Information technology outsourcing (ITO)

From 30,000 feet

​Digital innovation continues to disrupt the outsourcing industry. From robotic process automation to cognitive applications to cloud services, technology-driven innovations offer new ways for businesses to interact with customers, vendors, and internal stakeholders. According to Deloitte’s 2016 Global Outsourcing Survey (GOS), the majority of surveyed companies have outsourced much of their IT core, creating cost advantages but also raising a dilemma: How can organizations take advantage of digital innovations while increasing or maintaining their level of ITO and how can those companies control, quantify, and create innovation? To solve this dilemma, digital innovation value must be encouraged, captured, and measured within the existing vendor portfolios.

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Challenges and opportunities

​The GOS indicates that 65 percent of the companies surveyed fail to measure the value of innovation delivered by their vendors. To hone in on innovation value, it is important to define what “innovation” means. In this case, innovation can be defined as changes to an existing process or technology that result in a measurable benefit for the customer. Defining innovation may be the easy part. Extracting and measuring its value requires a multipronged approach with a keen focus on expectations, motivations, and governance.

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Lens on innovation: Three areas of value

​Organizations can examine innovation opportunities and outcomes at three key phases of the sourcing life cycle: strategy, contracting, and governance.

1. Strategy: Define innovation expectations early
The first step in measuring innovation value in digital ITO is defining innovation goals and expectations. Identifying an innovation solution and quantifying its value at the outset of the strategy discussion allows organizations to focus on selecting the most appropriate service provider. It also helps to set the tone for the remaining phases of the sourcing process in several ways:

• Innovation expectations affect the pool of vendors on the request for proposal (RFP) short list.
• The evaluation framework informs vendor scoring and selection.
• Vendors and companies collaborate more closely to define service level agreements that measure value-driven outcomes and develop SOWs to support the upcoming innovation and to align expectations over the duration of the sourcing process.
• Vendors develop their technical solution with more precision and clarity.

Quantifying innovation and including this as part of the business case is also essential since innovation solutions and tools typically represent a significant investment for the organization. A strategy-driven innovation framework encourages all parties to discuss, deliver, and measure innovation value. Contractually incenting performance is the next step to quantifying ITO innovation.

2. Contracting: Defining and incenting innovation
To build upon the defined innovation goals, they must extend to the contract. There are several contractual clauses that have increased importance in today’s digital environment. These innovation clauses should be included in the contract not only to encourage innovation but also to protect the company.

• Key personnel. Ensure that the service provider retains key thought leaders that were identified in the RFP process so that they can lead the desired innovation efforts.
• Exit (disentanglement) and termination. Ensure that the organization stays nimble as the sourcing cycle quickens and more innovation is sourced externally using termination clauses. Reasons for termination and exit should be agreed upon with the party responsible for paying termination costs.
• Security. Align security measures with the contract before an innovation project is pursued. The GOS survey showed that cybersecurity risks affect 73 percent of outsourcing decisions, with mitigation strategies primarily dependent on the contract to establish security protocols.
• IP retention. Discuss and contractually agree upon ownership of new intellectual property (IP) developed during the innovation process.

​Building a shared vision for innovation starts with the contract. Pricing agreements can and should be drafted in such a way that service providers are motivated to deliver innovative solutions. An innovation bonus can be written into the contract to reward positive performance, which can strengthen the partnership—often at a net-neutral business case cost.

Tailoring an incentive structure to the situation and the vendor relationship is valuable for organizations and their vendors. For example, a large agricultural company funded an “innovation pool” with one of its vendors. The “pool” included a clause detailing a research session with thought leaders from both companies. The session ultimately solidified the partnership and demonstrated the effectiveness of the funding. Another company spurred innovation through a gain-sharing relationship. This structure motivated the vendor to pursue breakthrough innovation and was a win-win for both parties. Defining and incenting innovation is an important step for realizing innovation value in ITO. To keep pace with the speed of innovation, however, organizations should also reimagine their approach to vendor governance.

3. Governance: Set up a right speed model
As with business case development and contracting, vendor governance should adapt to encourage and measure innovation. Traditionally, vendor governance has been a rigid, slow-moving, and one-size-fits-all solution focused on incremental cost cutting rather than disruptive innovations. To take advantage of vendor innovations, the three-tiered governance framework should include an Innovation Council to coordinate and maximize cross-enterprise innovation and drive a culture of innovation at both organizations. The council should help ensure innovation-related activities are strategic aligned. A value-based investment approach should drive funding and prioritization.

As IT develops a “right-speed” approach to support its overall business, vendor governance within the business should be flexible enough to balance and support the business value, risks, and technical feasibility across many different projects with various development speeds.

Specifically, innovation governance requires a different speed than steady-state vendor governance and requires agile oversight and management from the vendor management (VM) and IT functions.

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