Innovation and Offshoring: An Uncertain Mix?

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Back in September, I wrote a post wondering whether India was on the verge of becoming a hotbed of innovation, as consulting company Zinnov contended it was. According to Zinnov, a quarter-million Indian engineers are involved with R&D activities, a number second to California's Silicon Valley. A number of analysts questioned India's innovation capabilities, noting that most Western companies still see India primarily as a location for tasks like testing and maintenance rather than new product development.


While many companies appear satisfied with the financial savings generated by their outsourcing initiatives, far fewer see benefits that transform their business. According to a 2008 Deolitte study, 83 percent of companies achieved ROI of at least 25 percent by outsourcing. However, just 34 percent of companies queried by Deloitte felt they had ganed significant benefits from their service provider's innovative ideas or business-transformation efforts.


And business transformation is increasingly what companies want from their outsourcing efforts, say some experts. In a recent interview, Everest Research Institute Vice-President Katrina Menzigian said companies are becoming more strategic when outsourcing finance and accounting functions:

We are increasingly seeing a move toward reduction in complexity, working through global complexities and M&A complexities around F&A. We're definitely seeing more of a focus on creating process excellence and creating solutions that help bring expertise to a particular aspect of F&A. Of course, cost will always be part of the equation. But I think what we are seeing is cost being balanced against other things.

Service providers are trying to differentiate themselves with competencies in specific verticals or end-to-end processes or with more amorphous "value levers," which involve expertise in specific technologies, geographies and/or business capabilities, said Menzigian.


Is the growing emphasis on innovation and transformation a good thing? Maybe not, writes Arpit Kaushik in a CIO.com article. The founder of outsourcing consultant Crystals faults service providers' interpretation of innovation. While all offshore providers tout innovation capabilities, few of them back up their claims with action. Most providers offer improvements that are evolutionary, not revolutionary. He writes:

Have we really created anything new? Is changing the attributes of a pipe (making it fatter, increasing its flow, making it versatile) creating something new? And in what way has it generated value for the customer? When productivity increases and more work flows offshore, does it go to only improving the provider's margins or does the customer get a price benefit as well? How much of the proclaimed value is theoretical versus actual? Is doing things faster and cheaper all that's required to be innovative? Isn't there something more to it than that?

True enough, perhaps. But does innovation always involve something "revolutionary" like development of a new product? Nope, says Gartner, which points out that incremental process improvements are just as important as more radical reimaginings of products, services or markets.