The Outsourcing Innovator’s Dilemma
Stan Lepeak, Managing Director, EquaTerra Global Research
EquaTerra recently released the results of the 2009 edition of its UK ITO service provider performance and satisfaction (SPPS) study. EquaTerra conducts the SPPS market study program annually across several major European markets and is launching a US ITO version of the study in 2010. In the study EquaTerra surveys and interviews buyer executives actively engaged in managing major outsourcing efforts. A key component of the study is assessing buyer satisfaction with service provider performance based on a range of key performance indicators (KPI’s). Examples of these KPI’s include general satisfaction, quality, price, innovation and risk.
A KPI against which most service providers perform poorly is innovation. The average score given service providers on this KPI in the UK study was just 55 percent, the lowest average score among the ten KPI’s assessed. This is in contrast to general satisfaction that had an average score of 67 percent and quality, the highest ranked KPI in the UK study, rated at 76 percent. The score is calculated based on buyer self-assessment of satisfaction levels on a six point scale ranging from very unsatisfied (0%) to very satisfied (100%).
While the average score for the innovation KPI improved four percent from the 2008 edition of the UK SPPS, it is perennially one of the lowest ranked KPI across all of the SPPS market studies. Innovation, like transformation, is an often sought but generally elusive goal in outsourcing efforts. This is less an issue for an outsourcing buyer just seeking to only cut costs and does not expect innovation. As outsourcing continues to become more strategic, however, both in terms of benefits sought as well as activities in scope, delivering on innovation becomes more critical.
A fundamental challenge in achieving innovation via outsourcing is defining exactly what is meant by the term. Innovation is typically in the eye of the beholder. One buyer’s innovation is another’s mundane activity is another’s too risky endeavor. More commonly there is a difference of opinion on what constitutes innovation between a buyer organization and its service provider. This is in part because different buyer organization representatives typically have different views on innovation. Even where this is consensus, however, it is still very difficult to define innovation, tangibly measure its achievement and document its requirements in an outsourcing contract.
When seeking innovation in an outsourcing effort, key buyer decision makers must define what innovation means to them. They must define it in a way that makes it possible to both articulate the meaning and measure the degree of its achievement. They then must clearly articulate their innovation goals and desires to the service provider. This is not necessarily an exacting process. On the low end it could mean that buyer and service provider stakeholders regularly discuss innovation and gain a collective consensus on what they mean by the term and how it is addressed in the outsourcing effort. On the high end it could involve specifically defining targets for achieving innovation measured by proxy metrics such as improvement to process performance levels or more aggressively things like revenue generation or customer acquisition.
Buyers and providers must take care that any metrics employed to measure innovation are realistically tied to the work outsourced. Designing, building and deploying a new trading system for a bank, for example, could realistically get tied to a metric such as revenue generation of customer acquisition. Measuring innovation in running back office IT operations on the other hand would involve somewhat more mundane metrics such as processing volume levels moved to “the cloud.”
Buyers must recognize that the ability of an outsourcing service provider to deliver innovation is based on its skills as well as what has been contracted. There is typically a cost associated with enabling innovation. This is either because of the additional work required to enable it or because the buyer must pay a premium for a service provider’s “A-team” that has the skills and capabilities required to drive innovation. A buyer seeking the lowest cost for a service or focused purely on cost savings is unlikely to structure a deal than can economically support funding for innovation.
Achieving innovation through outsourcing is a laudable goal, albeit often difficult to achieve. Minimally buyers must clearly articulate their innovation goals and ambitions. When innovations goals exist buyers must ensure they are realistically accounted for in the outsourcing agreement and that there is a process in place to track their achievement.
Stan Lepeak
Managing Director, EquaTerra Global Research
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