Earlier this year I wrote about companies restructuring their outsourcing contracts to seek more flexibility from their suppliers, a trend spotlighted by TPI in its Index of the Outsourcing Industry for 2010′s first quarter.

The trend appears to be continuing, with companies looking to shorten their outsourcing agreements. S. Gopalakrishnan, CEO of Indian outsourcing giant Infosys Technologies, said in an interview this week that Infosys clients are “cutting large contracts into smaller contracts” and “are willing to commit only for the short term.”

While reports in some Indian publications, including this one from The Economic Times, put some of the blame on political rhetoric over outsourcing, the bigger story appears to be the still-shaky economy. Martha Bejar, president of global sales and operations for Wipro Ltd., another Indian outsourcing provider, says anemic budgets are making the company’s customers more cautious.

However, Bejar says, companies are more interested in transformational projects rather than just those designed to wring more efficiency out of their existing processes. She says: “It’s not only about cost. It’s about innovation.”

Indian companies have been insisting for some time now that their customers are more interested in innovation. A little over a year ago, Sudhakar Ram, chairman and managing director of Mastek Ltd., told The Wall Street Journal outsourcing models that emphasize innovation will be a “third wave” for service providers.

Bill Fowler, principal consultant for Compass Management Consulting, tapped an increased emphasis on innovation as one of 12 trends shaping the outsourcing market, telling me more clients are asking their providers to help them identify inefficiencies within the client organization’s internal environment that contribute to high costs and offer ideas for how those inefficiencies can be addressed.

I wonder, though,just how much innovation providers can offer if their outsourcing agreements are being cut short due to budget constraints?