It is often said that outsourcing contracts do little to encourage innovation. If anything, they make innovation more difficult. “We used to have time and resources for IT innovation and the development of new business models. Since we committed ourselves to an outsourcing contract, that’s no longer the case.” Such remarks seem to reflect popular opinion. It is a familiar problem for many companies.
A contract with the outsourcing partner is not concerned with innovation targets. The objective is to reduce costs for high-volume work. The focus is on price, which is also the overriding consideration in the partner selection process. This is perhaps understandable but innovation is a case apart. The aim is not to reduce outgoings, although innovation must remain cost-efficient in the longer term. Innovation inevitably entails investment and there are unlikely to be any large volumes, certainly in the initial stages. So how can we ensure that outsourcing does not stifle innovation? With a smart approach, outsourcing can actually give innovation a significant boost. Here are a few tips.
The first step in arriving at outsourcing arrangements which support innovation is taken even before tenders are invited. The client’s project organization is generally staffed by people with a commercial background: they are procurement specialists. This core group will be joined by legal experts and other professionals, either from within the organization or retained as consultants. They produce a briefing document to be submitted to interested parties. It stresses the importance of reducing costs and will include a set of KPIs which are primarily financial in nature. ‘Total cost of ownership must be reduced by x%’, for example.
If the client organization begins its outsourcing process like this, we can speak of a ‘false start’ in terms of innovation. Certain choices are made and become ‘set in stone’. They will be very difficult to adjust or reverse at a later date. The entire process relies on bottom-line targets. However, organizations which do not limit themselves to ‘bottom-line thinking’ but also consider the top line will quickly realize that innovation is crucial to their continuity. The outsourcing contract must reflect this.
There are several questions to be asked at the outset. What are our growth ambitions? How can this contract help us to achieve them? How can we improve both fundamental ‘breakthrough’ innovation and incremental innovation throughout the application development process? Having answered these questions, the astute client will realize that a new type of project organization is required: one with a different mindset and a broader set of objectives than has been customary in the past. The input of the procurement experts and lawyers remains very important, but they must be joined around the table by people whose focus is on the top line.
Another important way of ensuring that outsourcing can support innovation is to encourage an equal partnership with joint decision-making and input from both sides: ‘co-innovation’. Many outsourcing arrangements continue to reflect traditional client-supplier relationships, under which the vendor is expected to supply the client with certain predetermined products or services over a set period of time. This stands in the way of innovation.
It is possible to make clear agreements about co-innovation at the outset but the terms of the contract must provide the required flexibility. Rather than the typical client-supplier relationship, which is hierarchical in nature, there will be more of a ‘peer-to-peer’ relationship. Clear agreements can be made in advance to cover aspects such as future usage rights to the innovative applications and ownership of the relevant intellectual property rights. It may also be appropriate to make agreements with regard to shared facilities, platforms and market initiatives. All options should be carefully discussed beforehand and the agreements formalized by means of the written contract.
Innovation with third-party partners
The ‘gig economy’ is becoming more significant by the day. Companies will usually need assistance with their initiatives and here too they must make smart choices. Prospective partners include specialists and startups which could well have an entirely different organizational structure, if indeed they have any structure at all. The boundary lines between organizations are becoming less distinct. The partners now work together in a loosely connected ‘ecosystem’. This is particularly true in terms of innovative R&D.
In all disciplines, but certainly in IT, it is essential to choose one’s partners carefully. This demands a smart approach: there are no ‘standard’ choices. Partner A may offer greatest added value in one particular field, while Partner B will be the preferred choice in another. Here too, traditional outsourcing contracts have severe limitations because cooperation is restricted to a single partner: the organization with whom the contract has been signed. In many cases, it will be in both parties’ interests to call upon external expertise. Again, smart choices must be made. Innovation relies on creativity and original ideas. Drawing upon the insights and experience of third parties can help to keep the outsourcing relationship fresh and truly innovative.
The human dimension
If innovation is to be successful, the focus should not be confined to the bottom line. We must also consider the top line. It is important to create opportunities for co-innovation and the participation of third parties who can contribute specific expertise and insights. But above all, it is essential not to lose sight of the human dimension. Innovation is undertaken by people, not machines. Both the client organization and the outsourcing partner should think carefully about how they wish to work with each other, and what they understand to constitute a good working relationship. An increasing number of organizations are doing just that. Sometimes there can be a discrepancy between senior management’s stated desire to create added value for both partners (the ‘win-win’ situation) and practice, in which the negotiations remain very much transactional in nature (‘win-lose’).
A few exceptions aside, the vast majority of companies can now be seen to attach greater importance to a good relationship with their outsourcing partners. They work hard to foster a relationship built on mutual trust. If the desired innovation is to be achieved, it is essential that the nature of the relationship and the underlying principles are made clear and are established by means of firm agreements. Innovation relies on trust. Both parties must believe that the products they develop together will have benefits for both. There must always be a win-win rather than a win-lose situation. Both partners must be willing to invest time and energy in creating the right conditions. When formulating the KPIs, it is therefore advisable to include not only requirements relating to innovation and outcomes, but also the manner in which the partnership itself is to develop. Needless to say, the interests of the main stakeholders on both sides must be taken into account.
WIM VAN HENNEKELER is Head of Cognizant Business Consulting, Benelux.