While cost-cutting is the core goal for most outsourcing ventures, suppliers are always keen to make sure that innovation is also a priority of the contract. However, while it is all well and good to outsource a process and agree that the supplier needs to “innovate,” as a covenant of the contract, there needs to be the correct arrangements in place for this to occur.
As Phil Pavitt, CIO of Her Majesty’s Revenue and Customs says: “No supplier is truly transformational. Innovation comes from deep within an organisation. Suppliers are enablers. Innovation happens when the partnership is balance.”
And balancing a partnership means agreeing, at least some of the time.
A mutual definition of innovation is essential. This should be done before the implementation of the venture; otherwise a mismatch of expectations can arise. With clear definitions and measurement strategies in place, it is far easier for users to define their expectations and consequently for suppliers to meet them.
Whether it is continuous improvement - called “micro-innovation” by some - to tweak, develop and enhance processes or full-on, all guns blazing, mass systemic overhauls, all parties need to know the difference or one partner is going to be disappointed.
So once the user has defined exactly the level of innovation they expect form the supplier, how do they go about making sure that innovation is delivered? It can be drawn in to the contract as an SLA, but this can be a counterproductive tactic.
The purpose of such an SLA would be to mandate innovation, sometimes with pecuniary penalties for non-compliance. This can lead to transformation for transformation’s sake - fixing it when it ain’t broke. Suppliers scrambling round to be innovative to meet targets can cost money, and in some cases, ultimately prove wasteful.
It is better to incentivise innovation, on a gainshare model. Rather than reprimanding suppliers for non-deliverance of an SLA, offer a financial incentive for provision instead. Tempting with the carrot, rather than threatening with the stick -at least then you get innovation for the right reasons.
There is no need to force it- get everyone involved, at all levels of stakeholder, - in Phil Pavitt’s words ‘deep within the organisation’ and those eureka moments will arrive.
And to make sure they do, appoint named innovation leaders - on both sides on the deal. These are the guys who will passionately seek out innovations. The right innovations, for the right reasons.
As Tony Morgan, Strategic Outsourcing Chief for IBM and NOA Board Member, says: “innovation in outsourcing is about partnership, being pro-active and having a systematic process to fast track from discussions to delivery. If you really want innovation in your outsourcing arrangement to work, why wouldn’t you make somebody accountable for delivering it?”