John Smith had high hopes when Science Applications\n International Corp. (SAIC) took over Entergy\u2019s IT. Before\n the New Orleans\u2013based utility signed the five-year, $400\n million contract in 2000, SAIC\u2019s sales team described a\n rosy future in which it would lower Entergy\u2019s IT costs\n and improve service levels on everything from application\n development and maintenance to data center management to\n desktop and infrastructure support. And more than that, SAIC\n said it could become Entergy\u2019s partner in IT\n innovation.\n MORE ON CIO.com\n \n Exclusive Outsourcing and Innovation Survey\n \n IT Leaders Question Outsourcing Innovation\n \n Outsourcing' s Innovation Crisis\n \u201cA partner in innovation\u201d\u2014those were magic\n words for Smith, then IT director for Entergy\u2019s Southern\n Nuclear fleet.\u201cWe were looking for a company that would do more than\n just manage our IT service delivery,\u201d says Smith.\n \u201cOne that would not just provide best practices and run\n IT like a railroad but could also provide some vision about\n where IT was going.\u201d Smith, currently in a temporary role\n assisting in the reorganization of Entergy Nuclear, was\n particularly interested in SAIC\u2019s nuclear domain\n experience and its ability to apply that knowledge to the\n introduction of new business-specific systems.But as the relationship with SAIC matured, Smith\u2019s\n disappointment grew. \u201cInnovation was an expectation that\n wasn\u2019t delivered on,\u201d he says. SAIC met its\n service-level agreements (SLAs) and kept Entergy\u2019s IT\n costs under control, but there were no new ideas coming from\n the outsourcer, no guidance about emerging technologies Entergy\n should pursue. In short, no partnership in innovation.\n\n The Innovation Promise vs. the Innovation\n Reality\n When it comes to why SAIC failed to meet Smith\u2019s\n expectations, there\u2019s plenty of blame to go around. Smith\n suspects SAIC overstated its ability to move beyond the\n traditional provider\u2019s role of managing IT as a utility.\n He also admits that Entergy\u2019s leadership was unable to\n figure out how to manage the relationship with SAIC in a way\n that would encourage that kind of strategic involvement.\n Perhaps most important, despite what both sides said,\n innovation was never officially part of the deal.\u201cWhen we were all sitting in the room, there was all\n kinds of talk about what might be possible,\u201d says Smith.\n \u201cAnd what was possible got sold a lot harder than what\n actually went into the contract.\u201d (SAIC declined comment\n on its relationship with Entergy.)Smith is not alone in his frustration. Forrester Research\n reports that 42 percent of buyers are dissatisfied with the\n innovation provided by their primary outsourcer. According to\n a recent CIO survey, 44 percent\n of respondents were unhappy with the innovation provided by\n offshore outsourcers. (Twenty-one percent were dissatisfied\n with the level of innovation provided by domestic providers.)\n Of course, these numbers don\u2019t take into account IT\n leaders who are entering their deals with limited expectations\n or who are looking for more straightforward relationships with\n providers.\u201cWhen you talk to suppliers before the contract is\n signed, they talk innovation,\u201d says Mark\n Kobayashi-Hillary, offshoring director of the National\n Outsourcing Association (NOA), a U.K.-based outsourcing trade\n organization. \u201cOnce it\u2019s signed, they need to\n service the SLA. So you\u2019ll find outsourcers that hit all\n the key indicators and still the client is not happy.\u201d\n CIOs \u201clook at the dashboard and see that\n everything\u2019s green,\u201d says Ben Trowbridge, CEO of\n outsourcing adviser Alsbridge, \u201cbut they still feel\n red.\u201dAccording to an Alsbridge survey of 300 buyers of IT\n services, the biggest gap between outsourcing benefits sought\n and achieved exists around innovation. The same research found\n that suppliers themselves say that their inability to innovate\n to client requirements is their biggest challenge.As was the case at Entergy, both sides, customer and\n provider, bear responsibility for the failure to deliver on the\n promise of innovation. Though EDS or IBM may sell the idea of\n transformation, and offshore providers like Tata Consultancy\n Services (TCS) or Satyam may say they want to deliver higher\n value services, the former can\u2019t afford to do so due to\n decreasing profit margins and the latter built their businesses\n on commoditizing IT services, not innovating. And while IT\n leaders may say they want something more than \u201cyour mess\n for less,\u201d for the most part they\u2019re still focused\n on price, according to outsourcing experts. Most IT shops, says\n Trowbridge, are unable either to manage the relationship with\n their outsourcers in a way that yields innovation or are\n ill-prepared to implement the changes they say they want. Even\n when buyer and seller think they\u2019re on the same page, a\n clear definition of what constitutes innovation is rarely built\n into the deal.That leaves CIOs with two options if they\u2019re looking\n for innovation: Make radical changes to the way they establish\n and manage those relationships, or give up on the idea\n entirely.\n\n The Innovation Debate\n There are two schools of thought about whether IT organizations\n should look to outsourcers for innovation. \u201cIf\n you\u2019re a big retailer and you\u2019ve outsourced IT to\n IBM or TCS, those are the guys who are going to understand the\n way technology is changing, whether it\u2019s SOA or green\n data centers or using Web 2.0 to reach the customer,\u201d\n says Kobayashi-Hillary. \u201cIf you\u2019re a bank or a\n utility, you\u2019re not going to be an expert on social\n networks or how to utilize Second Life in the business. The\n service providers are.\u201d Outsourcers, after all, have\n strong partnerships with hardware and software vendors.\n \u201cThey\u2019re looking at the technology space, and their\n expertise and knowledge is far greater than what exists in our\n IT organization,\u201d says Robert Taylor, VP of IS for the\n $14 billion design, engineering and construction company Fluor.\n \u201cThe folks there know where IT is heading and we\u2019re\n looking to them to bring that expertise to us.\u201dOthers disagree. \u201cI\u2019ve had a few IT executives\n tell me that they were disappointed that their outsourcing\n vendor hadn\u2019t done much in the way of innovation.\n It\u2019s an odd expectation, and a tough one to put into the\n contract,\u201d says Jeanne Ross, principal research scientist\n at MIT\u2019s Center for Information Systems Research.\n \u201cVendors will innovate to the extent it saves them money\n or helps them introduce new products or services, but that\n won\u2019t feel like innovation to the customer.\u201d For an\n outsourcing provider to offer competitive differentiation for a\n customer would be contrary to what they\u2019re set up to do,\n says Barry Rosenberg, a partner with outsourcing adviser Pace\n Harmon. IT service providers make money when they can\n standardize processes across their customer base. You\u2019re\n not buying an innovator, says Rosenberg, \u201cyou\u2019re\n buying a factory.\u201dOutsourcing sales teams, however, haven\u2019t gotten that\n memo. \u201cThe providers will tell you they\u2019re going to\n transform your business,\u201d says Gartner Research Director\n Dane S. Anderson.\u201cA lot of that is hype.\u201dOverinflated claims from salespeople? Say it ain\u2019t so.\n But whether CIOs ought to expect innovative, transformational\n help from an outsourcer may be a moot point. Could they provide\n that kind of partnership even if they wanted to?Perhaps not.\n Tips to Get Your IT Services Providers to Innovate\n Outsourcing providers are more likely to introduce\n innovative ideas if they\u2019re hungry. That\u2019s\n why Ed Hansen, partner in law firm Morgan Lewis\u2019s\n global outsourcing practice, often advises his clients\n to take IT services that might be ripe for innovation\n out of the defined scope of services.For example, if you\u2019re on the verge of signing\n a $20 million outsourcing contract, $4 million of which\n is development work you\u2019d like your provider to\n approach in a new way, make it a $16 million contract.\n \u201cGive the outsourcer a position in your\n organization so that they can understand what\u2019s\n going on in your business and give them the opportunity\n to earn that $4 million by coming up with innovative\n project ideas,\u201d says Hansen. \u201cIt puts the\n economics back where it belongs.\u201dThe idea of actually encouraging your provider to\n continue to sell new ideas to you after you\u2019ve\n sealed the deal may be a turnoff to some IT leaders,\n but Gartner\u2019s Dave Anderson says he\u2019s seen\n positive results. A customer may hold regular brown-bag\n sessions, during which his vendor pitches new ideas.\n The client requires that the vendor bring a third party\n either to back up the sales pitch or weed out ideas\n that are purely self-serving.Some ideas have been approved and turned into\n additional work for the vendor. \u201cYou don\u2019t\n want to turn them into a bunch of used-car\n salesmen,\u201d says Hansen. \u201cBut if you take\n them out of that guaranteed revenue position and treat\n them as a trusted adviser, it encourages them to look\n for new opportunities.\u201dThey key words are \u201ctrusted adviser.\u201d To\n get innovation you have to \u201ctrust the vendor\n enough to let them under the tent, sharing and getting\n ideas,\u201d says David Rutchik, partner with\n outsourcing adviser Pace Harmon.Not only do you have to give the vendor a seat at\n the table, you need to make sure you\u2019ve got the\n right person in that seat. Hansen is currently\n renegotiating a nine-year outsourcing contract for a\n customer disappointed with the lack of value-added\n service provided by the vendor. The customer had\n stipulated that someone from the vendor sit in on\n CEO-level meetings, but that someone turned out to be\n the guy who \u201ckept the lights on,\u201d says\n Hansen. \u201cYou don\u2019t want the data center guy\n in on those meetings. You want the former analyst-types\n to be part of that.\u201dTraditional outsourcing pricing models can also\n discourage innovation. \u201c[CIOs] are starting to\n look at more innovative pricing models,\u201d says Ben\n Trowbridge, CEO of outsourcing adviser Alsbridge. One\n organization Trowbridge advised chose to go with the\n one vendor who offered a business metric\u2013based\n pricing model. The customer would pay the outsourcer\n $1.15 per claim that was paid. Period.\u201cThe provider had to think of all sorts of\n innovative technology they could use to make sure that\n they earned as many claims as possible,\u201d says\n Trowbridge. \u201cThe customer got the full benefit of\n working with a $20 billion outsourcing provider; the\n provider has a chance to increase its margins by\n sharing in the growth of the customer\u2019s\n business.\u201d\n\n \n \n \n\n The SLA Trap\n \u201cInnovation and operating margins go hand in\n hand,\u201d says Alsbridge\u2019s Trowbridge. And U.S.-based\n outsourcers are getting squeezed. If you edit out the\n short-lived reprieve of Y2K and the dotcom days, outsourcing\n margins in the U.S. have been declining steadily since the\n mid-1970s and have flatlined at 6 percent, with just 9 percent\n annual revenue growth, according to Alsbridge. \u201cWhen the\n crunch hits,\u201d says Gartner\u2019s Anderson,\n \u201coutsourcers do the bare minimum to succeed.\u201dThe financial pressure on domestic providers is the result\n of offshore competition, primarily Indian vendors who are\n riding high with double-digit profits. But don\u2019t count on\n them to fill the innovation gap. \u201cThey didn\u2019t get\n where they are by innovating,\u201d says Kobayashi-Hillary,\n author of Outsourcing to India: The Offshore Advantage.\n \u201cThey got there by repeating the same processes over and\n over again.\u201d Plus, they have their hands full managing\n their own growth.Thus, outsourcers around the globe are loath to do anything\n that might affect their ability to meet their service-level\n obligations and thereby reduce their margins. \u201cProviders\n are delivering to a contract, and it\u2019s difficult to build\n any kind of innovation into the language of the\n contract,\u201d says Kobayashi-Hillary. \u201cThere\u2019s a\n difference between what you sat down and talked about with the\n outsourcer and what\u2019s written in black and white.\n It\u2019s just not in the supplier\u2019s interest to\n proactively change anything.\u201dIndeed, most outsourcing SLAs and pricing models deter\n innovation. Take data center management. It\u2019s the\n outsourcer\u2019s responsibility to ensure 99.99 percent\n uptime or provide backup services. \u201cThe value add would\n be when the service provider looks at the environment and says,\n Now I understand how you support your business and I see that\n by leveraging this new technology or different hardware, we can\n improve the quality of the service or your costs,\u201d says\n Taylor of Fluor, which is on its fourth major outsourcing\n contract since the mid-1990s. \u201cBut you\u2019re paying\n the vendor X dollars per server so there\u2019s no motivation\n for them to reduce that number.\u201d\u201cThere\u2019s so much change management embedded in\n outsourcing processes to prevent them from missing an SLA,\n their ability to innovate to support our business is very\n limited,\u201d agrees Robert Fecteau, CIO of BAE Systems\n Information Technology, a line of business within the\n U.K.-based BAE Systems. Fecteau was hired in 2005 to oversee\n the backsourcing of U.S. IT services previously outsourced by\n its parent company in a $2.2 billion, six-year IT contract with\n CSC. (The rest of BAE Systems will continue to work with CSC as\n \u201ca trusted partner critical to our success,\u201d says\n Fecteau.) According to Fecteau, BAE\u2019s outsourcing had\n been driven by a desire to cut costs. (In addition to the\n design, manufacture and maintenance of military vehicles and\n equipment, BAE Systems provides IT services.) But there were\n trade-offs.\u201cIt\u2019s very difficult to write a contract with an\n outsourcer that says, \u2018Give me more innovative IT\n processes,\u2019\u201d says Fecteau, who will complete the\n backsourcing process during 2008. \u201cThey\u2019re not\n there to transform your organization,\u201d he continues.\n \u201cThey\u2019re there to deliver IT as a commodity.\u201d\n Fecteau should know since BAE Systems is itself in the\n outsourcing business. \u201cThe very nature of outsourcing\n naturally restricts innovation,\u201d he says.Processes further inhibit the kind of client-vendor\n interaction that would yield innovative solutions. \u201cI\n don\u2019t think the big outsourcers do well with customer\n intimacy,\u201d says Fecteau. \u201cThey\u2019re huge,\n matrixed organizations with revolving doors. You never know\n who\u2019s coming in on a given day.\u201d\u201cWe would clearly disagree with any assertions that\n large outsourcers such as CSC can\u2019t bring innovation to\n outsourcing engagements,\u201d says CSC spokesman Mike\n Dickerson. \u201cIn this case, BAE Systems\u2019 decision to\n insource certain operations was based on a long-term strategic\n objective to grow its computer services business in the federal\n IT services market, an area in which we obviously compete, and\n is not a reflection of the services provided by CSC.\u201dIf you really want innovation, you can get it, says Fecteau,\n \u201cbut you\u2019ll pay for it.\u201d Dearly.\n\n You Get What You Pay For\n That gets at another impediment to innovation and one\n that\u2019s squarely in the customer\u2019s control: price\n tolerance.\u201cU.S. providers may be able to come up with new\n offerings that provide innovation, but at what price?\u201d\n says Trowbridge. \u201cThey may come up with great ideas but\n if the price point is off, CIOs won\u2019t buy it.\u201dCIOs may not start off looking for the lowest price; they\n may have big ideas about transformation and innovation. But\n somehow, as they move from RFP to final selection, price almost\n always becomes paramount.\u201cFirst there\u2019s talk about how we\u2019ll be\n partnered forever,\u201d says NOA\u2019s Kobayashi-Hillary.\n \u201cBut once you get to the final stages of the RFP and the\n only people left in the room are those competent enough to\n handle the job, it comes down to price.\u201dTrowbridge ascribes this process to human nature:\n \u201cPeople like watching the vendor grovel and getting them\n to come down in price. The client deal team comes back and\n everyone congratulates them on how they kicked the\n vendor\u2019s butt.\u201d But negotiating the vendor out of a\n profit helps no one. Says Trowbridge, \u201cYou get what you\n pay for.\u201dIn 2003, Fluor signed a $351 million, seven-year contract\n with IBM Global Services, one of Big Blue\u2019s hallmark On\n Demand deals that year. In a press release, IBM said the deal\n would result in \u201csubstantial cost savings to\n Fluor\u2026the streamlining of numerous core work\n processes\u2026and flexible usage-based pricing that enables\n Fluor to access computing resources as needed to support\n growing businesses.\u201dHow\u2019d that work out?It didn\u2019t.\u201cThey were not innovating; they were not working as a\n partner for innovation,\u201d says VP of IS Taylor. But he\n doesn\u2019t blame IBM alone (which declined to comment on its\n relationship with Fluor). \u201cWe were putting the entire\n relationship in a place that\u2019s just\n commodity-based,\u201d admits Taylor. \u201cIf you want to\n say, \u2018Give me some value add,\u2019 there was no way for\n [IBM] to get compensated for that under the contract.\u201d\n Once price becomes the primary focus, you\u2019re locked in.\n \u201cIf you approached outsourcing as a price play, but now\n you want innovation, it\u2019s hard to move the provider\n around to that way of thinking,\u201d says Ed Hansen, partner\n in law firm Morgan, Lewis & Bockius\u2019s global\n outsourcing practice.\u201cYou can\u2019t change the business model on them in\n the middle of the deal.\u201d The provider didn\u2019t build\n in any governance dollars for innovation, and chances are the\n buyer didn\u2019t either.It\u2019s no wonder that the IT leaders who are reportedly\n most disappointed with the level of innovation provided by\n their IT service providers originally engaged in outsourcing to\n cut costs or because of competitive or business pressure,\n according to CIO\u2019s survey. That was certainly true for\n Fluor. \u201cWe had gotten too big in terms of cost, and we\n wanted to improve efficiency and consistency globally,\u201d\n says Taylor. And when measured against those objectives, he\n says, \u201coutsourcing was the best thing we did.\u201d But\n it hardly lent itself to outside-the-box thinking.\u201cYou put the vendor in a narrow box when you say we\n want you to do this well and less expensively,\u201d says\n David Rutchik, a partner with Pace Harmon. CIOs may have more\n of a shot at innovation on marquee deals, Rutchik says,\n \u201cbut [innovation] still has to be a function of the\n customer\u2019s knowledge of his own business and processes,\n what he really wants, and his ability to articulate\n that.\u201d\n\n What Happens After the Ink Dries\n According to CIO\u2019s survey, impediments to innovation\n include cultural and communications issues, the lack of skills\n within the supplier, internal resistance and internal budget\n restraints. But the simplest reason is that innovation was\n probably never written into the contract in a meaningful and\n effective way. Once the vendor\u2019s sales team and the\n buyer\u2019s procurement group part ways and day-to-day\n management begins, what the outsourcer is and isn\u2019t\n legally obligated to do suddenly becomes crystal clear.\n \u201cThat person with the strategic vision no longer\n influences the behavior of the vendor. The people responsible\n for the P&L take over and all that great stuff never\n happens,\u201d says outsourcing attorney Hansen.\u201cEveryone is in such a rush to get these deals done,\n they end up disappointed because [they] haven\u2019t had the\n right conversations,\u201d says Gartner\u2019s Anderson. Even\n if they have had discussions about \u201cinnovation\u201d or\n \u201ctransformation,\u201d definitions remain fuzzy.\n \u201c[A vendor] telling you they can provide\n \u2018innovative solutions to your business needs\u2019 is\n the same as them telling you they will \u2018implement your\n system based on proven methodologies,\u2019\u201d says\n Hansen. \u201cEveryone says it, but it means\n nothing.\u201dEven if the two sides do come to a consensus about\n what\u2019s meant by innovation, building a contract around\n those definitions is difficult. At Entergy Nuclear, Smith\n realized that his hopes for input and innovation from SAIC were\n never going to happen because they weren\u2019t in the\n contract. \u201cI had a kind of a selfish view of it,\u201d\n says Smith. \u201cContract be damned, you know, we brought you\n in here for a reason and that had to do with what else you\n could bring to the table.\u201d The excitement he had about\n SAIC using its nuclear domain expertise to come up with new\n ideas for IT faded. \u201cAll the talk about how they could\n show us how to do new things better\u2026it never\n happened,\u201d says Smith. \u201cEveryone turned back to the\n pure utility view.\u201dAn architectural council set up as part of the outsourcing\n deal and led by an Entergy CTO and technical leads provided by\n SAIC did a good job of setting standards but, according to\n Smith, it never played a role in bringing viable emerging\n trends to the business. On the occasions that SAIC did present\n Smith with ideas, \u201cthey\u2019d say, Here\u2019s\n something new, what do you think about it?\u201d says Smith.\n \u201cThe next question was, How much are you willing to pay?\n That\u2019s not want I want to hear from my value-add buddy.\n They didn\u2019t understand my business.\u201cI didn\u2019t expect them to live at the nuclear\n plant,\u201d he says, \u201cbut they could spend a week\n there.\u201d Smith included SAIC employees in all his own\n meetings, but the further he went up SAIC\u2019s chain of\n command, the less they knew. The one innovation for which the\n business was most hungry\u2014wireless\n capability\u2014\u201cturned into discussion of SLAs and how\n to restructure them,\u201d says Smith. \u201cThey wanted to\n set it up so each wireless point was treated the same as a\n server or router.\u201d (Entergy implemented the wireless\n project with limited help from SAIC.)\u201cThe further we got downstream from the deal, the more\n we got over our illusions about what the relationship with SAIC\n might be in the area of innovation,\u201d says Smith.\n \u201cWe couldn\u2019t figure out how to measure innovation\n and ultimately we had to decide whether we wanted them to\n manage the IT utility or innovate, because we weren\u2019t\n hitting either.\u201dWillingness to innovate only decreases over time, says\n BAE\u2019s Fecteau. It\u2019s an open secret that the\n beginning of the outsourcing relationship is a money-losing\n proposition for outsourcers; they make it up on the back end.\n If you try to renegotiate to improve or expand services, the\n provider puts in a less experienced and cheaper team, says\n Fecteau. \u201cThey can still deliver exactly to the SLA, but\n there is no thought about improving or innovating,\u201d he\n says. To get that, \u201cyou have to build a new kind of\n contract.\u201d\n Why Small Companies Have an Edge\n Sure, companies like GM and American Express may\n have a lot of clout when it comes to getting their IT\n service providers to innovate, but CIOs at small to\n midsize companies shouldn\u2019t despair.\u201cYou may not have the negotiating leverage\n that a GM does,\u201d says Ed Hansen, partner in law\n firm Morgan, Lewis & Bockius\u2019s global\n outsourcing practice, \u201cbut you might have the\n ability to help the vendor break into a new market or\n build a new business model or become more\n global.\u201d As a bonus, small organizations may be\n more capable of working with providers to incorporate\n new ideas or systems\u2014innovation. \u201c[SMBs]\n may not have all the built-in procedural barriers to\n innovation that a lot of bigger companies do,\u201d\n says Hansen.One trick Hansen uses to help small-business\n customers realize their own power is to turn the tables\n during the getting-to-know-you stage of negotiations.\n \u201cDuring the RFP process, customers always ask,\n \u2018Why should I do business with you?\u2019\n Instead, they should ask, \u2018What is it about us\n that makes this deal worth it to you?\u2019\u201d\n says Hansen.If you\u2019re afraid you\u2019re too small to get\n the vendor\u2019s attention, say so and see how it\n responds. \u201cThe vendor may say, Let\u2019s be\n realistic. The money we make on this deal is less than\n a week\u2019s worth of revenue from GM\n but it\u2019s valuable to us because of X,\u201d says\n Hansen. Then, at least, \u201cyou know you\u2019re\n worth more to them than the fees laid out in the\n contract,\u201d Hansen says. And knowledge is\n power.\n\n \n \n \n\n Separate Innovation from Service\n That new kind of contract is easier to imagine than write.\n \u201cI was in one meeting where the vendor sat for what\n seemed like centuries trying to put an SLA around innovation,\n saying we\u2019ll provide X number of ideas per month,\n creating this really detailed governance process in place for\n how ideas get vetted,\u201d Morgan, Lewis\u2019s Hansen\n recalls. \u201cIt didn\u2019t work.\u201d\u201cThe process that produces [the vendors\u2019] 6\n percent margins is well understood and providers are quite\n happy with it,\u201d says Trowbridge. \u201cThey don\u2019t\n have to think too much. They don\u2019t have to meet with the\n customer. If they have to show up and engage and innovate,\n that\u2019s risky.\u201dCustomers will have to break the cycle, and that begins with\n figuring out what they actually want from the vendor.\n \u201cIt\u2019s ultimately up to the buyer to define what is\n meant by innovation,\u201d says Gartner\u2019s Anderson.\n \u201cIf you can\u2019t define it, you can\u2019t expect\n it.\u201d IT leaders at Fluor attempted that with their IBM\n deal in 2003. \u201cWe tried to bake innovation into the\n contract, from a responsibility point of view,\u201d says\n Taylor. But the pricing remained inflexible and\n transaction-based so \u201cit was very difficult to reconcile\n their invoices with what we thought was their contractual\n obligation to innovate,\u201d Taylor says. If he wanted IBM to\n do some R&D work or explore a new technology, there was no\n efficient way to fund it.Fluor signed a new contract with IBM last year. \u201cThe\n lesson we learned was that we needed to put a more generic\n umbrella agreement in place for future innovation,\u201d says\n Taylor. \u201cThere are specific towers of service in the\n scope of work that are commoditized. But there is also a\n separate agreement that will enable IBM to provide innovation\n in all kinds of areas, like virtualization.\u201d The contract\n includes prenegotiated terms for future innovation around\n issues of indemnity, risk and intellectual property protection.\n \u201cIf we want to have IBM explore virtual desktops,\n there\u2019s already a fabric in place. We don\u2019t have to\n call the lawyers and go through a full negotiation each\n time,\u201d explains Taylor. \u201cAnd it\u2019s separate\n from the rest of the outsourcing, so IBM doesn\u2019t need to\n get reimbursed through the fees we pay for the commodity\n activity.\u201d Now Fluor can increase and decrease services\n from IBM without penalty. \u201cIt\u2019s important not to\n lock yourself in because you don\u2019t get the benefit of\n innovations that present themselves every day,\u201d Taylor\n says.Taylor hopes the fourth time\u2019s the charm. \u201cWe\n understand more about how IBM manages its business,\u201d says\n Taylor. \u201cAnd they know more about us.\u201d That\u2019s\n a good start. \u201cIt\u2019s in a customer\u2019s best\n interest to understand all of the vendor\u2019s warts and what\n it takes for a vendor to succeed,\u201d says Morgan,\n Lewis\u2019s Hansen, \u201cinstead of thinking, \u2018Can we\n put one over on them?\u2019\u201dAlsbridge\u2019s Trowbridge estimates that half his clients\n are interested enough in increasing the innovation provided by\n their outsourcers to take a chance on shaking up traditional\n outsourcing processes. \u201cThe other half want to stick with\n that arm\u2019s-length RFP process, the yellow-pad sessions,\n the focus on price,\u201d he says.Smith of Entergy Nuclear hasn\u2019t given up. \u201cI\n want to have a partner that can say, Here\u2019s the utility\n piece, and we can structure that deal, but then let\u2019s\n figure out how we can incent this other, innovative behavior as\n well,\u201d he says. \u201cI get really excited about the\n idea of a partner that could come to the table with that\n stuff.\u201dEntergy, however, has given up for now. The company renewed\n its contract with SAIC in 2006 but \u201cwe lowered our\n expectations,\u201d says Smith. SAIC, he says, had done a good\n job managing IT as a utility and cutting costs. When Hurricane\n Katrina struck, it provided business continuity and disaster\n recovery services beyond reproach. \u201cThere wasn\u2019t a\n whole lot of discussion about how responding to the storm would\n affect costs or service levels,\u201d Smith says. \u201cThey\n stepped up and did a dang good job.\u201d That\u2019s the\n kind of priceless dedication one wants from an IT provider.But it\u2019s not innovation.That\u2019s enough for some of Smith\u2019s colleagues.\n And some outsourcing experts contend that\u2019s the most one\n can expect. The holy grail, says MIT\u2019s Ross, is that the\n vendor delivers commodity services so well that the internal IT\n organization no longer has to worry about delivering those\n services or managing them and so can focus on innovation\n itself.Smith has the option to return to his role as CIO of Entergy\n Nuclear in a few years. That will be around the time\n Entergy\u2019s contract with SAIC is set to expire, and it has\n him thinking. \u201cThere has to be an inventive way to incent\n that innovative behavior as part of an outsourcing contract, or\n barring that, informal ways to encourage it,\u201d says Smith.\n \u201cI\u2019d like to push for that.\u201dSenior Editor Stephanie Overby can be reached at\n firstname.lastname@example.org.