The Outsourcing/Innovation Conundrum

Ann All

Some time ago I realized it wasn't fair to expect my 8-year-old son to behave himself unless I clarified my expectations of what constitutes good behavior. So now instead of simply leaving him with vague admonitions when dropping him off for a play date, I tell him not to pester a friend's pets or siblings, to keep the scatological humor to a minimum and to follow the rules outlined by the friend's parent.


A similar dynamic apparently isn't uncommon in outsourcing relationships, based on a article featuring insights from Forrester Research's Services & Sourcing Forum. Thirty-eight percent of respondents to a recent Forrester survey complained of a lack of IT innovation or continuous service-level improvements by their IT vendors. The desire for more innovation in outsourcing agreements is a persistent theme, one I've written about numerous times.


I think many companies see outsourcing as a means to achieve innovation, rather than an end. Some respondents to a Capgemini survey mentioned taking cost savings yielded by outsourcing non-strategic functions and using those savings to fund internal growth initiatives. In those cases, outsourcing plays an indirect role in business transformation efforts.


But while lots of people complain about this dearth of innovation, few offer suggestions for improving the situation. Transparency can help, says Dev Mukherjee, senior vice president and president of toys and seasonal items at Sears Holdings Corp. Like my need to be more specific with my son, he says companies must be more forthcoming about their problems with outsourcing providers if they want the providers' ideas for solving them. He suggests coming up with a list of five problems and then talking about them honestly with service providers.


Traditional outsourcing contracts and service-level agreements generally don't lend themselves to these kinds of dialogues. It may be necessary to modify existing sourcing strategies. The article mentions an interesting approach adopted by NASA, in which IT uses fixed-price contracts for stable, utility-based services and a more flexible cost-incentive model that rewards vendor initiative for more transformational efforts.


Several folks interviewed in the article mention the inherent implausibility in expecting outsourcing providers to offer strategic capabilities while keeping prices low. A suggestion from Everest Research Institute VP Katrina Menzigian, whom I interviewed earlier this year: Negotiate for a phased approach, one in which vendors are given more flexibility if initial cost goals are met. You should also reward vendors when they use technologies to streamline their own processes and pass along those savings to you.

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