Stop Expecting Innovation in Outsourcing

Spend Matters welcomes a guest post from Sara Enlow, Principal at Vantage Partners.

Our recent research and that of others shows that a lack of innovation and value add is one of the biggest disappointments of outsourcing customers today. While executives are generally pleased with savings achieved and the quality of basic operations, these arrangements are often failing to "wow" anyone with cutting-edge advancements.

Frankly, this shouldn't surprise any of us. Given the way that many outsourcing arrangements are crafted and managed, innovation in outsourcing is often little more than a pipe dream. It happens time and again -- eager to compare "apples to apples" and nervous about quality, customers spell out a set of stringent service-level requirements and create RFP processes where qualified suppliers duke it out (mostly over price). There's a lot of talk about innovation and creative solutions in the sales process, but as the weeks and months of negotiations wear on, the providers' margins are squeezed and it's a wonder that the "winner" can manage to deliver to the basic contract terms and make any sort of reasonable profit. The customer pockets his savings, nervously pores over SLA reports, and waits for the value add to roll in. And after 12-18 months of steady-state operations (and often "fine," but not "brilliant," performance), he starts to ask, "What happened to the innovation I was supposed to get?"

The reality is that providers aren't rewarded for bold moves and risk taking in existing deals -- they are rewarded for standardization (which allows them to scale operations, and thereby drive savings) and stability (minimal end-user disruption keeps business units off the backs of the governance teams managing these deals, which makes everybody happier). This is a good recipe for cost savings and more effective standardized operations, but not one for innovation.

Innovation in outsourcing takes work and investment, and it involves some risk and disruption that many customers just don't have the stomach for. And that's ok -- there are plenty of other benefits to be reaped from outsourcing. But executives who are really looking for innovation need to do some things differently. For starters:

Collaborate on requirements
While requiring potential suppliers to respond to a defined set of requirements allows for price comparison, it doesn't leave a lot of room for creativity. Some customers are taking a different approach -- sharing information with would-be suppliers about their business and operational goals and challenges, and collaboratively thinking through different possible approaches that take advantage of suppliers' strengths. While the resulting propositions can be more difficult to compare, they can afford you some creative options with different combinations of benefits and drawbacks to consider. And the process sets a tone of customer-supplier collaboration (vs. one of opposition) that can extend into implementation.

Give change management its due
We hear from many providers that a "not invented here" attitude among customers and a resistance to change often thwarts their efforts at innovation. An excuse? Maybe in some cases. But in our experience, governance teams are often too busy fighting fires to think hard about how to get key stakeholders and end users to play along with new ways of doing things. Change management is often still brushed off as the "soft stuff" that's hard to do well and even harder to measure. Taking an honest look at the barriers to change in your own organization, and putting in place specific strategies to remove those barriers is critical. And if you don't have the expertise internally, you might find it in your provider.

Jointly plan and align on accountabilities
Most buyers and providers do a bang-up job of planning for transition. Resources are assigned, milestones set, accountabilities agreed, and progress monitored. However, few companies and their providers plan as effectively to continue innovating post-transition. A few ideas may bubble up, but with all of the focus on basic operations, those ideas don't receive the resource and attention they need to thrive.

Innovation and value discovery programs require customer and provider participation and support. You can't sit on your hands and wait for innovation -- you need to plan and manage innovation jointly with your providers. Start by sharing information about your business goals and priorities, and asking your provider for an update on their capabilities and strategies. Then have joint teams brainstorm new opportunities -- ways to work together more efficiently and effectively, means for driving cost out, and ways to increase top-line value -- and prioritize the ideas based on effort and value. Resulting ideas then can be brought to fruition via a phased process of analysis, funding, and implementation, with agreed accountabilities and efforts to monitor progress.

The often-quoted definition of insanity is doing the same thing but expecting different results. So stop expecting innovation in outsourcing -- unless you're willing to try something different.

- Sara Enlow, Principal at Vantage Partners

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