4 approaches to getting innovation from service providers

I recently had lunch with a CIO who declared that "achieving innovation from outsourcing is impossible... suppliers simply do what is written in the contract – it’s as simple as that..."

While I don’t share this rather bleak view, I do empathise.

IT leaders often find themselves in outsourcing relationships where service providers fail to deliver innovation as expected and, as a result, feel short-changed.

The irony is that outsourcing does provide access to much deeper, ­expansive bodies of knowledge and expertise – which suggests that innovation should be readily available.

So why do so many people share the view that getting innovation from outsourcing is so difficult?

To keep things simple, let’s assume that in general, innovation is good. Typically, it benefits clients by reducing cost, transforming performance and helping to lower risk.

However, with many organisations in their third or fourth generation of outsourcing, the option to deliver significant benefits through innovation has diminished. Labour arbitrage is complete, processes transformed and technology thoroughly ‘-ised’ – rationalised, optimised, standardised and virtualised.

As such, service providers need to take a different route to delivering value.

The CEO of a leading service provider told me: "We are increasingly focusing on how we generate wealth for our clients", reflecting a step up the value chain. In simple terms, helping clients sell more widgets in addition to helping them produce them (at lower unit cost) is a positive differentiator.

So assuming innovation is good, we need to understand why obtaining innovation from outsourcing is so difficult and how to make it easier.

Not an optional extra: Traditional contracts typically contain clauses that require service providers to be inno­vative, often accompanied by an innovation fund which the service provider accesses at pre-determined times.

This ­approach — viewing innovation as an optional extra and assuming that it can be delivered in proportion to the depth of the client’s pockets — is a staggeringly effective way of stifling long-term value creation.

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