Trends in Outsourcing to Enable Client Organizations to Innovate in Their Businesses | Article

new opportunitiesPat Adamiak, Vice President, Portfolio Marketing and Alliances, Outsourcing Services, HP, says “Innovation is definitely the trend of the year. But it means something different to every client.”

Vikesh Mehta, General Manager, Innovation Group, Wipro Technologies, notes a trend over the past few months of potential customers increasingly asking “How can you help us with innovation?” earlier than in the past–as early as the RFP / RFI stage.

David Poole, Vice President, Deputy CEO Global BPO, Head of NA BPO at Capgemini, says “For us, the topic of innovation now comes up every day in discussions with clients. They continuously tell us they want to see outsourcing as the driver for innovation in their businesses.”

Sergey Karas, Vice President, Global Strategy, Luxoft points out that innovation is becoming a big differentiator in service providers’ capabilities.

Nearly everyone is talking about innovation, but many do so without first defining it or structuring it so that they can actually achieve it.

We spoke with some industry experts at the forefront of innovation in their respective companies. We share in this article their insights on what hinders innovation and their insights on best practices in ensuring the buyer and provider can achieve innovation. Let’s start by defining innovation and looking at some current examples.

Definition and Examples of Innovation

Innovation could refer to improvements in products, services, or business processes. However, this article discusses innovation from the perspective of what service providers do to enable and/or support their clients’ ability to innovate in their businesses and transform the way they do business. It goes beyond improving a process and beyond outsourcing’s usual benefits of enabling a client to save operational costs or speed time to market, for instance.

Within this context, Mehta at Wipro says that innovation is “a 360-degree business approach for infusing new ideas at the process level to give benefits to clients.”

However, buyers of outsourcing services sometimes define it differently. Mehta comments that innovation is currently a buzz word in outsourcing; some customers use it as a replacement for “what additional value can you deliver?” while others newer to outsourcing still refer to offshoring as an innovation.

As Mehta points out, “the definition and expectation of innovation in an outsourcing relationship is a factor dependent on time. It is less dependent on the size of the client or provider and more on the maturity of the outsourcing relationship.”

From the perspective of an outsourcing service provider enabling and/or supporting its clients’ ability to innovate in their businesses enterprise-wide and transform the way they do business, perhaps Adamiak at HP defines it best. He describes it simply by the outcome: “our ability to improve the client’s business.”

The definition is, indeed, important. “A very important thing to remember about innovation is that the mind-set is the manifestation of the culture,” states Wipro’s exec. “The client and service provider need to mutually define innovation. It’s not unusual in this effort that buyers and providers find they each have something different in mind as to what innovation means.” He says the definition discussion needs to take place up front but that it needs to happen during the solution discussion stage because “it’s too tricky to define it in an RFP.”

Poole at Capgemini cites an example of enabling clients to innovate to solve new business problems. Utility companies need to protect their revenue, currently attacked by customer churn in a highly competitive market. “We’re looking at how to help them,” says Poole. “We combine customer intelligence along with changing business processes to improve the way a company responds to customers. They don’t know which customers will churn, or when. But through customer intelligence we can identify changes in customer behavior before churn occurs (e.g., calling to check the rate plan, making slower payments, more complaints).”

Iris Goldfein, Vice President, Global Offerings and Centers of Excellence, ExcellerateHRO, says providing business intelligence for clients’ decision-makers is one area where the HRO provider focuses on enabling its clients to innovate in solving their business problems. The service provider knows a lot about employees (e.g., how they use the Web, what they ask for on the phone, their responses on surveys, etc). “We have this data, but what are we doing about giving the client’s HR and finance folks access to it in real time?” she asks. What could the client do with the information?

She says a CEO, for instance, could go beyond asking “What’s our turnover?” and ask “What’s our turnover of our high performers?” or “What is our turnover in different divisions…under certain managers…in certain geographies?” This is actionable information that the client can use to make decisions such as decisions about training managers.

Talent management is another area where the HRO provider focuses on enabling its clients to innovate in solving their business problems. “HRO conceived of managed services for talent management (career path, goals, compensation, etc.),” says Goldfein. “But alignment is limited because of how unintegrated the technology has been and how expensive it is to do that technologically. We have created that alignment in our offering.”

ExcellerateHRO also currently focuses efforts on helping its clients innovate to solve the dilemma of employees who are frustrated with Web-enabled self-service functionality in employee benefits. In HR, self-service often results in employees thinking they are taking on HR’s tasks. The provider collaborates with clients to innovate how to move from self-service to self-sufficiency, making a user experience highly intuitive and thus more satisfying and valuable.

An area where Wipro currently innovates is around “solution accelerators,” which enable clients to achieve the time to value from outsourcing much faster. An example of a delivery accelerator is the provider’s software factory model for global delivery, which is now a case study at Harvard Business School.

Normally business units, rather than the CIO, handle much of the IT work; thus, there are separate budgets and inefficiencies. “Our model helps them achieve efficiency through standardization across business units,” explains Mehta. “Business unit work often does not lend itself to a global delivery model–and the associated significant cost reduction–because it lacks the mass to benefit from offshoring to a large IT player. But our model creates the mass to get to the global delivery model because the architecture, infrastructure, software development and testing needs are the same across multiple business units.”

What Hinders Innovation?

Wipro notes clients often hinder their own desire for innovation right at the beginning. “They often state their interest in innovation at the RFP or RFI stage, but then at the contract stage they convert that interest to merely a contract clause,” says Mehta. “When this happens, there is not sufficient effort to ensure the parties create a program structure that is good for incubating and monitoring innovation.”

Buyers and providers need to structure their innovation efforts. But most outsourcing governance structures are highly attuned to black or white matters, such as change control. “Innovation is all about gray things–doing something differently,” Mehta explains.

“If the governance and contract constrain the service provider, it won’t invest in innovation,” Metha continues. Constraints position providers between a rock and a hard place–while a contract may constrain the ability to innovate, the provider faces the risk of the buyer downgrading it for not innovating and then not extending the contract.

He adds that if the parties reduce innovation to just a contract clause, they create a risk that the procurement folks will control it with a black-or-white cost mind-set. “Innovation is gray and needs to be handled at a functional level,” he advises.

Innovation requires collaboration and, in a collaborative relationship, the contract is the last thing that happens, explains Adamiak at HP. “The buyer can’t take a procurement approach to the deal, or there won’t be money in the deal for the supplier to innovate. Also, the buyer can’t micromanage.”

“Most innovation starts out as a wild idea,” he continues. Or sometimes it starts as executives in different companies having a collaborative discussion about a similar business problem they both have. Collaboration is fluid, and everything can’t be nailed down as black or white issues in a contract.

Best Practices in Ensuring Innovation

“A key to ensuring innovation is to institute it into the deal,” explains Poole at Capgemini. “An innovation council (or similar structure) must be built into the contractual obligations.” Such a council enables interaction, provides a way to capture and evaluate ideas, and ensures a mutual mind-set that promotes innovation. “It forces the issue of innovation for both client and provider, and we currently have an innovation council for each client,” says Poole.

Capgemini’s efforts at ensuring innovation do not stop with innovation councils. Its Accelerated Solution Environment (ASE) facilitates brainstorming and solutioning. Poole describes the ASE as “a creative work space utilizing things like whimsical furniture, soft toys, books, lights, music, and frustration balls, collectively structured to inspire ‘group genius’.”

“We take the most senior people from our clients’ organizations into the ASE to design the future state with us, and we get very effective results,” states Poole. Why? The environment allows the clients’ executives to brainstorm without the resistance at the board and decision-making level that often hinders collaboration and innovation from getting started. “The brainstorming in the ASE facilitates freedom in solutioning on how the client gets from where they are to where they want to be,” says Poole.

At HP, Adamiak says the provider builds a chief technology officer (CTO) into each client deal. “Now we’re working on building a formal mechanism for all of our CTOs communicating back to our lab to facilitate the innovation flow faster,” he says.

Karas at Luxoft says the Russian ITO provider this year established a CTO organization and office. Its function is to drive innovation within Luxoft and then translate that to enabling clients’ innovation. He describes it as “a center of accountability, together with executive attention, to ensure Luxoft keeps a focus on cutting-edge technology and services.”

Best practices in ensuring innovation start with building trust between the parties–an essential element in collaborative relationships, says Adamiak at HP. How can the parties build trust at the beginning of the deal? He says, “It usually happens in the longer term, but it can emerge early if you focus on finding a win-win.”

He advises that open-book and gain-sharing relationships also help to develop trust and ensure innovation, as do incentives to the client to make sure executive time for collaborative discussions actually happens.

Poole at Capgemini points out another best practice: “establish KPIs to address the innovation points, including the number of ideas that the parties generate.”

Capgemini also places innovation on the agenda for its annual conference with clients and shares ideas across clients.

Karas at Luxoft advises that buyers need to remember that they are the leader and driver of their innovation engagements, but their service providers are the technical leaders and should proactively lead the clients regarding technology risks associated with innovation.

Karas predicts, “In 2008, transformational outsourcing, which leverages strategic innovation to reinvent business processes, will gain more attention.” He says it is important to choose a service provider with in-depth knowledge of the buyer’s industry, one that can manage change and think outside the box.

Lessons from Outsourcing Journal:

  • The buyer and service provider need to mutually define innovation. It’s not unusual in this effort that buyers and providers find they each have something different in mind as to what innovation means. The definition discussion needs to take place up front but needs to happen during the solution discussion stage, not in the RFP.
  • Buyers often hinder their own desire for innovation right at the beginning. They often state their interest in innovation at the RFP or RFI stage, but then at the contract stage they convert that interest to merely a contract clause. When this happens, there is not sufficient effort to ensure the parties create a structure that is good for incubating and monitoring innovation.
  • If the governance and contract constrain the service provider, it won’t invest in innovation.
  • If the buyer and provider reduce innovation to just a contract clause, they create a risk that the procurement folks will control it with a black-or-white cost mind-set. Innovation is gray and needs to be handled at a functional level.
  • The key to ensuring innovation is to institute it into the deal. Establishing an innovation council into the contractual obligations is a best practice. An innovation council enables interaction, provides a way to capture and evaluate ideas, and ensures a mutual mind-set that promotes innovation.
  • Best practices in ensuring innovation start with building trust between the parties–an essential element in collaborative relationships. Trust can emerge early in the relationship if the buyer and provider focus on finding a win-win.
  • Open-book and gain-sharing relationships help to develop trust and ensure innovation, as do incentives to the client to make sure executive time for collaborative discussions actually happens.
  • A best practice in ensuring innovation actually can take place is to establish KPIs to address the innovation points, including the number of ideas that the parties generate.
  • If innovation is the objective, choose a service provider with in-depth knowledge of the buyer’s industry, one that can manage change and think outside the box.


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