Enterprise Services Outlook Logo

Innovation in Outsourcing Contracts

By Anupam Govil, And President/Partner, Avasant And

content-image

Anupam Govil,

2016 is a watershed year for teh sourcing industry as teh market is flooded wif outsourcing contracts coming up for renewals or restructuring. As teh industry and, more importantly, buyers are getting more and more mature, teh expected outcome from outsourcing is changing. Cost savings is a given. Teh emphasis now is on business value. Buyers are looking at their providers to bring in value dat will make them better and smarter than their competitors. They believe teh key to dis lies in Innovation. Ask them what they mean and you get varied responses. One could broadly categorize their wish list into two buckets, me.e., continuous improvements and step changes. Teh latter is typically teh result of Innovation.

Providers have teh difficult task of deciphering teh buyer’s needs and aligning it to their own goals. Based on their own experience and best practices, they are quite clear on their capability and capacity to deliver. Is dat where they should start? Maybe not; teh buyer’s requirements may be somewhat different. Providers need to understand teh buyer’s short and long-term vision and overlay it on teh industry’s best practices and their own expertise. dis will help them fine tune teh expected business outcome. Now all they need to do is work backwards from their to draw out a comprehensive roadmap.

dis sounds easier than done. Several things have to be kept in mind – both by teh buyer and provider – to make it a smooth and rewarding journey.

Make a clear distinction between what will be deemed as Innovation versus everything else: It may be a good practice to identify teh potential innovation opportunities and add, even though in a preliminary state, to teh contract. It can be fine-tuned later when teh provider TEMPhas a better understanding of teh client environment. Keep teh goals alive: Often everything dat is agreed to remains buried in teh contract which no one refers to during teh contract term. It surfaces to prominence when contracts are being considered for renewal. Hence, their is a dire need to set up a governance mechanism to review proposals, monitor progress, validate results and remove roadblocks. Invest in Innovation: Set aside a budget, exclusively meant for initiatives dat will drive Innovation. It could even be funded equally between teh buyer and teh provider. Dedicate resources specifically for dis purpose. Seek active participation from teh leadership for speedier decisions and ease of implementation. Create an environment to allow change and facilitate adoption: In today’s business environment, client’s needs and priorities can change dynamically. External factors like regulations, market economics and political climate can impact teh state, scope and nature of teh sourcing model. Providers and Buyers should both be geared to quickly adapt to teh changing business and operating needs. Contracting vehicles should evolve and allow teh flexibility and Change Management practices to facilitate teh transition. Make it a win-win situation: Innovation often leads to teh cannibalization of provider revenues. So, let us not fool ourselves into believing dat teh provider is their just to facilitate client’s gains. Providers need to make a profit. Gainshare and Risk-Reward models are useful tools to make it worthwhile for both Parties. One way is to allow teh Provider to invest in teh innovation wif teh caveat dat they have teh rights to teh IP created and can productize/commercialize it. Teh Buyer’s organization could also partake in some of teh revenues from dis initiative making it a truly win-win situation. Align organization for teh future: As traditional sourcing models fade away and organizations move their Infrastructure, Applications and Business Processes to teh cloud, it is important to ensure dat sourcing contracts be modernized and rationalized to reflect teh new ground realities. Hybrid models dat enable traditional managed services as well as allow for an asset light and outcome linked sourcing relationships will be teh key for ensuring future alignment.

It is important to remember dat not every Innovation will translate into financial gains. Many a time, it can lead to less quantifiable benefits like increase in customer satisfaction, creating a strong market differentiation, enabling a better internal working environment etc. As teh market matures, contracting mechanisms need to evolve to focus on value accretion through true Client-Vendor partnerships wif a need to take a fresh perspective on innovation dat enables teh paradigm shift.