by Stephanie Overby

IT Outsourcing: Study Highlights Impediments to Innovation

Mar 30, 2011
InnovationIT LeadershipIT Strategy

Most IT organizations and outsourcing providers remain too bogged down in the day-to-day management of their outsourcing arrangements to focus on innovation, according to the results of a recent study on outsourcing innovation.

A survey of European CIOs reveals that 67 percent of IT leaders say they rely on outsourcers to turn ideas into new and improved processes, but just a third actually measure the impact of innovation delivered by their service providers.

Two-thirds of the CIOs said they would benefit from a framework for innovation, and half would be willing to pay more for an outsourcer that could help them formalize and maintain a successful innovation process, according to the research conducted by the United Kingdoms Warwick Business School (WBS) and sponsored by offshore outsourcing provider Cognizant.

As outsourcing activity picks ups (two-thirds of the survey respondents said they are spending more on outsourcing than three years ago), moving beyond business-as-usual deals could benefit both customers and providers, says Ilan Oshri, WBS associate fellow and associate professor at Rotterdam School of Management, and co-author of the study.

Remaining too bogged down in the day-to-day management of outsourcing relationships prevents many IT organizations from deriving innovation from the practice. “Many client firms are still occupied with sourcing operations—trying hard to make outsourcing deals work, constantly monitoring SLAs and doing everything possible to avoid failure,” Oshri says.

Most IT service providers are equally mired, focusing on their bread-and-butter IT services rather than any kind of innovation consulting. “Many outsourcing vendors are capable of delivering incremental or radical innovation to their clients,” Oshri says. “However, they lack the capability of guiding and consulting their clients regarding the management of innovation. This pitfall in some outsourcing vendors could be the result of their concentration on mainstream outsourcing services—often their cash cow—rather than on an emerging area such as innovation.”

While many CIOs hold on to the traditional notion that IT should outsource commodity work in order to focus on higher-value tasks like innovation internally, Oshri says mature IT leaders approach outsourcing differently. “More sophisticated outsourcing clients seek innovation from their vendors,” he says, “while newcomers to outsourcing hope that by outsourcing a function they will be able to free up in-house talent to focus on higher value activities.”

An outsourcing relationship can reap more than cost savings, says Julia Kotlarsky, associate professor of information systems and management at WBS. Best-in-class expertise and experience drawn from multiple clients could theoretically be brought to fueling customer-specific innovation.

Oshri points to Shell as a company that has partnered with outsourcers to build a solid internal innovation function. They “bring together vendors to discuss future challenges, harvest solutions, identify the best solution, raise funding, and execute them as joint ventures.”

The Warwick research found that just 22 percent of outsourcing engagements are joint-venture deals with profit-sharing clauses, while the remaining 78 percent were fixed-priced contracts.

The researchers interviewed 125 CIOs and 125 CFOs for the study and found that IT leaders were more likely to view their outsourcers as a potential source of new ideas than their counterparts in finance. Less than half of CFOs expected service providers to help turn ideas into new and improved processes and just 39 percent of them would be willing to pay higher rates for an outsourcer that could deliver proven innovation on a regular basis.