Innovation is outsourcing’s new buzz word. However, it’s a lot easier to talk about innovation than it is to do it.
When it comes to outsourcing innovation, Gianni Giacomelli, SAP’s Head of Global Strategy and Marketing for its BPO Business Unit, says, “It’s the technology, stupid!” He believes new technologies or significant improvements in existing technologies significantly help create the industry’s sought-after innovations. He should know: after spending time as an outsourcing advisor with clients in the US and Europe, he joined SAP to drive its market strategy and thought leadership.
His angle goes against the conventional wisdom. His past as strategy consultant and his experience in mergers and acquisitions provided experiences he says are unfortunately still not widely spread in today’s BPO market. “Innovation, like other BPO success factors, it is not just about the contract.” He says it is about synergies between two organizations–the buyer and the provider. For innovation to occur, both parties “must understand the business fundamentals of the service delivery to be able to innovate; otherwise the provider will not be able or willing to really innovate.”
Does innovation help both provider and buyer improve their joint economies of scale, process optimization, and access to labor arbitrage? If yes, innovation will happen naturally. “If no, somebody must be forced to pay,” Giacomelli says.
What exactly is innovation, anyway? The Everest Group defines innovation as advancement in service delivery, processes, and infrastructure to increase efficiency and quality or reduce risk of process output.
Giacomelli says a good example of innovation is the popularity of self-service. Today most airline passengers use computer kiosks to check in; only customers with challenges see customer service reps. Banks still send paper statements, but many bank customers receive their monthly communications via e-mail. Those tired of mailing paper checks can pay bills online.
Another good example of innovation’s technological underpinnings is modern call center technology. Today you can discover how many cell phone minutes you have left this month or whether your ex paid child support, thanks to today’s interactive voice response (IVR) technologies.
Tellingly, all these technology-driven innovations have found their way into BPO: HR self-service and call center technology help optimize processes and increase economies of scale BPO providers can harness.
So how do you, an outsourcing buyer, ensure innovation is part of your outsourcing experience? Giacomelli suggests buyers should always include innovation in BPO contracts. The SAP executive says, unfortunately, many contracts ignore innovation. Sometimes this creates unwanted buyer dissatisfaction after the parties achieve the initial projected improvements.
How do you contract for innovation, which, by definition, is difficult to describe concretely beforehand? And is contracting all it takes to get innovation?
Giacomelli says he has observed two techniques that help buyers get innovation from their human resource outsourcing (HRO) providers. “We saw providers, who are often our customers, using these techniques. We also work with customers who retained ownership of the technology instead of outsourcing. They struggled with accommodating change, too,” says the SAP executive.
Successful Techniques for Innovation
These techniques include:
- Gain Sharing. Both parties benefit from innovation. He says gain sharing works well in cases of process efficiency since it’s clear the supplier provided the gains. Gain sharing becomes more problematic if the gain stems from improving business parameters like the cost of float or the price of goods, to use finance and accounting and procurement outsourcing examples.Giacomelli says gain sharing does have challenges. First is measurement: both parties have to determine a baseline-how much the buyer would have gained without the supplier’s help. The SAP executive says “because no one really knows what the gain is going to be, both sides negotiate hard to cover their risk. The result: they don’t arrive at a win-win situation.”
Other challenges include large savings or business model changes which make before-and-after comparisons impossible.
- Specific Stipulations. These could be setting a rate of continuous improvement or changing the minimum performance levels based on past over-achievements. Additionally, the parties can single out specific process components for “refresh” (e.g., analytics, self-service).
However, Giacomelli says these two routes do not work all of the time and certainly not in isolation. They are relics of an era when people believed that all BPO takes is a good contract.
What always works is what the SAP executive calls “respecting the fundamentals of innovation.” They include:
- A Partnering Attitude. What’s key here is “a strong, long-term relationship between the two organizations,” says Giacomelli. “Both organizations must discourage adversarial, us-versus-them attitudes. If the provider fails, the client fails–and vice versa. This is not about warm, fuzzy feelings; it is about clarifying synergies between the two organizations during the RFP cycle and ensuring alignment of interest just like in joint ventures,” says Giacomelli.
- The Right Technology Platform. The SAP executive says “IT should support innovation.” The technology platform provider must “be able to make new technologies available quickly through the provider. This requires close collaboration between the BPO provider and the technology vendor–not just marketing agreements. Also, buyers should select technology vendors with a demonstrated track record in bringing innovations to market over extended periods of time. The SAP executive says “anybody can provide bleeding-edge technology for a couple of years, look good, win a few deals, and then go down. BPO is long term; it is an innovation marathon, not a sprint.”
- The Appropriate Governance Mechanisms. “Buyers must ingrain innovation in their governance,” he notes. That includes creation of an innovation and technology council with members from both buyer and supplier who meet regularly to review progress, ensure the technology evolves, and check the benchmarks at regular intervals to identify where performance falls behind. And technology evolution must push innovation efficiently, meaning integration is easy because the platform conforms to standards, Giacomelli adds. Buyers can insure their tech platform does this using proactive oversight and agreed-upon standards. A good example is IKEA, which is working with ADP for its global HR BPO, and has brought the technology vendor (SAP) on its steering committee.
- Standardized Process Redesign and Related Technology. Buyers need to limit their customization demands whenever they can. Giacomelli points out if buyers want innovation, “the service delivery economics must work for the supplier. Suppliers that make money can afford to bring in innovation.” This often becomes tricky because both buyer and supplier have to clearly understand the cost structure of the service delivery. “A provider forced to accept a service delivery model that does not harness economies of scale, process optimization, or access to labor arbitrage is never going to be able to innovate,” Giacomelli says “And customers forcing BPO providers to tweak their offerings may inadvertently kill the very root of the economic advantage suppliers are supposed to bring to the table. Better discussions about standardization pains and gains must happen between the client and the provider organization.”
Traps to Avoid
What doesn’t work? Buyers aren’t getting innovation because they are:
- Upholding the Contract as if It Were Written in Stone. “Contracts are not going to save the day. Success in innovation also relies on business alignment factors, not necessarily soft ones. “Buyers and advisors must focus more of their efforts in understanding what the business alignment is and less on the tired discipline of pinning down technically bullet-proof contracts. The fact is, innovation is tough to pin down in contractual language; the best you can do is tentatively capture the means, not the outcomes. And even the means will become obsolete in a few years. By definition, new stuff is difficult to predict, especially for lawyers,” says Giacomelli.
- Leaving Innovation Completely to the Provider. Giacomelli says suppliers may tend to freeze the situation if buyers don’t set key performance indicators (KPI) or continuous improvement incentives. Also, buyers delegating innovation to the other party may become uncooperative or forget the fundamentals of innovation. BPO is about two people running in lockstep. To accelerate, both parties must pace themselves–jointly.
- Insisting on a Customized Solution When it is Not Absolutely Necessary. If the buyer insists on a bespoke solution, the provider cannot leverage innovation skills or investments (with either process-cum-technology blueprints or people training or anything). The supplier wants to syndicate across its customers.
- Refusing to Change. This occurs on both sides. Buyers need to determine if their supplier’s account team is on a “quest for stability.” Giacomelli points out “many account teams are not service delivery visionaries.” He suggests periodic reviews by specialists in process redesign.
- Having No Tolerance for Quality Fluctuations in Early Phases. By definition, innovation is doing something new. Innovation-induced change will have quality fluctuations; buyers have to accept that at the outset. Reducing the time to stable quality is the key.
- Missing Cooperation Between the Executives Responsible for the Business Processes and Those Handling Technology Design. The two sides of the brain not connecting is the best recipe to either have the IT departments provide gimmicks or the business people put forward unrealistic requests. One solution to this challenge is to involve experts with cross-functional experience.
- Basing Service on Proprietary Technology. Except for processes with limited and predictable scope, this historically does not provide the built-in flexibility necessary to follow business scope changes and innovation triggers.
- Using Too Many Best-of-Breed Suppliers. Buyers selecting a host of best-of-breed software vendors “do so at their own peril,” according to Giacomelli, because it’s difficult to upgrade cost-effectively individual components of the process. Using different software vendors may result in functional silos and inflexible custom integration, explains Giacomelli. Additionally, best-of-breed implementation consultants might become scarce the moment the related best-of-breed solutions are not hyped anymore, which would stifle the capability to actually implement innovation.
But the No. 1 reason for lack of innovation in an outsourcing relationship remains an economic one, according to Giacomelli. Buyers are:
- Unwilling to Pay. Giacomelli says sometimes the “supplier might not be the bottleneck. There are times when the buyer expected to get innovation for free.” That means the provider doesn’t have enough money to pay for innovation because it can’t afford to save costs by harnessing the requisite economies of scale, process optimization, or labor arbitrage. “In the end, either buyers allow the provider to standardize and hence save costs, or they have to give them extra money to finance innovation.”
What should buyers do differently to ensure innovation? Giacomelli has five suggestions:
- Look under the hood of the supplier’s technology engine to make sure it can evolve. Study process solution design from the beginning and ensure technology can get you there.
- Make sure the technology solution is flexible so that it can accommodate the changes to your business.
- Think end-to-end process and technology, not silos.
- Put yourself in the shoes of the BPO provider’s process and technology architects and try to understand their economic constraints.
- Think long term: this is a marathon, not a sprint.
Lessons from the Outsourcing Journal:
- New technologies or significant improvements in older technologies help create the industry’s sought-after innovations.
- A buyer’s unwillingness to pay or synergize with the provider are the biggest stumbling blocks for innovation.
- Buyers should always include innovation in their outsourcing contracts; this is possible using gain sharing and specifying change.
- The fundamentals of innovation include:
- A partnering attitude
- The right technology platform
- The appropriate governance mechanisms
- Standardized deployment
- Tight integration between the supplier and the buyer’s retained organization
- Innovation may not work when buyers:
- Uphold the contract as a silver bullet
- Use (or force use of) best-of-breed suppliers
- Leave innovation completely to the provider
- Insist on a customized solution at all costs
- Base service delivery to be based on proprietary technology infrastructure.
- Refuse to change
- Have no tolerance for early quality fluctuations
- Don’t foster cooperation between the executives responsible for the business requirements and those handling technology designs