It’s one of the most frequently used words in outsourcing – but when there’s confusion about what “innovation” actually means in the first place, is it any surprise that buyers complain of not getting enough? HfS’ Founder and CEO Phil Fersht and COO Esteban Herrera discuss some of their latest research – with plenty of takeaways for the innovation-conscious…

What, exactly, is innovation?
It is clear to HfS that buyers seek innovation, but are emphatically frustrated by their providers’ inability to deliver it. However, we maintain that this is a communication issue more than it is an execution issue. Also, buyers often do not back up their claim with their actions, often selecting the lowest-priced or most vertically experienced provider, rather than the most innovative.

When buyers say innovation, often they mean continuous improvement, or best practices, and not a willingness to try something that has never been done before (which is the true dictionary definition of an innovation). In an effort to help, HfS Research offers the following taxonomy:

Continuous Improvement: refers to providers implementing minor modifications to existing processes to make them perform better, without regard for what is done “outside”. Risk is minimal and failure is cheap. Returns are generally small, but can add up over time.

Best Practice Implementation: refers to providers bringing what they have learned from doing similar business “outside”, judging whether it is the best way to do it, and implementing it on behalf of their clients. Risk is moderate, but failure can be expensive. The return can range from moderate to significant, depending on the starting point.

Innovation: refers to trying things that have never been done before inside or outside. Involves highest level of risk-taking and the potential for failure is significant. Returns can be very substantial if the innovation succeeds.

Key takeaway: be clear. We strongly suggest that buyers be very clear with their providers about what they mean and the outcomes they seek when they speak of “innovation”.

Why am I not getting any innovation?
HfS Research has found that more often than not, buyers are unwilling to take the risk that true innovation requires.  In fact, when a provider offers them a truly different approach, their first question is often “where has this been done before?” In almost 90 per cent of the cases we’ve seen, the buyer is really seeking continuous improvement, best practices, or a combination of both.

Buyers should also understand that innovation is expensive, and that limiting how their providers use innovations (specifically whether they can be applied at other clients) means the entire cost (and risk) of the innovation must be shouldered within the relationship. Given that the back office is rarely a source of competitive advantage, buyers should be more open to allowing providers to disseminate their innovations, gaining access to a greater pool of buyer and provider R&D dollars while sharing the risk with fellow clients.

Key takeaway: be transparent. Providers have a responsibility to deal with innovation, continuous improvement, or best practice implementation transparently: the sales cycle leaves most buyers with the impression that innovation is “free” or “included.” That’s a tempting message for both parties to get the deal done, but it invariably leads to disappointment in the relationship. Providers can use the same taxonomy above during and after the sales cycle to ascertain what the expectations are and to craft a reasonable, fair plan to execute against those expectations.

source: Outsource Magazine