Is innovative outsourcing a pipe-dream?

The cost, pressure and nature of outsourcing restricts innovation says Fecteau. Vendors need to lower expectations or drastically change their outsourcing contracts to feel content.


John Smith had high hopes when Science Applications International (SAIC) took over Entergy's IT. Before the utility signed the five-year, $400 m contract in 2000, SAIC's sales team described a future in which it would lower Entergy's IT costs and improve service levels on everything from application development and maintenance to data centre management to desktop and infrastructure support. More than that, SAIC said it could become Entergy's partner in IT innovation.

"A partner in innovation" were the magic words for Smith, then IT director for Entergy's Southern Nuclear fleet.

"We were looking for a company that would do more than just manage our IT service delivery," says Smith. "One that would not just provide best practices and run IT like a railroad but could also provide some vision about where IT was going." Smith, currently in a temporary role assisting in the reorganisation of Entergy Nuclear, was particularly interested in SAIC's nuclear domain experience and its ability to apply that knowledge to the introduction of new business-specific systems.

But as the relationship with SAIC matured, Smith's disappointment grew. "Innovation was an expectation that was not delivered on," he says. SAIC met its service-level agreements (SLAs) and kept Entergy's IT costs under control, but there were no new ideas coming from the outsourcer, no guidance about emerging technologies Entergy should pursue. In short, no partnership in innovation.

The innovation promise vs. the innovation reality

When it comes to why SAIC failed to meet Smith's expectations, there is plenty of blame to go around. Smith suspects SAIC overstated its ability to move beyond the traditional provider's role of managing IT as a utility. He also admits that Entergy's leadership was unable to figure out how to manage the relationship with SAIC in a way that would encourage that kind of strategic involvement. Perhaps most important, despite what both sides said, innovation was never officially part of the deal.

"When we were all sitting in the room, there was all kinds of talk about what might be possible," says Smith. "And what was possible got sold a lot harder than what actually went into the contract." (SAIC declined comment on its relationship with Entergy.)

Smith is not alone in his frustration. Forrester Research reports that 42 percent of buyers are dissatisfied with the innovation provided by their primary outsourcer. According to a recent CIO survey, 44% of respondents were unhappy with the innovation provided by offshore outsourcers (21% were dissatisfied with the level of innovation provided by domestic providers). Of course, these numbers do not take into account IT leaders who are entering their deals with limited expectations or who are looking for more straightforward relationships with providers.

"When you talk to suppliers before the contract is signed, they talk innovation," says Mark Kobayashi-Hillary, off-shoring director of the National Outsourcing Association (NOA), a U.K.-based outsourcing trade organisation. "Once it's signed, they need to service the SLA. So you'll find outsourcers that hit all the key indicators and still the client is not happy.” “(CIOs) look at the dashboard and see that everything's green," says Ben Trowbridge, CEO of outsourcing adviser Alsbridge, "but they still feel red."

According to an Alsbridge survey of 300 buyers of IT services, the biggest gap between outsourcing benefits sought and achieved exists around innovation. The same research found that suppliers themselves say that their inability to innovate to client requirements is their biggest challenge.

As was the case at Entergy, both sides, customer and provider, bear responsibility for the failure to deliver on the promise of innovation. Though EDS or IBM may sell the idea of transformation, and offshore providers like Tata Consultancy Services (TCS) or Satyam may say they want to deliver higher value services, the former cannot afford to do so due to decreasing profit margins and the latter built their businesses on commoditising IT services, not innovating.

While IT leaders may say they want something more than "your mess for less," for the most part they're still focused on price, according to outsourcing experts. Most IT shops, says Trowbridge, are unable either to manage the relationship with their outsourcers in a way that yields innovation or are ill-prepared to implement the changes they say they want. Even when buyer and seller think they are on the same page, a clear definition of what constitutes innovation is rarely built into the deal.
That leaves CIOs with two options if they are looking for innovation: Make radical changes to the way they establish and manage those relationships, or give up on the idea entirely.

The innovation debate

There are two schools of thought about whether IT organisations should look to outsourcers for innovation. "If you are a big retailer and you've outsourced IT to IBM or TCS, those are the guys who are going to understand the way technology is changing, whether it's SOA or green data centres or using Web 2.0 to reach the customer," says Kobayashi-Hillary. "If you're a bank or a utility, you're not going to be an expert on social networks or how to utilise Second Life in the business. The service providers are." Outsourcers, after all, have strong partnerships with hardware and software vendors.

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