How to Get Innovation in Outsourcing [Dream or Reality?]

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There are many reasons why you may decide to outsource part of a function to an external service provider. Interestingly, alongside the well-known cost-related drivers, more and more managers have started looking into outsourcing, not just as a way to do the same thing cheaper, but as a way to do things better, or to do new things.

Underlying this is the idea that service providers are the "experts". They know much better than we do how to run those activities. In the end, it is their core business, not our core business. And there are, indeed, very good reasons to believe that working with experts should help us improve and innovate our processes.

Why is it, then, that when it comes to tangible innovation outcomes, outsourcing looks more like a desert than anything else, with innovation like water: nowhere to be seen? What is it that we are getting wrong? And is there anything we can do about it?

Observing companies and talking to managers trying to achieve innovation through outsourcing, with more or less success, I have come to conclude that there are 5 main reasons why we end up in this innovation desert.

Problem # 1: We do not (really) want it

The first reason, and this one probably drives all the others, is that in most cases, we do not really want innovation. Don’t get me wrong, I do not mean that we do not hope for it. Secretly I think most managers hope that their outsourcers will help them get better, and they even think they should do so. But the problem lies precisely in the fact that it often remains a hidden secret because we do not dare to make innovation a priority.

Now honestly, having worked on innovation even longer than on outsourcing, I don’t think outsourcing per se is the problem. Innovation in general is difficult and uncertain, and therefore a little uncomfortable. Looking at costs, on the other hand, has something reassuring about it. It gives the impression that this is something we can easily measure, and therefore control. It also tends to be a very legitimate thing to do in most organizations. While innovation is accepted, it often does not go beyond a bunch of techno geeks or scientists in the lab. Not in day-to-day operations. Not in my backyard, please.

In the end, I would say that innovation is on the wish list of most managers busy with outsourcing, but it rarely gets the driving seat. No wonder then we don’t see much of it.

Problem # 2: We do not define it

Innovation through outsourcing also tends to remain an elusive dream because more often than not, we fail to define what we mean by innovation. What is it that we dream about?

Is it continuous improvement through repeated, but mostly minor, modifications to make existing processes work better? Is it the suggestion of better practices that may involve a more profound redefinition of processes? Is it only the suggestion, or also the implementation of those better solutions? Is it about the development of radically new solutions that do not already exist whether inside or outside our company? It is innovation for us or with us? It is technology or business?

In the end, as Dave Anderson from Gartner has said: "It is ultimately up to the buyer to define what it means by innovation. If you cannot define it, you can’t expect it."

Problem # 3: We do not search for it

The next reason why we do not see much innovation coming out of outsourcing has to do with the way we select service providers.

If you want to buy different bread, depending on the kinds you want, you will not buy it all from the same place, right? If you do not care about the type of bread you buy, you may buy industrial bread at the grocery store together with you other groceries, because that is convenient and maybe cheaper. If you care about fresh bread, you may decide to instead go to a bakery, and add that stop on your way back home. But if the best bread in town is what you want, or fine and fancy pastries, you will probably start comparing bakeries, ask references of friends or colleagues, and you may be willing to drive an extra mile, and pay a little more, to make sure you get the best of the best.


Why don’t we adapt the same kind of basic behaviour when we buy IT, finance, or engineering services? If innovation is what we want, innovation capabilities of the provider must be reflected in the selection criteria we use. And if we find a provider who pretends to be both the cheapest and the most innovative, better think twice, and check. The capability to overcome inertia and really drive innovation typically comes at the cost of a higher price. But, instead of looking at it as an extra cost, if innovation really is important, we should see it as an investment.

There is no problem with cost savings-oriented outsourcing, if that is what we want. But secretly hoping for innovation while selecting on price simply does not work.

Problem # 4: We do not ask for it

Now imagine we do look for a provider that could drive innovation, and we do find one. Innovation will not happen unless we ask for it.

The first step is certainly to talk about it openly with the provider, and clearly express that our satisfaction with the deal will not only come from its ability to deliver service according to plan, but also from its ability to improve the way the service is delivered, or maybe even come up with a better service altogether.

But even that will not be enough. Unless it is reflected in the contract in a meaningful way – I will come back to what that may mean – that will not happen.

Problem # 5: We do not behave for it

That being said, if the contract is a cornerstone of any outsourcing deal, outsourcing is also a people business. And what we get out of it in the end is the result of how we behave in the relationship – as a provider certainly but also as a client. I always say that it is easy to blame the provider. But it takes two to tango. It is the same with outsourcing, and certainly with innovation in outsourcing.

If we feel we are not getting the innovation we hoped for when we entered the deal, better take a step back, and, before blaming the provider for not being innovative enough, looking at our own organization, our own people.

Are we doing our part of the job? Are we visibly demonstrating that innovation is what the provider should be busy with? What is it that we hold him accountable for? Savings? Quality SLAs? Certainly. But innovation, too? Do we open the doors of our organization enough to give the provider a realistic chance to come up with relevant ideas for improvement or for radically new sources of value? Or are we asking him to bet on what our challenges are and what kind of ideas we would consider novel enough? And if new ideas do actually emerge from the relationship, are we there to help the provider push them through our organization?

So much for the diagnosis. But what could we change if we want to increase the odds of seeing innovation coming out of outsourcing deals? I would suggest that every one of the 5 identified problems naturally leads to a piece of the solution. Here is how:

Action # 1: Aim for it

First, we should be clear about what we want to get out of outsourcing – and if innovation is on the list, what level of priority it should receive. From there, we should put it in the business case and run the outsourcing process accordingly, from supplier selection to contract negotiation, and eventually to how we behave and manage the relation.

It is much more difficult to change an existing deal that was built around the idea of delivering the same for less into an innovation generating deal, than to build in innovation from the start. We may want to start small and easy, and not innovate at first. But if we know innovation will become important, we can already plant the seeds of what will be needed when we get to that next phase and make sure that we select a provider that is capable of innovation … or we may decide to start with a short term contract to buy a commodity service, and then turn to something else when we think that the time for innovation has come. But in that case we should not expect innovation to come out of that first contract; it won’t.

Action # 2: Describe it

We should also be able to define what we mean with innovation. Again, innovation can be anything we want it to be, as long as it is clear – and clear is not just vis-á-vis the provider, it is also internally.

Does everybody involved in the outsourcing deal agree and share the same vision of what kind of innovation we are aiming for? When deciding on the type of innovation we want, does everybody understand, and accept, the consequences of the choice?

We need a shared vision about innovation from the front line to the top, and all across the organization, from business to IT and procurement. The alternative is a one-way ticket to guaranteed frustration, and resentment against outsourcing and the service provider.

I often recommend to start with a very simple question: "What would make us happy about the innovation outcomes generated through this deal?" If we can all agree on this, we have already made a giant step forward.

Action # 3: Select for it

Then we must make sure that in the "beauty and the beast" contest of supplier selection, the criteria we use to choose do not automatically favour low cost beauty over the innovative beast.

The problem is that is it obviously more difficult to assess whether a provider is capable of innovating, coming up with novel ideas and driving them to implementation, than assessing technical skills, or costs.

But we can, and should, ask for client referrals, and talk to past and current clients of the provider. Ask about attitude, willingness and ability to align with customer priorities. Does the provider try to educate its customers about the latest technologies and developments in the field? Is the provider flexible to change if clients’ priorities evolve? Does it make time and space for innovation? Can it show evidence of past innovation? Does it have the governance and communication channels to talk about and drive innovation?

Action # 4: Contract for it

I agree that integrating innovation in a contract in a meaningful way is easier said than done. But there are at least three options that I have seen work. The most important is to choose the right option for the right type of innovation.

The first option is to integrate innovation in the core statement of work of the contract and adapt the incentives and KPIs accordingly. That can be an appropriate option for continuous improvement kind of innovation. But if what we are after is to really change the way we do things, it may be difficult, within the same statement of work and set of SLAs, to make sure that current operations run smoothly while at the same time changing the processes. Those two things arguably require different pricing schemes, and different kinds of people and procedures.

Thinking of these as complementary but different objectives typically drives better results. One option is to have, within the same contract, a dedicated statement of work with pre-negotiated terms for future innovation. A more radical, but effective, way of doing this, if we really are after something new, may be to split the contract value into two parts. We can then sign a contract with a provider for "running" the activity. In parallel, we make sure the provider is in a position to understand our business, and we offer the possibility to earn the rest of the contract value by coming up with innovative ideas. [Ed Hansen from McCarter & English has also often discussed that option when talking about ways to drive innovation through outsourcing.]

Action # 5: Govern for it

Finally, our innovation ambitions must be reflected in the governance structure, governance team, and metrics we use to follow up on the relationship. And I said to follow up on the relationship, not follow up on the contract – because innovation, more than anything else in outsourcing, is about people being willing to share ideas, discuss, and work hand-in-hand towards better, faster, new ways of doing things.

It is, therefore, critical to have the right people around the table to talk about innovation. Operational people may not be the best for that as they often lack visibility and authority to drive innovation. We will also want to have dedicated meetings for innovation because those discussions require a different mind-set than discussing operational or financial issues.


So where do we start all this? In outsourcing, like with anything else, it only takes us to change the way we do things to make innovation work. In that sense, our mental frames maybe the biggest barrier against innovation.

Commodity outsourcing is reassuring. It is something controllable, and if things go wrong we can realistically blame the provider. Innovative outsourcing requires that we dare step out of our comfort zone, and accept sharing responsibilities instead of just pointing fingers.

That is a completely different ball game.