IT Outsourcing: 3 Reasons Your Vendor Won’t Innovate

Internal IT organizations choose to outsource for any number of reasons: to cut costs, improve service, increase efficiency. Increasingly, they’re seeking innovation from their IT outsourcing partners, even though many don’t have a clear picture of what innovation means in the context of outsourcing. Consequently, those IT departments are not getting much innovation from their service providers.

According to a 2009 Forrester Research survey, 38 percent of IT outsourcing customers said lack of innovation or continuous improvement was their greatest challenge with existing vendors–up from 33 percent the previous year. (Also see CIO’s Exclusive Outsourcing and Innovation Survey.)

“Clients expect more from their service providers than just a cost reduction and reliable service,” says Forrester Senior Analyst Chris Andrews. “In many cases they want their supplier to be aligned with their own business concerns, and that implies some level of evolution in the supplier’s capabilities.”

Leading IT outsourcing providers recognize that innovation is integral to their survival. “None of the service providers I have ever spoken with is unwilling to engage in an innovation discussion,” says Andrews, who recently interviewed ten technology service providers to figure out the disconnect between customer expectations for and outsourcer delivery of innovation.

So what’s the problem? In a word–it’s you. Andrews says IT outsourcing customers make the following three seemingly basic, yet critical mistakes in attempting to procure innovation from their external partners. He recommends ways they can address these mistakes to obtain the innovation they seek from their vendors.

1. You don’t know what you want.

Everyone wants innovation, but no one knows what it is.

In talking to IT service providers, Andrews found that most agreed that innovation should help clients achieve “a new and disruptive business impact,” but the scale and scope of such initiatives fluctuated wildly. Before the recession, transformational IT outsourcing deals or “going green” were seen as innovative. In the last few years, however, the focus shifted to cost-cutting efforts, preserving cash flow or increasing efficiency. In the near future, innovation may center on cloud computing or social computing.

If an IT outsourcing customer doesn’t define innovation in its own terms, an IT services vendor can’t provide it. “I don’t think that many [clients] really know what they are looking for,” says Andrews, recalling an outsourcing RFP he recently reviewed with a “innovation” section. “It laid out that the service provider was expected to help the company innovate–without any definition or context. There is widespread confusion, and this confusion has a big effect on the alignment between service providers and their clients.”

If you want your outsourcer to innovate, you must define innovation in the context of your corporate objectives, says Andrews. A good way to start is to think about the various innovation stakeholders in your company–executives, line-of-business leaders, IT, product development, marketing–and what innovation looks like to them. For the C-suite, it may be transformation efforts that improve shareholder value or create long-term strategic advantage. For business stakeholders, it could be projects that increase sales or improve customer satisfaction. “With that understanding, the innovation discussion can be clarified,” says Andrews.

If you’re still struggling, ask a provider to help. Many outsourcers are willing to administer IT-business workshops to outline objectives for their most strategic clients. Some have processes to sharpen a customer’s innovation focus, says Andrews, such as Capgemini’s TechnoVision and Rapid Innovation frameworks, Fujitsu’s FutureScape program and Accenture’s High Performance Research.

2. You chose the wrong provider.

Just as a tiger can’t change its stripes, a body shop won’t ever innovate.

“If the client has literally picked an IT services provider only to get cost savings, they are somewhat unjustified in turning around and asking the supplier to bring them greater levels of innovation,” says Andrews. “This is a big complaint from the service providers themselves: we can innovate, but our clients won’t pay us for it. Cost-cutting and innovation can coexist, but they do not do so easily.”

Once you’ve figured out what innovation means to you, seek out providers that line up with your definition. These days every vendor’s marketing materials stress their ability to innovate, but a closer look will reveal that a provider’s perspectives on innovation are closely linked to its culture, history and typical suite of services, says Andrews. Indian provider ITC Infotech, for example, says its ability to build deep vertical relationships at the IT level is helping it evolve from offshore outsourcer to strategic partner. IBM Global Services’ pitch is that it incorporates its technical research and consulting expertise into technology-focused business innovation.

Vendor-developed processes and methodologies around customer-specific innovation can be helpful in illuminating a provider’s experience, approach, and in setting client expectations, but they aren’t compulsory.

“The midsize company Sierra Systems does not point to an explicit tool or framework to guide their innovation efforts,” says Andrews. “They simply rely on their deep understanding of a few key business processes and an intense focus on client relationships to improve their clients’ business processes.”

Most importantly, says Andrews, look for an outsourcer that’s enthusiastic about the innovation challenge. If you’re frustrated with the lack of interest in innovation in your existing relationship, take your concerns to senior executives at the outsourcer. If you still encounter resistance, he says, it’s time to look for a new innovation partner.

3. You didn’t set up effective innovation metrics.

Innovation in IT outsourcing varies from customer to customer. So, too, do innovation metrics. Outsourcing customers have to define their unique desired outcomes and tie those objectives to service levels in the contract.

That’s easier said than done. Outsourcers are starting to move away from traditional IT service metrics that are easier to collect–and meet–to more complex business-outcome metrics, but the transition “is happening more slowly than many expected,” says Andrews.

“Clients realize that a variety of internal and external factors could impact a business metric–not just the work of the service provider–and they are hesitant to link the dollar value of the contract to such a complex metric.”

Further complicating the situation is the fact that more quick and easy metrics for innovation–such as number of Patents or R&D spending–don’t do the trick when it comes to IT outsourcing and innovation.

There are pockets of new innovation-related metrics activity in the IT services industry. India’s Wipro is starting some of its engagements with metrics discussions. “Instead of dictating a traditional IT metric, they are honing in on a client problem statement such as, ‘We want to reduce our days-sales-outstanding,’” says Andrews. “That helps the Wipro delivery team think about ways to affect that metric with their technology capabilities.”

In many cases, IT outsourcing customers who want innovation must push providers toward metrics that align with their innovation objectives, whether it’s the introduction of emerging technologies, the development of more flexible technology platforms, process improvements, or increased business collaboration. Defining the desired end state will challenge vendors to come up with creative ways to meet your innovation requirements, says Andrews.

Source: CIO

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