In reports recently discussed in a story at Global Services, it was found that outsourcing is expected to grow in the next 12 months. It is apparant that greater focus will be laid on increasing efficiencies and cost-savings. It is a time when both the customer and the service provider are taking innovation seriously, and talking at length about a solution that can transform their businesses; but are they really going to take the 'risk' to innovate?

In a recent research report from Gartner, titled, "How to Get Vendors to Deliver Innovation in Outsourcing Deals", Frank Ridder and Helen Huntley write, "...Clients often have differing expectations about what "innovation" really means and how to get innovation done. Outsourcing contracts are often vague when mentioning innovation, the innovation process or how innovation will be measured to ensure that it is delivered."

The report further recommends that; firstly, providers cannot solve problems or help clients achieve business goals unless they understand the issues, so clients who expect providers to bring innovation forward to solve business challenges or meet business goals must share business directions and issues with the providers.

Secondly, clients must also establish clear guidelines in the outsourcing contract on what innovation means, how it will be delivered, who will be involved in the innovation process and potential results for both parties.

Thirdly, clients and their providers must meet on a planned, scheduled basis for innovation workshops. Hold on to the workshop schedules with penalties, if necessary, for nonperformance. Do not let innovation discussions slide as one focuses on the tactical challenges of the day.

Innovation In Pricing

Pricing has evolved from being input-based, fixed or based on market indices, to something that motivates the services provider and reduces the risk taken by the customer. Clients expect suppliers to use innovative technology (including the Cloud) to offer services. In a number of cases, clients partner with the suppliers to implement innovation that can lead to business transformation over the tenure of the contract.

In a recent webinar, Ross Tisnovsky, Vice President, Everest Research Institute, explained how the rates of a buyer (of IT end-user support environment) negotiated in a contract became mis-aligned over a period of five years.

He further added that a solution for such an situation is to ensure a price review triggered by a market index of technology. That is, one needs to link the existing output-based price to appropriate market indices that can serve as indicators of cost improvements. Further, trigger a price review based on the threshold of market indices. Alternately, the agreement must emphasize on having a periodic schedule for a price review for services under consideration.

He further emphasized that in order to innovate, the supplier needs to be compensated through a combination of reward-sharing and input-based pricing mechanisms. It is important to introduce additional pricing scheme that shares a part of the benefits with the supplier for an agreed period of time, as a fair return on the supplier’s investment in the transformational activity, subject to achievement of desired outcomes. Supplier should be refunded for additional investments into innovation through input-based consulting fees, etc.

Benefits of innovation may be difficult to quantify in short-term contracts and are advisable only for long-term contracts (>5 years). There is not formulla for an innovative pricing structure. Client and service providers can continue using the traditional method, while accounting for a collaborative effort to use innovative technology. This should then be supported by schemes of reward and incentives for the supplier. These may sound workable and some may be in the advanced stage of documenting it; how many will implement it, is yet to be seen.