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Outsource magazine: thought-leadership and outsourcing strategy | August 22, 2017

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Navigating Innovation: The First Three Steps

Navigating Innovation: The First Three Steps
Paul Morrison

Innovation is the zeitgeist of outsourcing today (as the Summer 2014 edition of Outsource made clear). With budgets tight, and technology bringing new options and tools into play, everyone is trying to succeed by doing things differently. However, Aecus’ research in this area has shown widespread disappointment when it comes to innovation in outsourcing: 71% of buyers say they are not satisfied with the level of innovation they get from their outsourcing work:.

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However there are grounds for optimism. Aecus research shows that at the root of this disappointment are very often fundamental but avoidable misunderstandings about what innovation is and what it needs to thrive. The Aecus Innovation Blueprint aims to help orientate organisations and to approach innovation constructively from the start, and avoid these misunderstandings. The Blueprint addresses three fundamental questions:

  • Define: What is innovation?
  • Fund: How will the innovation be funded?
  • Enable: Are the right enablers in place?

1. Define: What is innovation?

The first problem is one of definition: any conversation about innovation in outsourcing begins with tangle of inconsistent ideas. “That’s not innovation, that is transformation/continuous improvement/process improvement [delete as appropriate]!”; “To be innovative, you need to be creating a world first”… One man’s innovation is another’s business as usual.

It sounds banal, but the consequence is that the outsourcing market lacks a common frame of reference; when suppliers and clients meet to talk innovation, they talk past each other; and even within a single organisation, Finance, Operations, Procurement and Legal lack a common language when it comes to talking innovation. It seems innovation doesn’t happen much because we can’t agree on what it is.

This seems absurd, as on a basic level the definition of innovation is incredibly obvious. At Aecus we define it simply as creating value by doing things differently. Dig a little deeper, and it is possible to find further common strands. In May 2014 we announced 18 awards to recognise what was possible through innovation in outsourcing. Our analysis of the awards showed that all the cases:

  • Solved a business problem (like improving C-SAT or reducing churn)
  • Harnessed an idea or combination of ideas (such analytics, automation or a customer channel)
  • Were viewed as innovative by the organisation (all created a strong ‘feeling’ on the part of the client).

So far, so simple. The problem is that beyond these basics, and the picture becomes really complex:

  • Does innovation in outsourcing relate just to deals, or does it really ‘live’ at a relationship level which develops over a very long term?
  • Does innovation require you to change your industry or the world, or does changing your business or your team qualify?
  • Does innovation need to be spontaneous (a new idea taking flight part way through an established relationship), or can it be specified at the start of a contract?
  • Does innovation in outsourcing rely on new technology, or can it draw on old ideas in new ways?
  • Can innovation really be described because by definition it is always changing?

One of the main patterns we have observed is that innovation in outsourcing appears most often to take one of four basic ‘forms’: Continuous Improvement, Project Innovation, Radical Innovation, and Business Innovation:

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Each operates at a different level of impact, and is regulated by a different mechanism: Continuous Improvement relates typically to small-scale changes that are committed to in the initial contract; Project Innovation is at a larger scale, regulated by change control; Radical Innovation typically requires a new contract because the change is so profound; and finally Business Innovation, typically through consulting or analytics, seeks to change the client business overall, not the service that is outsourced.

In reality, these patterns may well not fit exactly every case of innovation in outsourcing, and we are relaxed about this. The key is to recognise that innovation in outsourcing is not one thing: it is a family of opportunities, and one recipe alone will not suffice. Our approach is embrace this variety, and to take a ‘broad church’ view of innovation. Definition will get you only so far, and beyond that an open mind is essential.

2. Fund: How will the innovation be funded?

Once you have clarity on definitions, the next challenge comes into focus quickly: MONEY. In short, innovation in outsourcing does not happen by itself. It requires effort to plan, deliver and run; effort requires investment; investment entails risk; and hopefully it should result in benefits, soft or hard or both. All of these require careful consideration.

The importance of our first question on definitions is immediately apparent: not all innovation is of the same type, and different flavours of innovation will require different funding approaches. Take a process improvement for an HR self-service tool, versus the roll-out of a major new SaaS-based HR system like Workday. Both might be cited by a buyer of outsourcing as innovative, but the funding questions and answers and mechanisms will be entirely different.

Taking our four ‘forms’ for reference, it is clear that each type of innovation faces a different set of challenges:

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The examples provided here are indicative; but the main point of the Aecus framework is to recognise variety in innovation. Make sure you find a funding mechanism, and a share of risk/reward, that fits the types of innovation you are seeking, not a one-size-fits-all approach.

Our 2014 Innovation Awards showed a wide range of commercial models, but the majority were variations on two themes: either a fixed price (a long-term ‘bet’ by the supplier that they can deliver the innovation, typically focused on cost reduction innovations) or gainshare (a mechanism for apportioning the benefits of the innovation between client and supplier when they reach a target level, which is suited to both cost reduction and revenue growth innovations).

There are further funding related questions that need to be aired and addressed – such as finding a sufficient level and duration of payback for a supplier whose existing service revenues may fall as a result of innovation (clients are often to mean and supplier incentives are often far too low); finding a means of quantifying the impact of the innovation and avoid endless arguments over causation; and factoring in the value of the IP assets that the parties bring to innovation.

3. Enable: Are the right enablers in place?

Having addressed definition and funding, two of the fundamentals are in place and you are in a good position to tackle the third challenge – the simple matter of putting in place the right enablers to make innovation happen. Do you just need a few beanbags and a pinball machine in the canteen, or is something more radical required?

Having interviewed dozens of organisations as to what they do to make innovation happen, our shopping list has grown from a few to a few dozen items:

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We recognise that our enablers list has something of a ‘kitchen sink’ flavour to it – and we don’t apologise for this. Because there are many different types of innovation, not all elements will apply to all organisations. But beyond the noise, all enablers fit into one of three buckets:

  • Right framework. Does the organisation have the right ‘infrastructure’ to get innovation from its outsourcing relationships? Does it have clear but workable contractuals? Does it have capable and creative suppliers? Does it have the right roles and meeting places for the parties to come together to talk innovation?
  • Right ideas. Does the organisation, and its partners, create sufficient and sufficiently good ideas about what can be improved? Does it generate insights about what customers and stakeholders want? Does it gather information from the market and benchmarking about what is possible?
  • Right implementation. Does the organisation have the ability to take new outsourcing ideas forward? Is it able to focus attention solely on the best ideas or does it get swamped by the dross? Does the organisation have the expertise, flexibility and sponsorship to drive major change?

Stepping back from these three challenges, we feel that the overall picture is positive and empowering. It is that innovation in outsourcing is the product of many separate but reinforcing steps and decisions. Innovation in outsourcing is the result of putting in place a well-designed process, and constantly tending and improving this over time. Every day more organisations are discovering what is possible.

This article was first published in Outsource #37 (Autumn 2014)

For more on the Aecus Innovation Awards and innovation in outsourcing, click here.

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