This article originally appeared in Outsource Magazine Issue #23 Spring 2011
Increasingly, both buy- and sell-side organisations are trumpeting the need for innovation in outsourcing. But is “innovation” really anything more than the buzzword of the day? And if so, how can providers and users of outsourced services ensure that they practice what they preach? In the latest Provider Perspective we ask some questions at the heart of this issue – so, providers, over to you…
outsource: How important is innovation in an outsourcing relationship compared with other drivers like cost?
Jim Stikeleather, CIO, Dell: The first goals of any outsource arrangement usually centre around either cost-reduction or performance improvement (availability, response time, reliability, etc.). As a company outsources more and more, it reaches a tipping point where they have lost the knowledge, skills and experience to effectively either innovate with their technology, or innovate their business with technology on their own. This means they are increasingly reliant upon their outsource provider for supplying both technology innovation and innovation in the application of technology to their business. This also means that the outsource provider has an increasing responsibility to understand their customers business and be alert for potential opportunities for innovation.
Khem Aithani, Senior VP & Head Strategic Relationship, ITC Infotech: Innovation is a key differentiator in the nature of outsourcing relationship between the customer (buyer) and the supplier (provider). There are three types of outsourcing relationships viz. tactical, operative and strategic. All suppliers wish to become strategic to customer. Innovation is at the core of such an effort by a supplier to become strategic.
Sanjiv Gossain, SVP, Cognizant: According to research we recently carried out with Warwick Business School among 250 CIOs and CFOs of leading European companies across five regions, the majority believe the innovation achieved through outsourcing actually contributes to their organisation’s financial performance. Cost may still be a key reason for choosing to outsource business activity, especially as companies navigate the reset economy by investing wisely in processes that are cost-effective and beneficial in the long-term. However, the innovation delivered that by outsourcing partners can also have a major impact on overall financial performance. Well beyond saving money by way of “labour arbitrage” or improving processes through business process optimisation, the value equation for outsourcing has moved to a new phase of “intellectual arbitrage”, where the goal has shifted from simply improving existing outcomes or making them cheaper, to using global talent to create new outcomes, which were not possible previously.
outsource: With whom – provider, buyer or both – should the responsibility for driving innovation lie? And is this the case in practice?
John Callachan, BPO Director, DDC Outsourcing Solutions: It is clear that the responsibility is shared. Generally the drivers for the process that is being outsourced is driven and clearly understood by the buyer and therefore they are really important to the discussion. I believe a transparent approach on innovation is the best way. However from experience I know that this can be a political issue. I addition I have seen providers and buyers use term innovation but both parties do not put the structures in place to really explore this and therefore it’s lost before the relationship begins.
Dennis Curry, Director of Enterprise Innovation, HP Enterprise Services: Maturity is a core factor in driving innovation. Large companies have the resources within the company to be able to innovate and be creative and bring to bear required outcomes. However, it can also be dependent on the contract. A joined-up view and collaborative approach with the outsourcing partner is the key to success and we are seeing this co-innovation becoming more popular. It is successful when an outsourcer is willing to work with a particular customer with joint conviction and understanding of the required business outcomes enabling the customer to focus on their own business. This compares to wholly independent contracts where the value of the relationship is in the delivery of the product.
outsource: How can innovation be priced into an outsourcing contract? Do you have any examples of this from your own business?
Emma Teodoro, CAI-STA: In the past, pricing for multi-year contracts would normally be projected with escalation. With cost-cutting being an important driver in outsourcing, multi-year contracts include price reduction associated with improved efficiency. Benefits (such as reduced rates and improved service level) that may be derived from being innovative may be reflected in the contract.
Khem Aithani, Senior VP & Head Strategic Relationship, ITC Infotech: Innovation by its nature is something novel and creative. Organisations go to great lengths to encourage innovation. Japanese companies like Toyota seek micro-innovations every day. Innovation is about invention, about passion, about intimate knowledge of a process. Therefore, it’s very hard to introduce innovation into a contract for outsourcing. I have seen indirect attributes of innovation where the buyer rewards the provider for completing a project ahead of time, which can only happen with some sort of incremental process improvement and can be a micro-innovation. I have also seen contracts where buyer and provider allocate some funds in the contract for innovation projects. I am personally not aware of the success of such approaches. However, I do see it as a positive move to encourage innovation. It is understood that business organisations on average spend 4% of budgets towards innovation efforts (including R&D). Therefore, it will not be out of line to allocate a percentage of contract value towards innovation projects which will benefit both the buyer and the provider.
outsource: An Outsource correspondent recently described innovation as “more talked about than carried out”. Do you agree with this?
Emma Teodoro, CAI-STA: Innovation is only a word. What can be experienced or carried out are automated processes, management insight or foresight, reduced cost, reduced risk, faster turn around time, etc. which maybe the effect of innovation.
John Callachan, BPO Director, DDC Outsourcing Solutions: I think innovation often happens without anyone really thinking about it. In a sense, simply outsourcing the process is in itself innovative. In addition in most cases innovation will be ongoing without notice or recording it as other people will be looking at the processes with new eyes. Let’s face it private companies are always looking to keep the margins in the right place while costs of processing/people/transport etc increases, it’s become a natural state and therefore you don’t recognise it.
Khem Aithani, Senior VP & Head Strategic Relationship, ITC Infotech: Innovation means different things to different people. However, by its nature innovation is uncommon. I agree with the Outsource correspondent. However, we should continue to encourage more talk about innovation. The more we talk about it, we hope the more innovation will be attempted.
outsource: Do you feel there is now more room for innovation in outsourcing following the sharp focus on cost-cutting in the wake of the financial crisis?
John Callachan, BPO Director, DDC Outsourcing Solutions: Not really. I think there was a pause of a lot of spending or movement over the last year while business and the public sector took stock of what was happening, and options of what can be done to reduce costs. I believe business and the public sector now are looking at what they really need to do/deliver and what they are really good at and not good at. This is innovation, looking for partners/suppliers to use their strengths to complement and improve weak points within the buyers business. If you outsource you look for someone that can demonstrate that they have a track record in that process and have already gone through the pain of improving the process – and therefore can instantly improve costs (and hopefully quality) of the delivery.
Dennis Curry, Director of Enterprise Innovation, HP Enterprise Services: The financial crisis didn’t stop innovation, it drove a new focus for innovation: cost. We were being asked by customers how to best utilise and leverage their existing assets in emerging markets or an old data centre. Cost along with quality and security maintained their positions as the key drivers. However as we emerge from the downturn there is a new race and. we are increasingly seeing a shift as companies look to drive flexibility and advantage.
outsource: Are any sectors or geographies in particular proving especially dynamic in driving innovation with their provider partners?
Jim Stikeleather, CIO, Dell: In the West, the focus on both green business models, and the legal and regulatory focus on data (privacy, security, jurisdictional location, etc.) are and will continue to drive innovative business models and offerings if not technology itself. Less developed countries have a clean slate (less embedded sunk cost infrastructure) that is driving new ways of delivering IT services – outsourced in the traditional ITO sense or through newly forming cloud models. In industries, clearly healthcare with both market and regulatory focus is driving new business models, services and technologies. Consumer technology is now driving business technology, further accelerating innovation within the outsourcing models. Likewise, security issues in critical infrastructure industries (water, power, communications, etc.) are likely to be a forcing function for innovation. And lastly, retail – electronic or brick and mortar is developing new core and customer value creating technology needs that will have to be met by innovation in outsourcing approaches.
Dennis Curry, Director of Enterprise Innovation, HP Enterprise Services: The focus has changed those industries that were affected most by the economic downturn are now demanding more. Retail and manufacturing were two industries, for example, which were hit hardest and in HP’s experience they are the most proactive in asking for more such as seeking co-funded innovation programmes to best position them in responding to the new landscape. Geographically demand will continue to follow where the money is. There is momentum in emerging markets such as Africa and East Europe and Asian markets, which had been previously dormant with respect to outsourcing, are starting to require joint innovation programmes. Western Europe has remained stable throughout.
Sanjiv Gossain, SVP, Cognizant: In terms of geographies, the US is the most dynamic in driving innovation. Given that the US is now a veteran in global sourcing, the emphasis on driving innovation with the provider partners is very high among organisations there. In Europe, the emphasis on innovation is high amongst organisations that have several years of global sourcing experience. However, since the vast majority of European organisations don’t have extensive global sourcing experience, the emphasis on cost-cutting is more. Take the BFSI sector, for example, in the USA, where the emphasis on innovation is very high as it started global sourcing over a decade ago. In Europe, the telecom sector has extensive experience in global sourcing and therefore its emphasis on innovation is very high.