Is There a Lack of Innovation From Outsourcers?

Two out of five offshore outsourcing customers say lack of innovation from providers is their biggest challenge. But customers need to invest much more to make that happen.

One of the biggest drivers for sending IT work overseas remains cost savings, but the ability to contribute to revenue generation has a far higher value to offshore outsourcing customers today. Yet for all their talk about contributing to customer innovation, many offshore providers still fail to deliver on that increasingly important front, says Jan Erik Aase, a sourcing and vendor management analyst with Forrester Research.

According to a 2011 Forrester survey, 41 percent of outsourcing clients cited lack of innovation as the biggest challenge with their existing IT services relationships. Aase decided to dig deeper into the issue, interviewing 11 offshore outsourcing customers in depth about their innovation expectations and experience. Aase says he wanted to "determine if there were unique expectations clients have of their offshore vendors. [But] in the end, I believe my findings apply to any vendor relationship."

The first problem is that outsourcing vendors and customers lack a common definition of IT or IT-enabled innovation.

Clients interviewed by Aase identified three types of activities offshore vendors may try to pass off as innovation that failed to meet their expectations: innovation-for-pay (vendors creates a solution for one client and then licenses it back as a product to that client and the larger market), innovation for innovation's sake (emerging tech from vendor R&D labs that don't solve a customer problem), and administrative innovation (IT services buyers don't view process improvements, project management tools, relationship dashboards, and the like as real innovation).

For customers, the bar for innovation is much higher, says Aase. They want innovation relevant to their specific needs--something that helps them solve a clear business problem or introduce a new way of doing business. They want commercially viable solutions--ideas that creates competitive differentiation, improve market share, or have "an ROI with a multiplier of at least two," Aase says. Finally, they demand that innovation be something altogether new; a generic cloud offering or new release of existing technology won't suffice.

Could offshore outsourcing clients be expecting too much from their providers? "No, their expectations of getting advanced innovations from their offshore vendors is not unrealistic,"says Aase. "These vendors know their clients' companies inside and out in many relationships."

Rather, customers may be expecting too little from themselves. For innovation to happen in an offshore outsourcing relationship today, clients have to step up to the plate, investing more time and money than in the past. "It is unrealistic to assume that innovation can come without the client involvement and eventual investment,"Aase says. "The innovation that is now considered table stakes was happening in the back rooms and behind the scenes, so that created an expectation with clients. The issue is that the next generation of innovation, that is now needed and expected, can't happen in those types of closed ecosystems."

Customers seeking innovation from offshore providers have to make greater investments on several fronts, according to Aase's research. First, they need to foster vendor relationship not just with IT, but with the rest of the business so they understand the bigger business strategy and challenges. Secondly, they need to evolve from outsourcing managers focused on cost and contractual terms to strategic partners with their offshore vendors. Some offshore providers have created new engagement models to foster that kind of relationships that customers can participate in (Aase points to TCS's Co-Innovation Network (COIN), Wipro's Applied Innovation, ACS's Dream Sessions, Luxoft's LEAP, and HCL Technologies' Mad Jam), but they do require a different level of investment, from a time and money perspective, than a traditional labor arbitrage deal. Thirdly, smart clients will take advantage of the network of innovation that their offshore deals give them access to--from academic institutions to emerging tech vendors to venture capital funds. "Accessing this information helps the client become engaged in an entire ecosystem of innovation that takes innovation well beyond rate card contract language and more in the direction of partnerships, joint ventures, and joint intellectual property," Aase says.

Of course, there's the question of whether customers ought to depend on outsourcers--offshore or otherwise--to generate innovation. And not every client does. Some customers are solely seeking cost savings or operational improvements from providers. "[But] in many cases, clients don't have the right mix of people in-house to generate innovative ideas,"says Aase. "They are also very limited as they have very narrow vision and preconceived notions that often constrain their creativity."Additionally, most clients don't have anywhere near the amount of money to invest in research and development that the big offshore providers do, Aase says.

For those IT services customers looking for innovation from offshore providers, Aase advises that clients seek out vendors with:

  • Access to innovation resources, such as outside relationships with key industry providers and deep talent pools.
  • Solid client experience, as evidenced in contract renewals, increased investment, and customer satisfaction scores.
  • A culture of innovation, that includes reward and recognition programs tied to idea generation and corporate level goals tied to innovation.
  • IP development programs, supporting the exploration and execution of new ideas, such a customer experience centers, dedicated concept labs, and idea management processes.
  • Support for strategic customer partnerships, which might take the form of thought leadership events or innovation summits, fairs, or days.
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