6 steps on How to Achieve Innovation in Outsourcing

By: Ilan Oshri / Julia Kotlarsky

There has been a huge amount of growth in the outsourcing industry over recent years, so much so that it has become engrained in the way many large enterprises run their business. As the industry matures and the range of outsourcing services extends to higher value activities, client firms raise the bar regarding their expectations, seeking the delivery of high impact innovation from their vendors.

To keep up with market forces and changing consumer tastes, firms need to be innovative by tapping into both internal and external knowledge. The external element can be provided by an outsourcing partner, but it must go beyond the technical domain to demonstrate the vendor’s ability to transform business processes across the value chain as well as introduce management innovations that offer flexibility and agility to the client firm.

Research we conducted through Warwick Business School with Cognizant among 250 CIOs and CFOs across Europe, available at ValueOfInnovation.com, reveals just how important this innovation is: 64% of the responding firms believe that their ability to be more innovative contributes to the financial performance of their organisation. Seventy per cent of the respondents also thought that the innovation they have achieved through outsourced business arrangements has contributed to the financial performance of their organisation. And 53% of the respondents indicated that innovative capabilities demonstrated by the vendor are either important or very important in their vendor selection criteria.

However, the survey also revealed that businesses are not getting the most of outsourcers’ innovation capabilities – with only 35% actually quantifying the financial value that innovation adds to their business. In most cases they are struggling to prove its worth and make the case for future investment, due to the inability to measure the benefits it provides.

That’s why we have designed a six-step framework, which we refer to as the Innovation Ladder, to help companies incorporate innovation into their outsourcing strategy. Its aim is to ensure that the desired innovation is captured in the objectives of the outsourcing project as well as aligned with the outsourcing lifecycle and the business objectives of the client firm:

• Step One: Strategise innovation, in which executives need to consider what type of innovation is expected (i.e. incremental or radical) and what the expected impact of this innovation is at the operational and strategic level;
• Step Two: Design measurement instruments, in which executives are required to develop the instruments based on which the improvements achieved through either incremental or radical innovation will be assessed;
• Step Three: Assess vendor’s innovative capability, in which executives are required to develop a methodology which guides them to consider the innovativeness of the vendor as part of the other vendor selection criteria;
• Step Four: Design a contract for innovation, in which the contract should be crafted to include performance targets and compensations for incremental innovation and a clear roadmap to form partnership in order to achieve radical innovation;
• Step Five: Build relationships, in which the client firm and the vendor invest in mechanisms that support the on-going development and renewal of their relationships as a complementary element to the contractual approach;
• Step Six: Measure innovation, in which the client firm monitors and verifies meeting performance targets in incremental innovation and the health and performance of the radical innovation network.

With these six steps there is no reason why businesses can not only benefit from innovation, but also from knowing the monetary value it (and your partnerships) brings to the business.

Read more about the Innovation Ladder and the research findings in the following report.

By Prof. Ilan Oshri and Dr Julia Kotlarsky