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Outsource magazine: thought-leadership and outsourcing strategy | May 4, 2015

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Innovation and outsourcing: a contingency approach

Innovation and outsourcing: a contingency approach
Ernst Grosskopf

Innovation matters hugely to the development of our economies and companies. It is also a topic of considerable interest in outsourcing, with lots of different views being expressed, including in the pages of this publication.

Gartner recently said that customer organisations complain about a lack of innovation; also that while more contracts require innovation these did not properly address it as a contracted deliverable. Many of us are probably not very surprised by this finding but of course Gartner is in a position to put some measurement to the question.

So innovation is something that we all want more of, but can’t define well enough to wrap formal deliverable management around. Part of the problem might be that it is probably quite unlikely that a group of people will share a definition of ‘innovation’, so a good place to start might be to find a practical definition. The HfS article Innovation: what is it, and why am I not getting any? provides a good disambiguation of this nebulous ‘Innovation’ concept into three subsidiary concepts, which are used to structure the discussion below.

Continuous Improvement

This refers to a process of examining existing processes, especially in the light of failures, and making frequent but individually minor modifications. The practice became well known in the West because of its use in Japanese manufacturing and the approach has been applied successfully in services too. As HfS says, risk is minimal, failure is cheap and returns can be significant in the long run both in terms of effectiveness and satisfaction. It tends to find a local maximum rather than the optimal solution – by its nature this way of working is unsuitable when dramatic changes are needed but might be good for then helping them bed down and getting the most benefit.

In the context of an outsource relationship, the service provider is in the best position to measure failures and to identify improvements. Where improvements need some action on the customer side a joint approach will be needed to change processes, make some investment, etc. The customer should remember that one of the effects of continuous improvement will be to reduce the service providers’ revenue or to improve service at the same cost, so this is where to use that unused ‘gainshare’ clause in the contract, or to accomplish the same thing through a change request.

To perform meaningful continuous improvement is generally something a service provider either knows how to do already, or doesn’t. It’s not easy to see how it can be done for one account or added as an afterthought as its effect pervades the management system, so if this matters to the customer it needs to be checked before a contract is awarded.

Best Practice Implementation

This is the best practice that is incorporated in the service provider’s standard way of working; it is the intellectual property that keeps them in business and, together with some physical assets, allows them to be more attractive than insourcing (for various values of ‘attractive”).

By entering an outsource agreement, the customer therefore gets the benefit of the service provider’s way of doing; this is probably better than the customer’s previous approach (otherwise why deal?) so ought to be a real innovation to the customer and therefore bring benefits. Moreover the customer might benefit from the service provider’s process improvements although you would expect the majority of this benefit to accrue to the provider.

True Innovation

That leaves the third meaning of the word ‘innovation”, ie. something that hasn’t been tried before in this organisational context – or perhaps in the world. The risk as well as the benefit might be very large and difficult to predict – you can feel a two-by-matrix coming up, but not now…

If the customer just makes an undifferentiated request for “innovation’ he isn’t likely to be more than a target for the service providers’ cross-selling and those of its partners, and some vague technology futures sessions. These might be fun, and good ideas can of course come from these as it can from reading the newspaper or general conversation at an industry event.

Although outsourcing is normally delivered in a very structured and programmed way with little scope for variation, there might be real innovation on a customer-specific basis depending on the service provider’s management structure and style, and the initiative of its staff.

The best practice that I’ve seen involves the customer taking the responsibility to define the area in which he is looking for innovation, and then challenging the vendor to come up with ideas. In this area, as in others, outsourcing will only deliver to the extent that the customer manages the service provider, albeit at a ‘what’ not ‘how’ level.

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