Dynamic Innovation in Outsourcing

Theories, Cases and Practices

Leslie P. Willcocks, Ilan Oshri, Julia Kotlarsky, Leslie P. Willcocks, Ilan Oshri, Julia Kotlarsky

• Publisher: Palgrave Macmillan
• Year: 2018
• Print ISBN:
  9783319753515
• eBook ISBN:
  9783319753522
• Topic: Business
• Subtopic: Management
• Index: Business

This book is a guide for achieving innovation through outsourcing. Unpacking the various challenges faced by client firms and suppliers, the authors take the reader through the innovation lifecycle and devise a clear plan to achieve valuable results. Offering practical frameworks and tools to ensure informed decision-making at every stage, this book also includes collaborative structures and metrics to measure outcomes. Written by leading figures in the area of outsourcing, this book offers both the academic rigor and the hands-on experience based on dozens of cases that walk the reader from the very beginning of the outsourcing journey to the successful delivery of transformative innovations.

Part IIntroduction

© The Author(s) 2018

Leslie P. Willcocks, Ilan Oshri and Julia Kotlarsky (eds.)Dynamic Innovation in OutsourcingTechnology, Work and Globalizationhttps://doi.org/10.1007/978-3-319-75352-2_1

Begin Abstract

1. Why Innovation and Why Now?

Leslie P. Willcocks¹ , Ilan Oshri² and Julia Kotlarsky³

(1)

London School of Economics and Political Science, London, UK

(2)

Loughborough University, Loughborough, UK

(3)

Aston Business School, Aston University, Birmingham, UK

Leslie P. Willcocks (Corresponding author)

Ilan Oshri

Julia Kotlarsky

Email: [email protected]

This chapter is based on material appeared in Oshri et al. (2015) The Handbook of Global Outsourcing and Offshoring, Palgrave, London, 3rd Edition.

End Abstract

For nearly 30 years, organisations have sought innovation from outsourcing their back office information technology (IT), and latterly also their business processes. There are many reasons that companies of various sizes see the benefit of outsourcing particular aspects of innovation, here defined generally for a business context as deploying new and creative ways of achieving productivity or growth (Coulter and Fersht 2010). Quinn (2000) lists reasons that include limited resources and capabilities within the organisation, a shortage of specialist talent, management of multiple risks, attracting talent in the company’s non-specialised areas and getting to market faster. So how can companies achieve innovation through all the various ways of sourcing available? Often they have an ad hoc approach to innovation, or what Linder et al. (2003) call a transactional approach. This approach, however, often fails to leverage organisational learning and develop innovation capabilities within the client firm as they work with suppliers. Clearly, an ad hoc approach cannot create a culture in which external contributions are accepted or welcomed. Moreover, it is difficult to develop innovative processes and measure innovation outcomes when companies innovate on an ad hoc basis.

In this book, we look at how organisations go about achieving innovation through outsourcing in a more systematic manner. This sets the context for our major, more restricted focus on whether, and, if so, how, IT and business process innovations can be achieved through using external information technology outsourcing (ITO) and business process outsourcing (BPO) service providers. We want to stress that we are not talking about sourcing innovation through offshore R&D centres but about outsourcing engagement where the client is seeking to achieve innovation. We start by detailing the debate around whether innovation can be outsourced and, if so, under what conditions. We then look at the case for internal control and the research on how outsourcing innovation can become an organisational practice in outsourcing arrangements.

Innovation Through Outsourcing: Why Now

Historically, clients frequently assumed that innovation would result from outsourcing—after all you are supposedly hiring superior expertise with wide experience of doing things well/better. But it is only relatively recently, from 2000 on, that client firms have paid greater attention to achieving innovation through outsourcing from their suppliers. Weeks and Feeny (2008) have offered a helpful categorisation of such innovation, distinguishing between IT, business process and strategic innovations (see also Chap. 2). In the last ten years the outsourcing sector has experienced a shift in client expectations, predominately around growing demand from client firms to see business process and strategic innovation delivered by suppliers and in some cases an innovation push approach by suppliers pitching new technologies and business solutions to client firms. By 2018, clients were regularly demanding innovation that delivers strategic and significant operational benefits, and also looking to cloud computing (see Chaps. 7 and 8) and automation (see Chap. 9) as innovations that contributed to these goals. Several factors have contributed to this recent trend. First and foremost, long-lasting outsourcing engagements have, over time, created more trustful relationships between the parties that allowed them to shift from focusing on transactional service-based outsourcing projects to venture into riskier joint innovative projects. Second, as cost benefits from transactional labour arbitrage have eroded over the years yielding diminishing value to the client firm, new sources of advantage from outsourcing were pursued, such as joint innovation projects. Third, some suppliers have seen delivering innovation as a way of differentiating themselves from the crowd while deepening their relationship with the client and on some occasions increasing the client’s dependency on their services and technologies. Fourth, not least, and ironically, the prolonged outsourcing of services has negatively affected some client firm’s ability to innovate, forcing them to seek external sources of innovation.

The last five years have only magnified the effect of these factors. With growing blending and dependency of services on technologies in the form of cloud computing, robotic process automation and cognitive computing, client firms are dependent on suppliers as sources of innovation more than ever. Therefore, from around 2013, as outsourcing contracts have come up for renewal, clients have insisted on suppliers helping them to progress their cloud computing and digital imperatives and, since 2015, their automation imperatives. This shift from more traditional services to a digital/automated ‘As-A-Service’ mode requires itself a great deal of innovation on the part of clients and suppliers alike, but especially in the latters’ business and operating models. The dilemma for suppliers in particular has become increasingly stark. Looking across a range of sources, our estimates are that, in 2016, the global ITO market was probably $US 657 billion with a 2.6% compound annual growth rate to 2020. But the traditional IT services market was predicted to decline by −2.4% per year over this period and the ‘As-A-Service’ market to rise by 21.7% per year. For BPOs, these were globally $US 336 billion in 2016, with a compound annual growth rate of 4% to 2020. However, traditional BPO services have been predicted to rise at 2.5% per annum across this period, while the ‘As-A-Service’ market by 8.6%.

Given these developments, it is imperative at this point in time to understand this timely topic in the broader context of management and the specific relevance for outsourcing.

The Innovation Through Outsourcing Debate

Over the past 20 years of ITO, BPO and offshoring, the record on innovation through suppliers has been one of many disappointments and false starts. In practice, clients and suppliers have found it difficult to draw up contracts that lead to innovation. Suppliers have created and tried to use innovation centres, and clients have created innovation funds or have set up multisourcing arrangements in which they hoped that greater collaboration and competition might lead to greater innovation. But time and again, such well-intended efforts have not yielded significant innovation. All too often, the promise of innovation has been too small a part of the overall contract and, moreover, has tended to be negotiated out of outsourcing contracts as both parties seek to reduce their risk and investment exposure (Willcocks and Lacity 2009). More recently, Coulter and Fersht (2010) have suggested that an additional limitation for ITO and BPO alike lies with outsourcing suppliers that historically have been organised around the industry verticals of their clients. They argue that suppliers need to develop a new organisational model from their experiences of servicing multiple industries that bypasses an industry vertical’s inherent resistance to collaborate and creates an environment of willing collaborators (see Chap. 2 for details of such a model, also Chap. 3 for details of the management practices required).

Certainly there is plenty of evidence that if an innovation agenda is to be productive, a lot needs to change from the way leaders perceive and are willing to invest in innovation through outsourcing. For example, a survey of client organisations taken in 2015 (Oshri et al. 2015) showed that client firms have considered a wide range of activities and mechanisms that will foster innovation.

An earlier study by Forrester Research found that 38% of IT outsourcing customers cited a lack of innovation or continuous improvement as their biggest challenge with suppliers. Indeed, IT analysts were registering considerable scepticism among clients about suppliers’ innovation pitches (Overby 2007; Savvas 2007). For example, Fersht (2010) surveyed 588 senior decision-makers in client, supplier and advisory organisations. While 43% of clients viewed innovation as a critical element in BPO, more than half of all BPO buyers were disappointed with their current state of innovation. Customer care, recruitment, payroll and management reporting were noticeably failing to meet clients’ expectations. Buyers saw their major impediments as ineffective change management and unempowered internal governance teams. More recently, concerns have been raised about suppliers failing to meet clients’ expectations when implementing automation innovating solutions (see Chap. 9).

There has been a long-standing debate around whether innovation through outsourcing can in fact be achieved. At the heart of this debate is the dichotomy between the service and innovation mentalities. The service outsourcing mentality is based on the ability to clearly define the scope and nature of the service and capture these dimensions in a service-level agreement (SLA). On the other hand, innovation requires an open-ended mentality in which it is not always possible to define the outcome of the innovation effort, let alone develop a clear commercial model that will ensure compensation for the supplier for their innovation effort. Overby (2010) rightly argues that in fact the problem lies more with clients’ critical mistakes in attempting to procure innovation from external suppliers. She cites three such errors: Clients do not know what they want (a failure to define innovation in the context of corporate objectives), clients choose the wrong suppliers (they do not adequately examine the supplier’s culture, history, suite of services and innovation track record) and clients do not set up effective innovation metrics (therefore avoiding traditional IT metrics; in addition, most SLA regimes and pricing models deter innovation).

The Role of Strategy and Internal Capability to Innovate when Pursuing Innovation Through Outsourcing

All this would suggest that, before looking to the market for innovations, companies should first consider whether innovating through outsourcing is a viable strategy. As Chesbrough and Teece (1996) and Chesbrough et al. (2006) point out, the virtues have sometimes been oversold. Companies that place a great deal of emphasis on external sourcing while neglecting to nurture and guard their own capabilities may be taking many risks. One approach, therefore, is to build internal capability to innovate. This is particularly important in firms that are highly dependent on innovation for market leadership. Westerman and Curley (2008) provide a useful example here of building IT-enabled innovation capabilities at Intel. Their study charts how, from 2003, Intel adopted a staged approach and built a global network of IT innovation centres, together with a virtual innovation centre that acted as a focal point for making new innovation tools and activities available throughout the company. They suggest seven lessons:

1. 1.
   Take the lead in innovation. Do not wait to be asked.
2. 2.
   Build momentum early, and use it to expand scope.
3. 3.
   Measure and publicise progress.
4. 4.
   Culture is not a prerequisite; it can be changed to be more innovative.
5. 5.
   Build an enabling environment and infrastructure for innovation.
6. 6.
   Do not innovate alone: obtain external people and funding.
7. 7.
   Gain and maintain executive support.

There are many echoes of these practices throughout the research we carried out for the chapters of this book. Chesbrough and Teece (1996) help by also distinguishing two types of innovation: autonomous and systemic. Autonomous innovation can be pursued independently from other innovations, whereas the benefit of systemic innovation can be realised only in conjunction with related, complementary innovations. The two types of innovations call for different organisational strategies. Autonomous innovation can be very well managed in decentralised virtual networks, while systemic innovation requires a high level of information sharing and the capabilities to coordinate adjustments throughout an entire product system. Such capabilities of coordination and integration are usually available within a well-managed organisation rather than a loosely connected network.

IBM is a good example. In the early 1980s, IBM had an open architecture based on standards and components that were widely available. This architecture enabled IBM to take advantage o...

Table of contents

• Cover
• Front Matter
• Part I. Introduction
• Part II. Managing Outsourcing: Towards Dynamic Innovation
• Part III. The New Outsourcing—Cloud and Service Automation