. The capability to overcome inertia and really drive innovation, typically comes at the cost of a higher price. But instead of looking at it as an extra cost, you should see this as an investment. Secretly hoping for innovation while selecting on price, simply does not work.

Solution: Select for it

Assessing whether a provider is capable of innovating, coming up with novel ideas and driving them to implementation, is obviously more difficult than assessing technical skills, or costs. But you can, and should, ask client referrals, talk to past and current clients of the provider, ask about its attitude, willingness and ability to align with the client’s priorities. Does the provider try to educate its customers about latest technologies and developments in the field? Is he flexible to change if clients’ priorities evolve? Does he make time and space for innovation? Can he show evidence of past innovation? Does he have the governance and communication channels to talk about and drive innovation?

Problem # 4: We do not ask for it

The first step is certainly to talk openly about innovation with the provider. Express clearly that satisfaction will not only come from the ability to deliver the service according to plans, but also from the ability to improve the way in which the service is delivered, or maybe even come up with a better service altogether. However, talking is not enough. Unless it is reflected in the contract in a meaningful way, it will not happen.

Solution: Contract for it

There are 3 options to integrate innovation in a contract and you should choose the right option for the right type of innovation.

  • a continuous improvement :
    1. It’s best to integrate innovation in the core statement of work of the contract, and adapt the incentives and KPIs accordingly.
  • Innovation that really changes the way you do things:
    2. Within the same statement of work and set of SLAs, it may be difficult to make sure that current operations run smoothly whilst at the same time changing the processes. Perceiving these as complementary but different objectives typically gives better results. So within the same contract, you could add a dedicated statement of work with pre-negotiated terms for future innovation.
    3. A more radical but effective way, may be to split the contract value into two parts: a contract for “running” the activity, and in parallel offering the provider the possibility to earn the rest of the contract value by coming up with innovative ideas.

Problem # 5: We do not behave for it

It take two to tango. Likewise, what you get out of outsourcing in the end is the result of how you behave as a provider but also as a client. Before blaming the provider for not being innovative enough, take a look at your own organisation and  people. Are you making it very clear that the provider should be focusing on innovation, and not only on savings and quality SLAs? Is your organisation open enough to give the provider a realistic chance to come up with relevant ideas for improvement or for radically new sources of value? And if new ideas do actually emerge from the relation, are you there to help the provider push them through the organisation? 

Solution: Govern for it

Your innovation ambitions must be reflected in the governance structure, governance team, and metrics used to follow up on the relation; not merely the contract. Innovation, more than anything else in outsourcing, is about people being willing to share ideas, discuss, and work hand-in-hand towards better, faster, new ways of doing things. It is therefore critical to have the right people around the table. And you also need dedicated meetings because innovation requires a different mind-set than operational or financial issues.


And where do we start all of this? With outsourcing like with many other things, our mental frames may be the biggest barrier for innovation. Commodity outsourcing is reassuring. It is something more controllable, and if things go wrong, the provider can be blamed. Innovative outsourcing requires that we dare stepping out of our comfort zone, and accept to share responsibilities instead of just pointing fingers. That is a completely different ball game. But also one where the gain is bigger.

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