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CIO upfront: Innovation through outsourcing - managing the paradox

CIO upfront: Innovation through outsourcing - managing the paradox

The optimal conditions for innovation are almost the opposite of the optimal conditions for successful outsourcing...Recognising this paradox, how do we make innovation through outsourcing work?

In order to maximise innovation, working with new suppliers – thus gaining access to new ideas – is preferred to dealing with known ones.

Prof Benoit Aubert, Victoria University of Wellington

Innovation is a constant preoccupation for managers. It is a key driver for growth, and being innovative is seen as the only way companies can survive in the long run.

The speed of innovation is accelerating and the variety and quantity of information required to innovate is growing every day. Companies are increasingly keen to collaborate with external partners in order to keep the pace of innovation. Deloitte’s Global Outsourcing Survey 2016 indicates that several companies use outsourcing as a source of innovation for the organisation.

Successful innovations through outsourcing take many forms: An aerospace company developed with a supplier new KPIs to manage vendors, improving significantly part management processes [1]. 

IBM developed a solution for Novartis enabling better tracking of anti-malarial drugs to save lives in Africa.  

Tyrol Air Ambulance uses new capability developed by an IT supplier to access high quality data while they are transporting patients.  

In all these cases, the exact solution was not known when the contract was signed. It was developed as an innovation project, not knowing for sure how or if it would work.

Interestingly, this move toward innovation through outsourcing creates a paradox.

On the one hand, outsourcing usually works best when contracts are clearly laid-out, SLAs are set, and results are monitored.

This clarity ensures client and supplier both know they are enjoying a fair deal. Choosing a known supplier is usually recommended since it will already understand the client’s work routines and culture.

On the other hand, research tells us that innovation thrives when workers have high flexibility and slack resources. In order to maximise innovation, working with new suppliers – thus gaining access to new ideas – is preferred to dealing with known ones.

The optimal conditions for innovation are almost the opposite of the optimal conditions for successful outsourcing.

Recognising this paradox, how do we make innovation through outsourcing work? There are several avenues enabling managers to consider simultaneously opposite sets of constraints and goals.

One avenue used by companies is to separate innovation into modules. The client retains the knowledge and control of its architecture and the suppliers are free to innovate freely for modules they are developing.

A new supplier can bring new ideas and, as long as the interfaces with the other activities of the client firm or the other components of a system do not change, innovation can be introduced while control is preserved.

This limits the innovation to the components of a system, but provides relatively easy contract management.

Another approach consists of periodic dual reviews.

Overemphasising contract control could kill innovation. Conversely, lax contractual management could lead to innovation at unreasonable costs

Prof Benoit Aubert, Victoria University of Wellington

Using product development stages (including idea generation, concept development, building the business case, product development, market testing, and market launch), managers conduct a dual review of the contract for each stage, considering both the outsourcing view and the innovation view and ensuring that a balance between both sets of goals is maintained.

Overemphasising contract control could kill innovation.

Conversely, lax contractual management could lead to innovation at unreasonable costs. Recognising the tensions and assessing explicitly both sets of criteria can provide good results.

A third approach consists in shifting managers from one role to the other. For instance, a contract manager, formerly responsible for outcomes like cost control and monitoring, is given responsibilities linked with fostering innovation.

In parallel, a former innovation manager is given responsibility for cost control and monitoring. This ensures that each one can understand the dual conflicting perspectives associated with the innovation contract.

Innovation through outsourcing can lead to great benefits. Faster innovation and access to new knowledge. However, it is a challenging undertaking.

Recognising and managing the paradox associated with innovation through outsourcing is essential for such approach to succeed.

The pressure to innovate restlessly is unlikely to diminish and the likelihood that one organisation can produce fast and sustained innovation by itself is slim at best.

In order to harness the ideas of external collaborators, a sophisticated understanding of the management of these new types of outsourcing relationships is needed.

Managers have first to recognise the paradox involved, then introduce some concrete mechanisms that can help achieve the goal of innovation through outsourcing.

[1] Lacity, M. C., & Willcocks, L. P. (2013). Outsourcing business processes for innovation. MIT Sloan management review, 54(3), 63.

Benoit Aubert (benoit.aubert@vuw.ac.nz) is Professor of Information Systems and Head of the School of Information Management, Victoria Business School (Victoria University of Wellington). His previous posts included Professorship in Governance and Information Technology at HEC Montreal (Canada). He also worked as a faculty member at Laval University in Quebec City (Canada). His main research areas are outsourcing, risk management, and new organisation forms. He was a member of the panel of judges in the 2017 CIO100 report of innovative ICT leaders in New Zealand.

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