Bridget Fleetwood, Legal Director at international law firm Pinsent Masons LLP, looks at how, when and why there are real opportunities for outsourcing to enable innovation and deliver business value.

Outsourcing has been around long enough now to feel familiar and tried-and-tested yet it continues to present difficult challenges.  One of those challenges is delivering innovation.  Customers often say that their outsourced IT supplier is “very good at the boring stuff” but somehow doesn’t seem to grasp the nettle of innovation.

Why does it matter?  Well for one thing innovation is highly valued by customers.  Surveys show that the most satisfied customers are those that have innovative suppliers.  Innovation is also identified as a key enabler for efficient and effective services, sometimes at a lower cost.  This is more relevant today than ever.

At a recent event hosted by the National Outsourcing Association (NOA) on innovation in outsourcing , many suppliers and customers debated the issue.  By the end of the day, there appeared to be a growing consensus as to the factors that help or hinder innovation within an outsourcing relationship.

The innovation challenge

As outsourcing lawyers, we have an interest in understanding these factors to allow us to assist delivering innovative deals to clients.   We are often asked to advise customer clients who, at the outset, identify innovation as a key business objective of their procurement.  Some are less clear than others about what this means in practical terms and as a result it is often left to suppliers to describe the innovation that they wish to deliver.

This is less than ideal.  For one thing, it means that the customer has lost the initiative in terms of aligning its procurement to business drivers.  For another, suppliers may not be in the best position to second guess what is needed and can be confused by any mismatch between the customer’s apparent desire to buy an innovative service and a contract that is drafted in such onerous terms that the supplier has no incentive to innovate.

What also seems clear is that both customers and suppliers need a realistic understanding of what innovation can be achieved in the circumstances.  There is little point in attempting to contract for innovative service delivery when the relationship contains no trust (perhaps because it is new and untested) or where the customer simply has no appetite to pay for innovation or accommodate the resulting changes within its business.

All too often we see an uncomfortable half-way house emerge whereby the contract pays lip service to innovation through annual “five good ideas” targets and gainshare models that only deliver rewards to the supplier if separate business cases are signed off by the customer (and they rarely are).  These sorts of provisions are not only difficult to enforce but end up being meaningless and can be treated with cynicism as a result.

Grasping the nettle

So how can the legal and contractual elements of a transaction create the right environment for innovation?   First, all efforts will fail unless the customer’s ambitions for innovation are articulated clearly within the procurement process and ultimately the contract.  Innovation can mean many things from using cheaper technology to developing a new customer product.  Whatever is needed, it should be reflected within the contract.  It is then the job of the lawyer to find the right contracting model.  One size does not fit all. If a customer wishes its outsourcer to generate genuine business change, evidence shows that alliancing, joint ventures and outcome-based contracting models can be the best way forward as they combine elements of collaboration and business focus that other more traditional contract forms sometimes lack.

True alliances and joint ventures in the outsourcing market are rare (though we have worked successfully with clients to create interesting shared ownership and multi-party alliancing vehicles) but there is a renewed focus on the role that outcome based contracting can play and we have seen a number of examples of outcome-based principles being used within the outsourcing arena. Since the customer’s requirements are defined by reference to business outcomes (eg more products sold) rather than deliverables or inputs (eg availability of networks), there is more scope for a supplier to define its own solutions, if appropriately incentivised, in an innovative way.  Intellect has been particularly active in promoting the debate, with a recent paper  highlighting the correlation between outcome-based contracts and the level of valuable innovation delivered to the customer.

Where transformational projects are an intrinsic part of the customer’s requirements, it is worthwhile exploring the extent to which the levels of innovation can be enhanced – whatever the nature of the outsourcing contract.  Innovation may be delivered on a small scale and yet still be highly valued.  For example, within a standard outsourcing deal with output-based service descriptions and SLAs, it can be useful to define transformation by reference to business-driven success criteria – such as increased user productivity.  Collaboration during complex transformational projects, involving business change, is also key and can be recognised with a unique governance model and appropriate measures which apply to the transformation programme.

A dose of realism

Not all customers are ready to bite this bullet and this is not always through a lack of appetite.  We recognise that there are circumstances in which it is unrealistic to expect a high degree of innovation.  Research shows that cultural and environmental drivers will largely determine the success or failure of an outsourcing designed to deliver innovation:

• how “ready” is the customer for true innovative service delivery?
• if commodity or XaaS type services are involved, how appropriate is it to require innovation?
• is the customer prepared to share its business plans so that a supplier can offer innovation that is worthwhile for the business?
• is the supplier perceived to be a competitor?
• how likely is innovation to result if the customer and supplier hardly know each other at the start of a first generation outsourcing?

Finding the Holy Grail

Innovation can be inhibited by these constraints.  But our experience is that innovation can flourish if the right ground conditions exist.  With executive sponsorship, investment of time and people to create to a collaborative environment and, above all, a willingness on the customer side to invest, allow financial incentivisation and to business change, we see real opportunities for outsourcing to enable innovation and deliver business value.