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Outsource magazine: thought-leadership and outsourcing strategy | May 3, 2015

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Fuelling innovation in the digital era

Fuelling innovation in the digital era
Kevin Parikh

Innovation is the most sought after and at the same time the most underachieved outcome of many modern outsourcing relationships. The primary issue is that the driver for these engagements is cost reduction versus service enhancements. In the digital era we are presented with an interesting opportunity: can outsourcing deals driven by social media, mobile, cloud, analytics & big data (SMAC) technologies bring innovation back into outsourcing? While the meaning of innovation varies by organisation, there is uniformly a strong desire to translate sourcing dollars and service providers’ world-class capabilities into improvements in service delivery and demonstrable impacts to business. The Outsourcing Draft International Standard (ISO/DIS 37500) defines innovation as: “implementation of a new or significantly improved product (goods or service), or process, new marketing method, or new organisational method in business practices, workplace organisation or external relations.”

Previously the exclusive domain of third- or fourth-generation (“mature”) outsourcers, today we are seeing innovation becoming the central theme of even first-generation outsourcing contracts. Why this change? Is it a fad? Are RFP “templates” driving this trend? We don’t think so – the underlying cause is the accelerating pace of change driven by SMAC technologies. It is bringing more into the realm of the possible, and in turn escalating demands from user groups and customers. Every delivery organisation today is faced with a constant pressure to re-invent their services and the way they are delivered. Best-practices based delivery constructs, which were the critical success factors of outsourcing relationships, today merely serve as good starting points. Where “transition” used to end with stabilisation of operations, today it is just expected to provide a robust base in a continuous journey of innovation and transformation. Although ensuring stable operations is still critical, that alone does not constitute a truly successful engagement.

The requirements of innovation are diverse for different organisations and situations. The only underlying constant is the need to improve the delivery process, technology, or structure to remain current with the business situation and demands. Innovation could be as small as removing redundant process steps to shorten turnaround times, and as significant as deployment of a new technology platform and skills to deliver added services and functionalities to the end user groups, launch novel products and services or reach unique customer bases. As opposed to planned hardware / technology refresh cycles, the requirements for innovation are not known in advance, can almost never be budgeted, and anticipated in detail; nor can the outcomes be pre-determined and tracked. This causes significant challenges in an organisation’s quest to be nimble, and evolve while saddled with constraints of traditional outsourcing contracts. Avasant’s observation is that over 80% of outsourcing contracts have innovation as one of its key requirements, but not more than 10% of them achieve the objective over the life of the agreement.

Let’s examine some of these challenges in greater detail.

Requirement Definition
Many times organisations just don’t have a clear vision of the outcomes being sought vis-à-vis innovation. It is a forward-looking desire to have a delivery setup that will lead the way in terms of bringing in best practices from the market, evolve the delivery model and outputs to keep pace with market, competition and internal business requirements. As such, while directional statements are typically included to define the “spirit” of outsourcing engagements, for want of any specific requirements, there is no way for a service provider to design a solution and budget for such efforts. Also, traditional contracts have requirements crafted with the view to “providing services,” while the modern SMAC-fuelled environment requires “service enablers”.

Conflict of Interest
Innovation is often one of the many mandates of the delivery manager, and not the most important one at that. There is an inherent conflict in objectives here. Any outsourcing contract has concrete metrics pointing to a myriad of parameters such as defect-free, on budget, on schedule delivery being tracked, along with availability and turnaround times. All of them are easier to control in an environment with minimal change. Innovation on the other hand inherently requires disruption to the current methods, and conflicts with the primary objectives of the delivery organisation. As a result, very few innovative ideas come to the table, if at all, and most of them are not followed through to their conclusion for lack of will and drive. Additionally, a number of potential innovation ideas have outcomes that lower resource requirements, or fixed portions of cost. Such initiatives end up reducing the service provider’s revenue without any material upsides, which in turn limits the pursuit of innovation from the service providers. Instead of leading the way, they resist change.

Contract – Budget, Effort and Benefits
While clients want to contract for innovation, many times it is the contract itself that limits or blocks innovation. Rigid contracts lacking mechanisms and provisions for change, bind the client in situations where they either forego significant improvements or incur heavy costs for change. On the other hand, there are situations where poorly written contracts don’t specify enough structure and process to originate, evaluate, budget for and implement innovations. Grey areas around investments in resources, new technologies and processes force the client and the service providers to open a negotiation at every stage, making the journey very cumbersome. In addition, lack of clarity on ownership and stake in the upside limits the initiative.

Avasant has observed that in order to realise benefits of innovation in the true sense, it takes a revamp from the ground up regarding how we view and structure client-service provider relationships. While each may appear adversarial at times, we see a potential for synergies which can be harnessed to harness the client’s drive for market leadership with service providers’ superior capabilities and insights in their respective core areas. It is not enough to bolt on contract sections describing innovation requirements and expectations. A service provider with past examples of innovation is no guarantee of the same in every situation – the environment and incentives need to be conducive.

When clients look for continuous evolution and business outcomes, not just efficiencies and cost reduction, the very fabric of the contract needs to catalyse and encourage innovation; these include:

  • Innovation vision needs to be clearly articulated and agreed to by all parties
  • Innovation needs to be a core requirement, with clear agenda, effort budgets, monitoring and tracking mechanisms
  • Requirements need to be tuned towards service enablement and support evolution into a SMAC-fuelled business and IT environment
  • Categories and guiding principles need to be set up to characterise various types of innovation ideas that come up, with clear assignment of investments and ownership between the client and service provider at each stage from identification to ultimate value realisation
  • Mechanisms to quantify  and share the upsides need to be established – at times it is difficult to do when a relationship commences, and can be taken up on a case-by-case basis at a pre-determined checkpoint for every significant innovation
  • Asset ownership and refresh responsibilities need to be tailored to the innovation agenda
  • Clear ownership of intellectual property arising out of innovations needs to be articulated

Besides contractual enablers, delivery of innovation is a process that needs to be set up to establish and implement procedures which facilitate the delivery of additional value through innovation. Often the innovation process resides exclusively at either the client or the service provider side. In many cases the client expects the provider to unilaterally deliver innovations and continue to deploy the latest technologies. When client business drivers require innovations to maintain a competitive advantage, then the nature of the relationship between the client and provider will need to reflect this and a formal innovation process should be established and facilitated.

Within governance, an appropriate committee should be set up providing the strategic direction, supervision and control of all innovation related activities, along with clear delineation of delivery and “innovation” responsibilities. A joint innovative or research center can be established with their own distinct mandate and scorecard. The primary components of an innovation delivery process are:

  1. Capture innovation ideas
  2. Explore potential business benefits and investment case
  3. Deliver a process which qualifies and supports selecting innovation candidates to pursue
  4. Develop initiatives via formal sponsored innovation projectse. Trial initiatives and prove business case enhancement of an initiative
  5. Request formal transformation approval from the appropriate governance committee

After years of hearing about innovation and the all too familiar slide-ware from service providers, we are finally beginning to see some practical and measurable innovation-linked deals. Whether it is the use of technology to reduce headcount and improve processes or co-creation of new products/services to go to market, innovation has started to seem real. Providers are proactively investing in new concepts, tools and technologies to use as differentiators. Customers have also become more demanding, are looking for business outcomes, new systems of engagement and globally integrated enterprises, not just efficiencies and cost reduction. Customers are therefore making outsourcing decisions not just on price and capabilities, but on the ability of the provider to support their transformation into digital enterprises. This positive energy and initiative needs to be channeled through the right relationship constructs and innovation delivery processes to deliver the maximum impact and true business outcomes.

This article was co-written by Nishant Verma, Sr. Manager, Avasant.

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