Is outsourcing just a tool for cost-cutting and risk-shifting to a supplier? Some industry experts suggest that, when properly conceived and implemented, outsourcing can pave the way to permanent innovation within an enterprise. Despite that vision, most outsourcing relationships fail to generate long-term innovation. What are the best practices for achieving innovation through outsourcing?
Innovation: Life beyond Optimization
In the famous duel between man and machine, a world champion chess player can lose a chess match to a machine that has learned predictive solutions through brute transaction processing. This type of rote learning, resulting in [business] process optimization, does not yield innovation. The optimization of business processes through process management tools serves many goals, but innovation does not arise simply from BPM optimization. Rather, innovation comes from shifting the paradigm of an industry by adopting new ways of creating and delivering value to a customer.
Getting beyond Optimization
For an enterprise to transcend the limitations of the classic outsourcing models, it must redefine the goals of the outsourcing process and its relationships with its supply chain. Getting beyond BPM optimization requires a venturing attitude with some venturing risks. Consider the following possibilities:
Human Capital Realignment.
In a world where educated workers are self-empowered and supported by efficient administrative infrastructures and resources, enterprises can develop and protect human capital through collaboration tools, knowledge management and strategic development. Not all workers can achieve “high-level” strategic value, but the goals of education, job training and all interactions should be to implement an enterprise that seeks innovation through its people. Freed from mundane administrative drags, employees have more time to make personal connections, to absorb market conditions and enter the game of “what if” scenarios and experimentation. If the enterprise defines its mission as the pursuit of prosperity for the supply chain, it will strengthen its market position by alliance formation, shared commitments and shared rewards. If the enterprise defines its mission simply as serving its shareholders, innovation opportunities might be squelched by high ROI hurdles and risk aversion.
Global Resource Distribution: A Risk or Opportunity?
The innovative enterprise must find new markets, new opportunities and take new risks. Outsourcing can be used to develop a culture that explores new opportunities by transitional use of a service provider. But such culture does not spring automatically from outsourcing. Inspiration must start at the top and be facilitated by outsourcing as a tactic in a strategy for risk-taking and innovation.
Outsourcing as the Leveler, not Guarantee of Innovation.
Outsourcing enables small and mid-sized enterprises to focus on their core business advantages. By adopting outsourcing as a significant goal for non-core functions, outsourcing can lead to innovation. But it is only a tool to level the advantages of larger enterprises by aggregating demand by smaller enterprises. It becomes a tool for innovation when used to free management and staff to experiment and innovate. A company with a risk-averse culture will never innovate, regardless of its chosen solution to the Sourcing Dilemma.
Relationships Generate Innovation: The Network Effect
An inspection of patent registries reveals that, in innovation-rich enterprises, a large number of patent applications are filed. Not surprisingly, such enterprises establish breeding grounds for research and development through collaborative teams. For innovative people, teaming with others is more productive often than individual efforts.
After business processes are tamed and optimized, innovative people will count more than ever. Linking people across enterprises, just as people now are linked to friends and relatives globally by Internet and telephone, is the key to innovation.
Lateral Thinking: Compare and Contrast Processes
Beyond the “network effect,” based on sharing inspiration across corporate entities, innovation also requires lateral thinking and open communications.
Intellectual Property Rights as a Barrier to Innovation
The biggest challenge for any organization is to find ways to generate innovation from teams that include external resources. Networking to share in innovation is limited by intellectual property rights (“IPR”). Judged solely on IPR, insourcing and shared services are legally favored to preserve IPR from in-house contributions to innovation. However, corporate entities also insulate inside thinking from external forces. If relationships with service providers are purely contract-based, long-term innovation from such relationships will not occur. The challenge for achieving innovation in outsourcing is defining and rewarding shared innovation, including intellectual property rights. Today, IPR pose a challenge to shared innovation. Rarely do both parties share a compatible innovation-focused culture and are willing to share risks for innovation.
What Can You Do?
Board members and investors should explore the myriad opportunities and counterbalancing risks of all forms of business process management. Professional advisors such as outsourcing lawyers and consultants can accelerate a path towards innovation, with strategy and tools for managing barriers to innovation. Along the way, decisions need to be taken about sourcing solutions and the use of alternative sourcing solutions to support a culture of global innovation.
Culture and people generate innovation. Outsourcing and other BPM solutions provide the tools for empowering employees that embrace the culture of innovation.
Governmental Framework for Innovation and the Economic Role of Outsourcing
Innovation in the delivery of services is needed to overcome poverty abroad in low-income countries and to prevent poverty at home in industrialized countries.
“Global firms increasingly realize that the bottom-of-the-pyramid markets [with low wages] are a source of innovation in business models — potentially, even of ‘breakthrough’ innovation. Innovations in technology, capital intensity, delivery, governance (e.g., in collaboration with civil society organizations) and price-performance levels are all needed to create a market at the lowest-income level. To “make poverty history,” leaders in private, public and civil-society organizations need to embrace entrepreneurship and innovation as antidotes to poverty. Wealth-substitution through aid must give way to wealth-creation through entrepreneurship.” Mr. C.K. Prahalad, Paul and Ruth McCracken Distinguished University Professor at the Ross School of Business, University of Michigan, quoted in Wall Street Journal, Aug. 31, 2005, p. A8, col. 8.
Under this approach, outsourcing creates wealth through entrepreneurship. Outsourcing revolves around the ability to adapt and implement innovations in technology, capital intensity, supply chain and delivery systems, the governance of business relationships in support of long-term contracts and continuous scrutiny (and eventual adjustments) of price-performance levels. Governments concerned about poverty levels should consider a renewed focus, as Joe Lieberman did in his 2004 bid for the U.S. Presidential nomination, upon strengthening the infrastructures that support entrepreneurship.