How to Harness the Value of Outsourcing-led Innovation

By: Sanjiv Gossain

Companies who are engaged in developing innovation processes are also likely to be involved in outsourcing significant aspects of their operations. So how do you innovate when you’ve also outsourced? Sanjiv Gossain explores the issues.

In this age of globalisation, outsourcing has become an integral part of the way large, multinational enterprises are managed. From helping to provide application support, processing claims, managing networks, billing systems or even customer service, the majority of large businesses are spending more on outsourcing now than at any point in the last few years. Research from Gartner[1] shows that 53% of European organisations in 2010 were planning to outsource more with 40% due to increase their external IT services spending.

Innovation is increasingly becoming a vital element of outsourcers’ offering, and businesses are relying ever more heavily on their outsourcers to deliver  innovation capabilities.

Innovation is increasingly becoming a vital element of outsourcers’ offering, and businesses are relying ever more heavily on their outsourcers to deliver  innovation capabilities. Research we recently conducted with Warwick Business School among 250 CIOs and CFOs across six regions (the UK, Germany, Switzerland, Benelux, France and the Nordics), reveals just how important this innovation is: 70% of European C-level executives believe the innovation achieved through outsourcing contributes to their organisations’ financial performance. But, worryingly, the research suggests that businesses are not getting most of outsourcers’ innovation capabilities. If only 35% are actually quantifying the financial value that innovation adds to their business, how can they prove its worth and make the case for future investment?

Outsourcing-driven innovation

Modern outsourcing relationships now offer and deliver far, far more than just cost savings. They can transform the business.

As companies navigate the reset economy, they are investing wisely in processes that will be cost-effective and beneficial in the long-term. As both outsourcers and clients can attest, modern outsourcing relationships now offer and deliver far, far more than just cost savings. They can transform the business, achieving greater efficiency and productivity, helping a company maintain the competitive edge. The survey, available at www.valueofinnovation.com, suggests that many businesses are now turning to outsourcers to offer innovation capabilities. As CIOs across the globe are constantly challenged by the board to deliver value by doing things differently, 67% of European CIOs look to their outsourcing partner to develop ideas into new and improved processes.

Enterprise innovation is no longer a spectator sport; it is now in everyone’s hands. But, importantly, not all innovation is about once in a decade breakthroughs. Both radical and incremental innovation are delivering major benefits to businesses.

The future of work depends on next-generation business models which enable globally distributed teams consisting of the best innovative talent to provide new perspectives on a project or ongoing line of work.

In traditional models, innovation typically takes the form of a costly R&D-generated product that may or may not be monetised. In the reset economy, however, these projects are difficult to underwrite.

For innovation to work, it should be an enterprise-wide, collaborative initiative where vision and enablement are steered by senior leadership. The middle level owns and drives the initiative with the team implementing it. In order to deliver innovation to clients, we think innovation has to be embedded into the outsourcer’s make-up in three key ways. Firstly, culture. By making innovation part of employees’ everyday work, they can seek and identify challenges – to generate ideas and to collaborate effectively. Only in such a culture can every employee discover what it means to innovate, and how to contribute using their own ‘innovator’s mindset.’

Secondly, process. For each innovation initiative, and at every stage, a series of discussions between the outsourcer and the client is vital to ensure stakeholders are initiated. This sets the tone for innovation efforts to be tightly aligned with client business strategy. And thirdly, infrastructure. Outsourcers have to have the right infrastructure to enable the global execution and scalability of an innovation framework with clients, where innovation efforts and outcomes are measured and monitored, including the evaluation of innovation scorecards by the leadership team.

Framework

Where innovation often falls down is in its management. This is frequently one of the key weaknesses in firms’ ability to build an innovation capability. From measuring the return on investment to proving that all processes have tangible benefits, it has to be part and parcel of any outsourcing engagement. A recent study by SAP[2] among 500 senior IT staff in eight countries across Europe, the Middle East and Africa showed that they feel restricted in their investments as they have to divide expenditure between operations, maintenance and innovation. One third said the current IT strategy focuses on ‘keeping the lights on’ in the day-to-day running of existing IT systems and two thirds claimed this strategy ‘held them back’ from investing in innovation.

A modern outsourcing relationship, therefore, should help a business to innovate and set out metrics from the start. If innovation achieved through outsourcing is boosting a company’s financial revenues, this needs to be properly appraised and communicated.

In order to drive repeatable innovation, companies need to establish a framework with their outsourcing partners to determine their objectives and formalise the innovation achieved.

In order to drive repeatable innovation, companies need to establish a framework with their outsourcing partners to determine their objectives and formalise the innovation achieved. Developing metrics will also help the C-level share the results and prove the worth of outsourcing-led innovation. This benefits both parties, the CIOs in terms of the innovation and expert knowledge they can work with, and the CFOs with regards to their balance sheets and to increase profit margins.

Our research demonstrates that CFOs and C-level IT executives are aware of the financial benefits of outsourcing-led innovation. Tying this innovation back to the advantages gained from outsourcing – better talent, increased expertise, improved efficiencies and overall cost-savings – and communicating this to the stakeholders and the board, however, will help free IT staff from existing strategies and become more flexible.

Conclusion

So, while businesses are clearly turning to outsourcers to aid and deliver innovation within their organisations, many are missing a major opportunity to demonstrate its success by not measuring the benefits achieved or communicating these effectively. This can only mean that money is being wasted by investment into innovation initiatives that are not delivering tangible results.

The next steps must be to harness this innovation, by measuring it, communicating the effect it has on a company’s bottom line and growing it.

By Sanjiv Gossain