How to get more innovation from your IT outsourcer

While cost containment and performance improvements have long been primary drivers for IT services decisions, the desire for disruptive solutions is eclipsing those traditional rationales. IT leaders are seeking innovation — not only internally but from outsourcing partners — as they look to help the business become more agile and adaptive, create new products and services, and enter new markets.

“When I started, outsourcing was about cost cutting, getting some modest service level improvements, using expense instead of capital for variability, or accessing skills,” says Doug Plotkin, managing director with Deloitte Consulting. “We didn’t talk about innovation, and we didn’t talk that much about speed. Now everything is about speed and trying to get innovation.”

However, as the old saw goes, doing what you’ve always done will get you what you’ve always gotten. CIOs who want innovative solutions from their providers must shift how they select, contract with, and manage those partners. Here are actions IT leaders can take to drive more innovation from IT service providers.

Pick the right partner

Not every IT service provider wants to innovate. “Make sure you have the right outsourcing partner that has the resources, core competencies, and interest for and in innovation,” says Jeff Ganiban, a partner in the Washington, D.C. office of law firm Drinker Biddle. CIOs should confirm that the vendor has resources specifically dedicated to identifying and developing disruptive solutions and services. 

Challenge providers to perform

The most reliable way to drive innovation is to “hardwire it into the contract,” says Marc Tanowitz, managing director with business transformation and outsourcing advisory firm Pace Harmon. Requiring providers to commit to productivity improvements and pricing reductions, driven by market-specific benchmarking, can compel them to come up with new solutions.

“This properly incentivizes the provider, because if they exceed the targets, then they earn the margin benefits associated with them,” Tanowitz says. “As long as customer satisfaction remains high, then this scenario offers a win-win for both the client and provider.”

Make sure, however, to “avoid unrealistic expectations regarding what can be achieved,” says Ganiban.

Let go of the reins

A surefire way to stifle innovation is to tell the outsourcer how to do its job. “The more a client describes what they want to accomplish — rather than how to do it — the more the provider is given the flexibility to think creatively about how to get it done,” says Tanowitz. “This means communicating goals for the end-game rather than rigidly producing a plan for execution.”

Be the change

One of the biggest mistakes an IT organization seeking innovation from a provider can make is “not holding their own staff to the same innovation standards,” says Jimit Arora, partner with Everest Group. “A company that has a true culture of innovation will seek it in its own staff first. Our experience strongly suggests that companies that take a collaborative approach to innovation (i.e., innovation is an equal responsibility of clients and service providers) see breakthrough value.”

Move beyond vendor management

IT leaders should create incentives for their team members to work with the IT service provider on innovative solutions, advises Ganiban. In addition, “the most valued provider relationships have a healthy dose of governance that facilitates interaction with the business they support,” says Eisner, “not solely with the vendor management office.”

Embrace multi-sourcing

Having multiple providers competing with one another can be a huge driver of innovation. “Nothing keeps providers incentivized like competition. Wherever possible, consider having two or more suppliers who stand ready to bid for and provide services,” says Rebecca S. Eisner, partner-in-charge in the Chicago office of law firm Mayer Brown. “However, spreading your business over too many suppliers may result in little interest from the suppliers.”

Having a preferred stable of suppliers, who are prequalified and with whom the IT organization has master agreements in place, that are ready to accept statements of work or order forms for business, is an efficient approach, according to Eisner.

Put your money where your mouth is

“The traditional approach was that the vendor funds innovation. We see this as fundamentally flawed,” says Arora, pointing to a recent Everest Group survey which found that 75 percent of CIOs now say their organizations should either finance or co-finance innovation from providers.

“Suppliers will not invest in and offer innovation if they are not rewarded in some manner for their efforts,” says Eisner. “Nothing is free.”

Get procurement on board

“Too many procurement organizations are focused solely on getting the lower possible rate from the provider,” says Plotkin. “But the rate itself is less important than the speed that can be generated.”

Beating the competition has a monetary value, and procurement organizations must be willing to take a more strategic view of IT outsourcing for innovation to flourish. “Fixed fees and steep price cutting thwart innovation, as providers logically seek to maximize profit by cutting internal cost of provision of service,” says Eisner. “Clients cannot expect to see innovation or to develop a trusted team relationship when the client treats a provider as a commoditized vendor versus a valued service partner.”

Give it time

Many IT contracts have gotten shorter, driven by the disruptive cloud computing industry. That can be a good thing, as it enables CIOs to avoid getting locked into longer term deals in a rapidly shifting technology and business environment. However, contracts that are too short can be problematic as well. “Innovation takes time to develop, so extremely short-term contracts — one or two years — typically do not allow enough time for an innovation relationship to take hold,” says Eisner.

Understand both parties’ rights and obligations

“Partnering for innovation can be tricky, including around ownership and IP rights, data use rights, cost sharing, non-compete restrictions, exclusivity and other similar protections that are typical when two parties combine to innovate,” says Eisner. “However, the rewards can be substantial, including obtaining a first-mover advantage, improving performance and innovating around newer digital transformation services, such as artificial intelligence and data analytics. These newer partnering agreements are structured to enable mutual benefit and mutual interest in innovation, creating an environment in which innovation is much more likely to succeed.”