To expect innovation from an outsourcer reveals a lack of understanding of the business model under which the industry works. An outsourcer is in business to make money out of you (nothing wrong with that, it's a business - just like yours). It is a vendor in a standard, contractual client/vendor relationship. Outsourcing makes sense when you as a customer can toss a "specifications document" (in the broad sense of the term) to a vendor and basically say "please do this for me" and then walk away (management and coordination notwithstanding).

Needless to say, innovation doesn't fall into this category. Innovative applications development requires a continuous back and forth between the business and IT - ideally in an iterative or agile mode which brings out incremental innovation at 3-6 month intervals. This approach does not lend itself to the client/vendor relationship of the outsourcing model. This can only be achieved under a shared risk/reward partnership (a real one, not a "spin" one). Internal IT departments are natural candidates for this - outsourcers are not. While the more innovative amongst them might adapt to this model (and I’ve actually worked with a few of them who are trying out new stuff), most would be incapable of shifting from their traditional client-vendor model based on contracts, SLAs and long-term commitment. As Stephanie says, these are the factories, and factories don't innovate – they produce commodities.

Oh, and btw, this is easily one of the best articles that has ever appeared on CIO.com..

Michael Gentle

Stephanie,

I am running the US operation of one of the largest Chinese outsourcing companies. We focus our efforts on software companies, and our message to our prospects is that we want to become their partner for innovation.

So needless to say, your post got my undivided attention!

First and foremost, let me say that it seems like a very questionable move to fully outsource innovation. If a company has lost its ability to innovate, I do not see how would outsourcing improve the situation. In addition, I do not believe it is the role of an outsourcing/BPO provider to innovate in lieu of their clients.

It reminds me a comment from Bill Homa, CIO of Hannaford Bros., that I read some months ago in CIO magazine. “If you are outsourcing a problem, it will still be a problem.” How true!

I recently read on Mark Hillary's blog an article “can innovation be outsourced” that describes an initiative from TCS (Tata Consulting Services) in the UK. I understand from his article that this initiative has not produced any visible output so far.

The way I understand being partner in innovation is quite different, and it is to provide our customers with all the required instrumentation and organization that will enable them to focus on and therefore accelerate innovation; in other words, to create the conditions to “commoditize” the process of creating products from their ideas and concepts.

I am not to elaborate on our recipe, but our measure of success is our customer’s ability to innovate faster and better.

This may sound painful, but expecting "innovation" is the most commonly misunderstood aspect of outsourcing.

Clients usually outsource to save money. Vendor cost cases reflect this, and the winning solution never includes an expensive annual "rethinking" of the delivered solution. Vendors implement a cost effective deal that utilizes standard toolsets and processes (the same ones they use for ALL their clients), and deliver this solution for 5-7 years.

That is the Nature of the Beast.

Innovation costs money. Vendors may invest in innovative projects silently and subsequently reap the benefits of the ROI for themselves (and they often do). Problem is, clients want the cost savings from innovation too, and therein lies the problem. The statement “I want more innovation” usually means "Why aren't you using those new efficient technologies on my account so I can save some money?"

So here it is in a nutshell: Why would the vendor invest their own money in an expensive (possibly risky) project that would likely result in lower revenue for the vendor?. They won’t, unless they are pushed hard by the client to do a specific task the client recommends. Simply put, outsourcing vendors never actively do things (much less expensive things) that would force them to lower their revenue. Never. Ever. Period. Commitments for revenue (contracts) are the Holy Grail for all outsourcers, and they will not proactively look for ways to diminish the value of those contracts.

That is The Nature of the Beast, and it has been that way from the beginning.

Clients must drive the innovation (or “architecture” to use a less spectacular word), as vendors have every incentive not to do it. Driving the innovation will always cost extra, but that is the price paid for that “low cost solution” which was signed three years earlier. These are the basic economics for all outsourcing (IT or otherwise), and this needs to be fully understood by the client prior to outsourcing.

This is not necessarily a bad thing. It is just the way it is, and relationships that recognize this are often quite successful. Expectations regarding these realities must be set early, which is often difficult as it is contrary to almost all the marketing materials which got the vendor in the door in the first place.