Innovative Outsourcing – how’s that going for you?

Traditional outsourcing and innovation are in some respect ‘odd bed fellows’. Not because buyers don’t want to see their outsourced relationship move past optimization and do some really great things – and not because providers don’t possess the necessary vision about where IT and the industry is moving.  But I would just bet you that this beautiful synergy gets stalled by the vehicle that sets the tone of the relationship and establishes the rules of the engagement.

Indeed, most of your typical outsourcing contracts, SLAs and pricing models stand in the way of innovation. I don’t want to over simplify the problem but we all know that most firms decide to outsource for four primary reasons – Cost, Focus, Flexibility and Innovation.  We also know that without discipline and attention to business outcomes, at the final negotiating table the drivers quickly become COST, FOCUS, FLEXIBILITY and innovation.  Cost and Innovation – they are diametrically opposed.  The negotiating dialog of the past went something like this – “It costs my firm this much money to do this much work — please manage my mess as well as I do for less money”. And as much as I hate to say it, in order to compete with all of the other potential providers, the one you eventually select tells you it’s all about innovation.  It’s all about what they can do for you because they are immersed in your business and committed to your success.   It sounds like an incredible idea at the time but since you aren’t about to consider funding that innovation as a part of the arrangement, not all of what the salesman tells you makes it into the contact. And therein lies a very big problem.

Bottom line, your typical outsourcing contracts are built to manage cost and standardize services. Once those two are “done” neither party has any incentive to change anything.  To matters worse, most contracts hold the provider to service targets and schedules with steep penalties for failure and very little opportunity for reward.  It’s a counterintuitive posture in a contract, but just for discussion’s sake – say the contract says that the dollar benefits of innovation will be split 50/50. That makes a lot of people nervous, but it drives the right behavior, doesn’t it?

Enlightened buyers and sellers (and the advisors who help guide them through the journey) must understand that 1) innovation costs money, 2) innovation requires accepting that you might sometimes fail, and 3) innovation requires a contract that rewards the innovator. So for the business that determines outsourcing can be an enabler to IT and business performance, it is on them to make sure that they don’t put shackles on their partners—or themselves– but rather incent and reward them for helping them get to the next level.