There are few matters raising as much heat and as little light in service provision as innovation. Customers are often aggrieved that they do not get what they have paid for. Suppliers feel hard done-by that their contributions are not valued as they should. Why does this arise and what can we do about it?
At the start of an assignment some time ago, I went to see the client’s CEO for a briefing on what he really wanted of me. He told me that he could not currently trust the head of IT to keep the lights on. First, as interim CIO, I had to fix that. Then, the state that he really wanted to be in was to chew over possibilities as to how he could use technology to deliver a “wow” to his customers. This was important to his relationship with them, and thus competitive success for the organisation. He knew that his customers expected a stream of valuable changes.
The delivery had to be in this order. Without the basics being reliable, there could be no place at the table to talk of strategy and customer delight.
Types of Innovation
Much has been written on Innovation. Observation and practice has led me to start with two categories, as that seems to drive useful action:
- Delivering the contracted services to higher levels of performance and better value;
- Delivering new services to support new modes of competition.
According to some, type 1 would be an improvement, not an innovation [Ref 1]. It has much in common with ITIL and the Quality Movement’s emphasis on continual service improvement. I distinguish between the two as the level of risk, ability for suppliers to assure delivery and the impact upon customers differs significantly. Some contractual terms seen concerning innovation have been vacuous, with the author expressing only the vaguest idea of what was to be delivered. I am currently aware of one legal dispute in progress in which the customer claims the supplier has failed to deliver on obligations to innovate and seeks damages. This is not trivial.
It is quite common for outsourced service contracts to contain terms requiring year-on-year improvement in service levels. Some also require annual price reductions.
Periodic service performance improvement requires real change underpinned by thought of how to get better. This may be delivered by a supplier through the application of technological tools (e.g. service management suites), process improvement, training, complementary elements and people change. At the start of a contract, a supplier may not confidently predict which of these techniques (or others) it will apply to which service to what effect. It can however reasonably project that some level of improvement may be gained at moderately acceptable risk, and thus sign up to it.
A service I worked on a while ago saw the provider introduce a private cloud. This required considerable change. It promised significantly increased flexibility of capacity, resilience and lower cost. It required a large investment. This was accepted by the customer and was implemented as a change. Whilst IT and certainly the supplier saw this as an innovation, the end-users would have seen little difference. Essentially the same service was delivered more effectively at better value.
Whereas service improvements require a change in the mode of delivery, year-on-year price reductions may be underpinned by such changes, but are often not. They can be delivered through financial engineering alone. Any link with true innovation is weak. If this is all you are getting, light the coals and invite your supplier to go for a stroll over them.
Year-on-year improvement can and should be contracted for. Set good initial service levels and require annual performance increased in the contract. The supplier may well need your help as a customer in authorising change to deliver this, so be ready to give it. The obligation to fund such changes should be written into the contract as lying with the supplier, and they will of course price this into the initial deal. This works particularly well in a multiple supplier environment, where one supplier may need the cooperation of another to improve the value of its own services. I have seen this done through a healthy bit of give-and-take with recourse to money when all else fails. Having an effective inter-vendor relationship, well mediated through your Prime or SIAM, is essential for success here.
Delivering New Services
One of the reasons for engaging a big, and we hope capable, supplier is that they have access to all sorts of people with diverse skills. They are doing exciting things for other customers, and there is a hope of cross-fertilisation. How come, as a customer, this type of person who wrote sections of the bid response for the winning supplier, magically disappears as soon as the contract is awarded? How come the flow of enlightenment from the supplier to drive the business forward dries after signature? The reasons are quite simple:
- People with the breadth and depth of experience to drive significant innovation are expensive. The suppliers keep them focussed where they get the greatest impact, which is generally in winning new business. The customer has probably contracted for low-cost service, so will not fund the people needed.
- Contracting for initiatives can work, but has a pretty low strike-rate. This is a measure of input, not output or achievement. It is easy for a supplier to play games with such an obligation; providing activity to fulfill the terms without delivering real value.
- Real innovation has significant knock-on effects across the whole enterprise e.g. go to web-based sales from physical retail, and your sales organisation, incentives, supply chain, customer service organisation and a host of others are significantly affected. Big decisions take lots of thinking through and discussion inside the many customer departments affected.
- Traditional outsource contracts involve the creation of a financial model that funds initial investment over the life of the contract. The investment has to be predictable for this purpose. Future innovations (as opposed to improvements) are rarely predictable, so are excluded from the model.
“Do you want fries with that?” may be appropriate and effective for McDonalds; it is less so for driving corporate progression. So if your service supplier is in the best position to provide the input you need, fund them in addition to the base operational contract and engage. If they are not, hire someone who is more capable. You will need to form a team to bring together your customers’ needs and aspirations with your corporate and suppliers’ knowledge of what is possible and affordable. A friend refers to this as “co-innovation”.
When I was working as part of a supplier, a good proportion of my work was devoted to bidding. This is a focussed, directly competitive search for the best way to deliver the greatest value to the customer. It differs from the innovation process most significantly in that it is a one-off rather than ongoing. As a representative of a prime contractor, I had to know that the components would all work together effectively as an end-to-end service. We had some cracking good sessions, working through the implications for our customer’s business, looking for the edge that our service could give them. Some of the most stimulating and valuable sessions were when we sat down with the customer’s people and talked through what they really meant. I can still picture some of these sessions, years later. In this, it is a big mistake for a customer to field Dilbert from purchasing for the dialogue. The poor soul is most unlikely to know what a good solution looks like and is certainly incapable of helping a supplier bid well. Good procurement people know when to take a friend along.
How Innovation has been Made to Work
The writers on innovation emphasise the importance of creating the right environment and linking these through a process. There is a good body of evidence of the value of using a process rather than relying on more spontaneous approaches [e.g. Ref 2]. Tidd and Bessant [Ref 3] identify the following types of innovation:
- Paradigm (mental model)
- Product / service
And plot each initiative in a rose-diagram from incremental to radical.
An innovation process is also widely emphasised. For Tidd and Bessant, it has four stages operating within the context of innovation strategy and an innovation organisation:
Drucker [Ref 4] places innovation on a high pedestal. For him, it is not something to be bought; it is the central business of the vital enterprise. Innovation is real work, the product of the methodical analysis of seven areas of opportunity:
- Unexpected occurrence – including setbacks. Why did they occur?
- Incongruities – disconnections between accepted industry wisdom and reality
- Process needs – giving rise to a market for a product /service to fulfil it
- Industry and market changes – When an industry grows quickly, its market changes
- Demographic change – e.g. ageing in the west, growth of youth in Arabia
- Changes in perception – e.g. attitudes to risk
- New knowledge – New devices like a computer required the development of many fields of knowledge
Having spotted the opportunity, you then need the discipline, talent and process to realise it. I particularly like the principles that Drucker lays out for exploiting innovation:
- Start small
- Listen intently to the outside world
- Keep it simple
- Aim to establish leadership
- Work hard at it
- Practice systematic innovation.
This is close to my own heart. I looked at the sourcing industry a couple of years ago, and determined to shift my own position within it significantly. Too many friends in former organisations I have worked with are in a position close to that of the legendary boiled frog. Not healthy.
Innovation and Outsourcing
So if our business is the delivery of services, what does this thinking lead us to do? The first conclusion is that the central job of delivering innovation for competitive success rests with the customer. Do not try to outsource the commission, direction or control. By all means buy-in help. This is bringing the outside in, which all applaud. We should engage those with expertise in a technology (and other fields) and put them together with people who know our customers and market. Mix them up! As with any other field of management, the trick is to ask the right questions. The accountability for results stays firmly with the customer. Remember, if this is really to work, the effect on the organisation and your customers’ experience could be radical.
Keen and McDonald [Ref 5] talk about the “Value Network”. In this, they speak of the enterprise not as a single entity with clear boundaries, but as an alliance coordinated by the company. It draws on others for economy and skill in back-office process and non-customer differentiating functions that it cannot do as effectively itself (or chooses not to). This has long been the proposition of BPO, facilities management and a host of other services. They go further. The really interesting stuff comes when the network is exploited not for economy, but for agility, expertise, skill in establishing a capability that delivers differentiating customer value. So Amazon has close links with UPS for logistics, Samsung and Google together deliver Android Phones. Microsoft and Nokia crash and burn.
One of the parts that I find fascinating about the potential offered by multisourcing and SIAM today is the potential for engaging the right parties in a sparky alliance to blow customers’ minds. A useful proportion of cost will be saved but that is worth little in comparison with stealing a prime market position. That is really worth getting passionate about. The combination of cloud delivery, accessible APIs to transfer transactions between members of the network, agile development and entrepreneurial flair has given rise to a rate of change of business model and combinations of sourcing modes that are leaving old competitors standing. Wikipedia and WordPress are less enterprises than swarm-alliances. Encyclopaedia Britannica and web content management vendors have been left gasping. What is happening in your industry, and how are you engaging partner / complements / suppliers to augment your in-house capabilities? This mental approach shifts the selection of suppliers and their relative roles from procurement to corporate strategy, product development and marketing.
This looks like a tipping-point for the use of services. The potential is huge. So are the risks. It is no accident that in this environment, Agile comes to the fore as a way of thinking. Its emphasis on rapid movement, tolerating failure and learning rapidly to minimise adverse effect is a good way to design and develop in an environment that cannot be planned out in detail. Julian Birkenshaw advocates much the same for corporate innovation [Ref 6].
So what can we do to harness innovation? We can build continual improvement into business as usual, and contract for it through annual service performance hikes. We can also use sourcing to build not only cost savings of the 1990s, but consciously and deliberately build value networks in the context of a diligently worked process to listen, analyse, and blow the socks off customers.
 Breakthrough Innovation and Growth, PriceWaterhouse Coopers, September 2013 http://www.pwc.com/gx/en/innovationsurvey/index.jhtml
 Managing Innovation, Joe Tidd and John Bessant, Wiley 2009 and http://www.managing-innovation.com/
 The Discipline of Innovation, Paul R. Drucker, HBR August 2012 http://hbr.org/2002/08/the-discipline-of-innovation/ar/7
 The eProcess Edge. Peter Keen, Mark McDonald. McGraw Hill 2000.
 Three principles for making innovation a reality in your company. Julian Birkinshaw. November 2012. http://bsr.london.edu/blog/post-99/index.html
This article was first published in Outsource Magazine 2013 September 24 and is reproduced with permission.