In this age of globalisation, outsourcing has become integral to the way large multinational enterprises run their businesses. From managing crucial business processes, advising on IT services and infrastructure transformation, to providing application support, processing claims, managing networks, billing systems or customer services, the majority of Europe’s leading businesses are spending more on outsourcing now than at any point in the last few years. Research from Gartner shows that 53 percent of European organisations in 2010 were planning to outsource more, with 40 percent due to an increase in their external IT services spending.

As the industry matures and the range of outsourcing services extends to higher value activities, client firms raise the bar regarding their expectations, seeking the delivery of high impact innovation from their vendors. In order to keep up with market forces and changing consumer trends, companies must improve their innovation quotient by tapping into knowledge, which is both external and internal. The external element can be provided by an outsourcing partner, but it must go beyond the technical domain to demonstrate the vendor’s ability to transform business processes across the value chain, as well as introduce management innovations that offer flexibility and agility to the client firm.

Proving innovation’s worth
Innovation is indeed a buzzword at the moment, with Chief Innovation Officers considered key hires in an increasingly challenging market and with an ever more conspicuous discourse around innovation, ranging from books and treatises to conferences and workshops. The importance of innovation through outsourcing is underscored by recent research carried out by Cognizant in association with the Warwick Business School.

The study looked at the impact of innovation on businesses and highlighted the key dimensions of restructuring innovative processes, to measure their impact on the business as a whole. Cognizant’s innovation research, carried out among 250 CIOs and CFOs across six regions (the UK, Germany, Switzerland, Benelux, France and the Nordics) has revealed the importance of innovation. The research shows that 70 percent of European C-level executives believe that innovation achieved through outsourcing contributes to their organisations’ financial performance.

However, the survey also revealed that businesses are not getting the most out of outsourcers’ innovation capabilities, with only 35 percent actually quantifying the financial value that innovation adds to their business. In most cases, they are struggling to prove the financial worth of innovation through outsourcing and make the case for future investment, due to the inability to measure the benefits outsourcing provides.

Additionally, 53 percent of the respondents indicated that innovative capabilities demonstrated by the vendor are either important or very important in their vendor selection criteria.

Culture, process and infrastructure
Enterprise innovation is no longer a spectator sport; it is now in everyone’s hands. But, importantly, not all innovation is about once-in-a-decade breakthroughs. Both radical and incremental innovation types are delivering major benefits to businesses. The foundation for “a new normal” is built on three pillars: A new generation of highly distributed and virtualised business models; a new generation of cloud and mobile technologies; and a new generation of born-digital workers and consumers, the so-called Millennials.

In this virtualised, globalised environment, where new technologies like cloud computing and social networks intersect with the millennial generation, clients are looking for better ways to organise teams, cultivate innovation, allocate resources, and reinvent knowledge processes. This is what we call the future of work. It depends on next-generation business models, which enable globally distributed teams consisting of the best innovative talent to provide new perspectives on a project or ongoing line of work.

In traditional models, innovation typically takes the form of a costly R&D-generated product that may or may not be monetised. In the reset economy, however, these projects are difficult to underwrite. For innovation to work, it should be an enterprise-wide, collaborative initiative, where vision and enablement are steered by senior leadership. The middle level owns and drives the initiative with the team implementing it. In order to deliver innovation to clients, we think innovation has to be embedded into the outsourcer’s make-up in three key ways.

Firstly, culture. By making innovation part of employees’ everyday work, they can seek and identify challenges – to generate ideas and to collaborate effectively. Only in such a culture can every employee discover what it means to innovate, and how to contribute using their own ‘innovator’s mindset.’ Secondly, process. For each innovation initiative, and at every stage, a series of discussions between the outsourcer and the client is vital to ensure stakeholders are initiated. This sets the tone for innovation efforts to be tightly aligned with a client’s business strategy. And thirdly, infrastructure. Outsourcers have to have the right infrastructure to enable the global execution and scalability of an innovation framework with clients, where innovation efforts and outcomes are measured and monitored, including the evaluation of innovation scorecards by the leadership team.

The six-step ladder
With this in mind, and in conjunction with Warwick Business School, we have designed a six-step framework, ‘The Innovation Ladder’, to assist companies in measuring and employing the correct strategies through innovation.

Step One: Strategise innovation, in which executives need to consider what type of innovation is expected (incremental or radical) and what the expected impact of this innovation is at the operational and strategic level;

Step Two: Design measurement instruments, in which executives are required to develop the instruments based on which the improvements achieved through either incremental or radical innovation will be assessed;

Step Three: Assess vendor’s innovative capability, in which executives are required to develop a methodology that guides them to consider the innovativeness of the vendor as part of the other vendor selection criteria;

Step Four: Design a contract for innovation, in which the contract should be crafted to include performance targets and compensations for incremental innovation and a clear roadmap to form partnership in order to achieve radical innovation;

Step Five: Build relationships, in which the client firm and the vendor invest in mechanisms that support the ongoing development and renewal of their relationships as a complementary element to the contractual approach;

Step Six: Measure innovation, in which the client firm monitors and verifies meeting performance targets in incremental innovation and the health and performance of the radical innovation network.

By following these six steps, businesses can not only benefit from innovation in their own right, but also determine the monetary value that innovation (including that delivered by your partners) brings to the business.

In the same way that innovation is all-encompassing, yet hard to truly pin down, the current outsourcing trends and future predictions are demonstrating just how business is akin to innovation in many ways. As businesses and enterprises are becoming increasingly comfortable using a global delivery model to execute large and complex transformational engagements, they must harness innovation effectively to enable the future of work and unlock enterprise value by leveraging and realigning people, process and technology. Innovation has no barriers, whether geographical or financial. It’s about tapping into it, wherever and however it is generated.

For more information please visit www.valueofinnovation.com