Rethinking Innovation in Outsourcing: Defining Outsourcing Innovation

After talking to many people on all sides of the outsourcing business, I have concluded that most of the nearly infinite number of ways that clients, service providers, academics and advisors define innovation today do not provide a useful definition of the action and results of innovation between a client and that client’s provider. Rather, they tend to favor either the idea of innovation or the outcome and aftereffects.

So we need to rethink the definition. Let’s consider three approaches that can help to describe the action of innovation in outsourcing relationships: a 2008 definition from ISG, the “big I” and “little i” approach, and an idea about innovation being done to or being done by a company.

ISG Definition of Innovation — from the 2008 Innovation Initiative

ISG launched the Innovation Initiative in 2008 in response to a drumbeat of dissatisfaction from clients that their providers did not produce enough innovation. In the course of that study, led by ISG Partner Harvey Gluckman, we created a definition of innovation:

Innovation is the object of value and the means of identifying and introducing improvements that result in an elevated level of business execution.

It is a pretty good definition even now; it identifies that there is something that is valued, and it talks about the need to identify and introduce the improvements to achieve the objective of an enhanced business. It could be read to include both incremental improvement and significant innovation. However, this definition misses (as many do) the inclusion and acknowledgement of the nature of the outsourcing relationship. The Innovation Initiative specified contractual terms to try to help make innovation possible, which I will discuss in one of my next blog posts when I cover the industry experience of contracting for innovation.

In many conversations I’ve had in the last six months, I’ve heard the same sort of struggle to define innovation in a practical way. It’s akin to the discussion we hear in every contract negotiation about the definition of projects – the “big P” and “little p” definitions that are so carefully wordsmithed by each client. Innovation tends to be discussed by clients and providers in similar terms: the “big I” and “little i” form of innovation.

It’s worth creating a conceptual difference between those forms of innovation, since smaller or larger innovation efforts tend to drive toward different levels of the organization and, therefore, different levels on the strategic stratification.

“Big I” and “Little i” Innovation

In our Sourcing Industry Conference session with a group of service providers in June, we came to a general agreement that “little i” innovation was really more like “continuous improvement developed between clients and service providers in the business operations to improve cost, efficiency, quality or other desired results.” As Sherry Good of CGI wrote to me later, “It is better to use the term continuous improvement and link it to the governance structure in the agreement — this allows the client and provider to define what needs to be improved throughout the agreement; for example, an IT project, optimization of systems, implementation of new processes to improve services, and so forth.”

Most of us would accept this definition of continuous improvement, and indeed most contracts contain some expectation of ongoing jointly developed improvements in service levels, quality or other metrics over the life of the agreement. “Continuous improvement” as we know it today is a more comfortable fit to contractual language for services.

It is much more difficult to define “big I” innovation, because the act of getting to something that feels like company-changing engineered innovation represents a tremendous challenge in an outsourcing relationship. In our SIC session, it was my sense that based on their experiences, the service providers despaired that this could be achieved in a relationship; and it is in this area that the expectations of clients are raised — and dashed — with their providers. This is partly due to the very nature of the services. Most client companies are not culturally focused on innovation in non-core business areas, and therefore it’s harder for both clients and providers to see what “big I” innovation might actually take place.

The service provider community, on the other hand, is constantly focused on significant innovation, because it is only through innovation that these providers can differentiate themselves from competition and offer improved services (and lower costs) to clients. This innovation is typically encountered by clients at the start of the relationship: A provider is selected because it brings a great new approach for how to do something, which is used to “transform” (another dangerous outsourcing word) the client’s organization to be better at what it does today.

Thinking of it this way, then, a “big I” innovation could be defined as “a planned and jointly-engineered change that brings transformative improvement to a client organization through provider services.”

As the initial innovation becomes routine, the ability of both parties to identify and to approach areas for potential new “big I” innovation is submerged into the vicissitudes of daily operations and, without direct focus of the two parties, is put aside. Innovation in the context of client corporate competitiveness is seldom in scope for the innovation in outsourcing discussion, because neither the client nor the provider has the focus or the right people involved to determine what such a “big I” innovation might be.

Intrinsic and Extrinsic Innovation

I recently had an interesting conversation with Ed Hansen, an attorney with Baker & McKenzie, who has worked on outsourcing contracts with clients for 20 years. He notes that words like innovation and transformation make it difficult to tie down expectations of the client in a contract — and, in fact, end up being used interchangeably.

He wrote to me “with transformation, I have started using the terms intrinsic innovation to mean transformation that happens within the client organization, and extrinsic transformation to mean process or technology transformation that happens to the outsourced process in the service provider’s organization.”

The difference between the two, he says, is tied directly to the ability to contract for the results: “Extrinsic transformation is fairly easy to contract for and to build into pricing models. You see this reflected in terms that require decreasing costs over time, improved service levels over time, and other such clauses. The problem with extrinsic transformation is that it is only satisfying to the client at the start of the relationship. There is not much difference between extrinsic transformation and extrinsic innovation from a contractual point of view.” As time passes, the initial important transformation becomes invisible (both operationally and financially) and is perceived as “just part of the deal, and, therefore, not gratifying.”

Intrinsic innovation asks the client to make significant transformative changes in behavior throughout the client’s organization. “Intrinsic transformation is very visible, but requires a real change management program, and is an area where client stakeholders can throw up roadblocks causing the innovation or transformation to fail.” When a transition to the provider’s services requires intrinsic transformation in the client, it creates substantial risk of failure over which the provider has little control or influence. “Shifting risk from the client to the provider for this type of transformation is not the answer. Mitigating the risk of transformation failure requires an organizational change-readiness assessment and plan, effective governance, and other tools in the organizational change-management expert’s arsenal to identify and address the transformation killers.”

Experience has demonstrated that this works only when done in an intentional program with strong executive support. Like so many aspects of outsourcing, success comes down to people and human factors. There needs to be some solution for risk allocation and sharing in the agreement when the innovation/transformation is not entirely within the control of the service provider.

“If intrinsic innovation is the goal, then it is important to apply some critical thinking to the requirement and some brutally honest risk assessment,” Ed notes. And, I might add, some realistic contract language to deal with the situation fairly.

A Proposal for a New Definition

So we have looked at three approaches to articulating innovation that have produced definitions during the past five years. As in so many areas of definition in this industry, every situation is going to find its own definition and approach — but it helps to have a realistic view of what innovation means in the complex business/social environment of outsourcing. It is my continued experience that innovation in outsourcing is hindered by an additional fact (the elephant in the room): the provider is in the relationship to make money. For some reason this removes thoughts of creative options from most clients’ minds, although it shouldn’t. As we found in our Innovation Initiative, innovation isn’t free, and it doesn’t come without dedication from both sides to work together. So I will go out on a limb and propose my own take on innovation in outsourcing:

Outsourcing innovation is the process of a client and service provider working together in an atmosphere of trust and mutual gain to identify problems that can be jointly solved to improve (in any way) the client’s business operations or competitiveness, or create other valuable contributions, and that can be delivered in a reasonable time in a conducive atmosphere.

While there is a definite difference between “big I” and “little i” innovation from a cost and implementation perspective, the principles used to bring about innovation should be the same. Problem statements can come from operations team members or from executives: I worry that if we separate them artificially we risk missing something good. Many small innovations can add up to important results. However, transformative opportunities require extensive engagement from client executives and business stakeholders.

In an upcoming post, I will profile an innovation approach called a Dream Session that Xerox has conducted with some clients, which has all the ingredients of a great process and a promise of real outsourcing innovation.

About the author

Cynthia brings 25 years of experience helping clients develop their sourcing governance and service management design. Having worked with more than 50 organizations to improve business management and service management processes in both single-provider and multi-provider environments, Cynthia has become a recognized expert in sourcing governance, vendor and contract management. She currently serves as the architect for ISG’s service methodology and global integrator of its products and services. Cynthia works to leverage ISG’s accumulated intellectual property resources to help enterprises create effective transformation and governance capability, and maintains a continuing role in the Strategy and Organizational Change Enablement practice.