Over the years, innovation has become a more important requirement in outsourcing relationships. According to a recent Forrester Forrsights Services survey, 87% of IT executives and technology decision-makers say innovation will affect their company's spending in 2012. But innovation is still a challenge in existing outsourcing relationships. Many customers underestimate their own role in getting innovation from outsourcing relationships by failing to consider how the length of a contract and their own internal processes and organisation can affect innovation in their outsourcing model.
Customers must contract for innovation. This requires a regular review of innovation strategy and projects, which cannot be effectively managed within short-term contracts. With this in mind, innovation should ideally be pursued within the context of a long-term (around five years or more) supplier relationship. Short term contracts often significantly reduce the level of innovation achievable, as they cannot always be crafted to include essentials such as performance targets, compensations for incremental advancements or a clear roadmap to achieve radical innovative results.
Innovation may not be appropriate in the first term contract with a supplier as they are still learning about the business and gaining a return on investment. Realistically, the first term should be about driving efficiencies and improving service, because innovation opportunities will often present themselves during the second and third terms if the contract is re-let and initial costs have been recovered. This is why short-term contracts can be so untenable and insufficient for true innovation.
The ultimate choice of supplier should be influenced by their ability to meet the competing sourcing objectives. Not all suppliers are as mature as others in terms of innovation capability. Governance mechanisms, including forums and objectives around innovation should be discussed and agreed within the contract. Specific innovation provisions and targets should be agreed rather than a general innovation statement of intent. It is also possible to consider establishing a joint innovation fund with both parties contributing a pre-determined sum to cover the cost of proof of concepts, but this should be looked at carefully to ensure it drives the appropriate innovative behaviour.
What underpins all of this is organisation. In Part one, we looked at the importance of a workable strategy and constant communication. Once this, along with a decent-length contract is in place, the organisational approach will come into its own in terms of importance. A high level of innovation ambition means a high level of organisation. Relationships with suppliers need to be collaborative, and attention should be paid to building the right supplier relationships. This should be based on mutual trust and teamwork – a transactional or adversarial relationship will not deliver.
It is important to drive open communications with suppliers and ensure that business issues and opportunities are effectively and regularly communicated. Business representatives should be involved with IT and the vendor management community in looking at innovation initiatives – suppliers should be encouraged to engage directly with businesses and stakeholders in order to drive out innovation opportunities. Time should be spent ensuring that objectives are aligned and personal compensation plans do not drive the wrong behaviour.
Innovation in outsourcing is not a pipe dream. With commitment from both supplier and customer, a healthy contract and strict governance, there is no reason why both parties cannot benefit from ensuring that the innovation objectives and obligations are met.
