Outsourcing and Innovation

The October 15 issue of CIO Magazine, has a thought provoking article entitled “What Price Innovation?” by Stephanie Overby. In it the author makes the following points:

1. Outsourcers are not motivated to innovate because they make their profit through standardization among clients.
2. If they were somehow motivated, innovation is made difficult because senior business leaders are unable to manage the outsourcer in a manner that encourages innovation-- (our findings are more specific in that senior business leaders are reluctant to share business strategy with a vendor).
3. Contracting for innovation is difficult if not impossible.
4. Vendors will only innovate to the extent it saves them money or helps them introduce new products.

All this confirmed our findings in a survey we completed in 2002 in which we scored the level of and satisfaction with innovation provided by outsourcers. We measured 4 elements of innovation provided by the outsourcer:

1. Product Delivery Innovation – innovation in support of delivering existing products and services
2. Process Improvement Innovation – innovation in support of improvement in existing business processes
3. Competitive Innovation – innovation in support of improving competitive advantage
4. Overall Creativity – generation of new ideas for IT usage within the organization

On a scale of 1-7, the overall score over the 12 organizations and 123 respondents surveyed was 2.7 (1.3 points below an average 4.0 score) on the 4 elements above. The scores ranged from an average low of 2.3 for Process Improvement Innovation to 3.2 on Overall Creativity. However, the innovation factor rated most important by the several hundred respondents was Competitive Innovation with an average score of 2.5. By comparison, the average scores given to the outsourcers in our survey for Delivery to Contract (meeting SLA’s etc.) averaged 4.9 (almost a point above a 4.0 average score) on the same 1-7 scale and 2.2 points higher than their score on Innovation.

The obvious conclusion – IT innovation cannot be successfully outsourced. At minimum, internal IT needs to include keeping abreast of emerging technology and it implications for leveraging business strategy for both the long and short term. Also, IT architecture, standards, and enterprise-wide infrastructures cannot be effectively outsourced. In short, nothing that is strategic to the individual business/organization should be outsourced where innovation and/or leading edge thinking or technology is required.

Give me your thoughts.