What Does It Take to Get IT Outsourcers to Innovate?

IT leaders say they want outsourcing providers to go beyond traditional services. And the providers want to market themselves as partners in innovation. So why isn't it happening?

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Fluor signed a new contract with IBM last year. “The lesson we learned was that we needed to put a more generic umbrella agreement in place for future innovation,” says Taylor. “There are specific towers of service in the scope of work that are commoditized. But there is also a separate agreement that will enable IBM to provide innovation in all kinds of areas, like virtualization.” The contract includes prenegotiated terms for future innovation around issues of indemnity, risk and intellectual property protection. “If we want to have IBM explore virtual desktops, there’s already a fabric in place. We don’t have to call the lawyers and go through a full negotiation each time,” explains Taylor. “And it’s separate from the rest of the outsourcing, so IBM doesn’t need to get reimbursed through the fees we pay for the commodity activity.” Now Fluor can increase and decrease services from IBM without penalty. “It’s important not to lock yourself in because you don’t get the benefit of innovations that present themselves every day,” Taylor says.

Taylor hopes the fourth time’s the charm. “We understand more about how IBM manages its business,” says Taylor. “And they know more about us.” That’s a good start. “It’s in a customer’s best interest to understand all of the vendor’s warts and what it takes for a vendor to succeed,” says Morgan, Lewis’s Hansen, “instead of thinking, ‘Can we put one over on them?’”

Alsbridge’s Trowbridge estimates that half his clients are interested enough in increasing the innovation provided by their outsourcers to take a chance on shaking up traditional outsourcing processes. “The other half want to stick with that arm’s-length RFP process, the yellow-pad sessions, the focus on price,” he says.

Smith of Entergy Nuclear hasn’t given up. “I want to have a partner that can say, Here’s the utility piece, and we can structure that deal, but then let’s figure out how we can incent this other, innovative behavior as well,” he says. “I get really excited about the idea of a partner that could come to the table with that stuff.”

Entergy, however, has given up for now. The company renewed its contract with SAIC in 2006 but “we lowered our expectations,” says Smith. SAIC, he says, had done a good job managing IT as a utility and cutting costs. When Hurricane Katrina struck, it provided business continuity and disaster recovery services beyond reproach. “There wasn’t a whole lot of discussion about how responding to the storm would affect costs or service levels,” Smith says. “They stepped up and did a dang good job.” That’s the kind of priceless dedication one wants from an IT provider.

But it’s not innovation.

That’s enough for some of Smith’s colleagues. And some outsourcing experts contend that’s the most one can expect. The holy grail, says MIT’s Ross, is that the vendor delivers commodity services so well that the internal IT organization no longer has to worry about delivering those services or managing them and so can focus on innovation itself.

Smith has the option to return to his role as CIO of Entergy Nuclear in a few years. That will be around the time Entergy’s contract with SAIC is set to expire, and it has him thinking. “There has to be an inventive way to incent that innovative behavior as part of an outsourcing contract, or barring that, informal ways to encourage it,” says Smith. “I’d like to push for that.”

Senior Editor Stephanie Overby can be reached at soverby@cio.com.

Copyright © 2007 IDG Communications, Inc.

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