Innovation in outsourcing and offshoring

A contact of mine, Rasmus Lema sent me a few questions regarding innovation. I would like to reproduce my answers here.

Here are the questions

• When does innovation happen in offshore outsourcing relationships? And when doesn’t it?
• What are the main differences between clients that have that vision of allowing to innovate and those who do not?
• Has this increased or decreased over the last 8 years?
• What types of innovation comes out of comfortable client-vendor relationships?

Continue reading for the answers. Comments are appreciated.

When does innovation happen in offshore outsourcing relationships? And when doesn’t it?

Off the bat, we need to understand that innovation by nature is a risky proposition. Sometimes it works, most times it does not.

Innovation happens when there is hunger for innovation on both sides of the relationship. This is true even in a normal corporate environment – your team (read your boss) and you need to be thinking on the lines of innovation. Similarly in an offshoring/outsourcing environment.

In an offshoring/outsourcing environment, there are some additional factors that come into play. First is the culture clash. If we talk about Indian offshoring, there is a tendency amongst Indian companies to just follow the leader (read client). They are afraid of proposing new ideas – one of the reasons of which is the fact that sometimes the vendor construes new ideas as a way to increase billing. If a vendor were to propose a new idea/process/implementation strategy, it is many a times construed as an attempt to increase revenues for the vendor.

Communication is the other factor that affects innovation. I believe that for innovation to succeed, clear, honest, transparent communication is critical. The teams on both sides need to have that understanding and tacit trust that both teams have the greater good in mind when doing this.

If there is a breakdown in understanding on any of the above two fundamental points, innovation ceases to happen and rather the engagement starts becoming counterproductive for both.

Another related issue is the ownership of the resulting IP that is generated. This however is something that can be taken care of early on in the game when the contracts are negotiated. I have seen however, that when the entire IP is owned by the client, and nothing accrues to the vendor, there is little incentive for the vendor to innovate drastically.

What are the main differences between clients that have that vision of allowing to innovate and those who do not?

Outsourcing rarely happens in areas where the client wants to innovate in a big way. If they have a big new idea, they would probably not outsource it. They would want to do it themselves for reasons of secrecy and IP protection amongst others.

Clients that foster innovation are typically those that do not have an IT department of their own and do not have a huge inclination to create such a department . To put it bluntly they do not have great knowledge or inclination towards of the IT side of things – the project itself, from a technology point of view and the underlying processes. They of course understand their business. This allows the vendor team to openly initiate innovation and get feedback from the client.

Clients that allow innovation tend to have at least one business analyst dedicated full time to the project. This is not typically seen in many outsourcing projects. Business analysts are considered a cost burden. If there is a good business analyst on board, both sides can bounce ideas off the BA and make way for more close understanding of the client’s business for the vendor.

Has this increased or decreased over the last 8 years?

Innovation has mostly increased in the last 8 years. There has been better understanding of the whole outsourcing/offshoring paradigms and the inherent risks and rewards. Relationships have matured. Both sides have understood that they will have to innovate within the outsourcing/offshoring framework as that is a mandatory item on the agenda moving forward.

Vendors have also realized the culture of companies across the world and the culture in the IT industry in India (particularly) has changed from being one of “follow the leader” to “let us work together”. The fear of outsourcing has died down on both ends. They realize that they have to make outsourcing successful.

Some of things that I really feel should happen more in the client vendor relationship is the presence of more people from the vendor at the client’s site. There is a huge gap in understanding of the client’s nature of business and processes and many small and large efficiencies can come out if there is constant interaction the old fashioned way between at least some members of both sides.

What types of innovation comes out of comfortable client-vendor relationships?

I would tend to think that some really good innovations can come out of comfortable client vendor relationships. Most of the innovation however happens in the process side of things. Many times none of this is documented or noticed as innovation and gets lost with the team and transition.

I have seen innovation coming out in the work flow of applications. I cannot cite any examples because of confidentiality but there was a pressing need to increase speed in data entry and a terrific new way of data entry was devised by the vendor (AJAX based – long before the term AJAX was coined). Again – IP issues did not allow the innovation to go beyond the boundary of that project. No one is to be blamed here. The vendor was not allowed to use the technology while the client owned it and did not want to pursue the technology.