“When you talk to suppliers before the contract is signed, they talk innovation,” says Mark Kobayashi-Hillary, offshoring director of the National Outsourcing Association (NOA), a U.K.-based outsourcing trade organization. “Once it’s signed, they need to service the SLA. So you’ll find outsourcers that hit all the key indicators and still the client is not happy.” CIOs “look at the dashboard and see that everything’s green,” says Ben Trowbridge, CEO of outsourcing adviser Alsbridge, “but they still feel red.”

According to an Alsbridge survey of 300 buyers of IT services, the biggest gap between outsourcing benefits sought and achieved exists around innovation. The same research found that suppliers themselves say that their inability to innovate to client requirements is their biggest challenge.

As was the case at Entergy, both sides, customer and provider, bear responsibility for the failure to deliver on the promise of innovation. Though EDS or IBM may sell the idea of transformation, and offshore providers like Tata Consultancy Services (TCS) or Satyam may say they want to deliver higher value services, the former can’t afford to do so due to decreasing profit margins and the latter built their businesses on commoditizing IT services, not innovating. And while IT leaders may say they want something more than “your mess for less,” for the most part they’re still focused on price, according to outsourcing experts. Most IT shops, says Trowbridge, are unable either to manage the relationship with their outsourcers in a way that yields innovation or are ill-prepared to implement the changes they say they want. Even when buyer and seller think they’re on the same page, a clear definition of what constitutes innovation is rarely built into the deal.

That leaves CIOs with two options if they’re looking for innovation: Make radical changes to the way they establish and manage those relationships, or give up on the idea entirely.

The Innovation Debate
There are two schools of thought about whether IT organizations should look to outsourcers for innovation. “If you’re a big retailer and you’ve outsourced IT to IBM or TCS, those are the guys who are going to understand the way technology is changing, whether it’s SOA or green data centers or using Web 2.0 to reach the customer,” says Kobayashi-Hillary. “If you’re a bank or a utility, you’re not going to be an expert on social networks or how to utilize Second Life in the business. The service providers are.” Outsourcers, after all, have strong partnerships with hardware and software vendors. “They’re looking at the technology space, and their expertise and knowledge is far greater than what exists in our IT organization,” says Robert Taylor, VP of IS for the $14 billion design, engineering and construction company Fluor. “The folks there know where IT is heading and we’re looking to them to bring that expertise to us.”