Innovation and Outsourcing – Do they go together?

According to a research report released by The Hackett Group, and reported by Financial Week, they don’t.

The Financial Week article, titled “Customers say innovation not part of outsourcers’ services“, describes The Hackett Group’s research.  A few excerpts:

In a new study, the Hackett Group, a consulting and advisory firm, found that businesses that have already begun to move their general and administrative functions offshore will likely pick up the pace over the next three years.

Indeed, by 2010, these companies will have outsourced or transferred off-shore an average of 16% of these back-office operations—an increase of more than 50% from the current level.

Not really much of a surprise…many companies have been outsourcing these functions for a while and the trend is to continue to do so.

The article continues:

Not surprisingly, cost savings drives most companies to shift back-office work overseas. Whether businesses outsource the work to specialist firms located in cheaper locations or set up their own captive offices abroad, the Hackett Group found that most companies save 25% to 50% on back-office work that’s shipped outside the United States.

The catch? Less than half the companies who had begun moving general and administrative work to offshore offices said they were satisfied with the new unit’s ability to innovate. In fact, only about one in six of the companies in the Hackett Group’s study were satisfied with so-called business process outsourcers’ innovation ability.

Emphasis mine.

After reading the article, I jumped over to The Hackett Group’s research report for more information.

The research report dives into more detail.  Specifically, a discussion around innovation, which says:

Only 17% of all responding companies using BPOs said they were satisfied truly satisfied with their BPO’s ability to innovate. While a much larger percentage – 46% — of all companies using captives made the same claim, this is clearly an area that both types of organizations can target for investment.

Emphasis mine.

Looks to me like an opportunity for BPO’s to improve their offerings…but also a hurdle for organizations who are considering outsourcing.

So…back to the original question at hand.  Do innovation and outsourcing go together?  I don’t think they do currently, but I think they can…at least in the realm of BPO or IT outsourcing. However, to make innovation and outsourcing go together, you’ve got to know what you want from the outsourcing company…and you will have to specifically ask for it.  And…you wil get exactly what you pay for and nothing else.

For me, the question that rises to the top of my brain is: Do you really expect an outsourcing companies to innovate for you?  I’m not talking about consulting companies who’s sole business is innovation, consulting, etc.  I’m talking about outsourcing companies who focus on processes.  Finance, HR, IT, etc.  Does anyone really expect these folks to come up with new and innovative ways to handle your business to save money, be more efficient or create more value for you (the outsourcer)?

I don’t. I’ve done some work for large IT outsourcing companies.  They can be quite innovative….but, for the most part, they use their innovative ideas to get more money from their clients.

I’d love to hear your ideas on innovation and outsourcing.

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Comments

  1. Outsourcing, almost by definition, is a contract with Service Level Agreements. That precludes innovation right off the top, except for the vendor — who will innovate to provide your outsourcing service at less cost!

    On the other hand, you can innovate in any country of the world (hey, Viagra was discovered in Ireland!) if you have employees there.

    Outsourcing, not so much.

    Scot Herrick’s last blog post..Another Monday, Another Bank Bailout

  2. Eric D. Brown says:

    Hi Scot: Absolutely correct. Unless specifically written into an SLA, innovation isn’t going to happen from your vendor.

  3. As a virtual assistant (VA), I am an outsourcing service professional, and I honestly believe that innovation should go together with outsourcing. I can’t imagine just going through the motions with my clients, and keeping the status quo. I am always looking for new ways to help them improve aspects of their business, and I do the same for myself. I belong to an http://www.VAnetworking.com, which is an online community for VAs, and we constantly share ideas and ‘best practices’ to keep our clients on the leading edge. Many of our clients are entrepreneurs and small business owners, and by introducing them to innovative ways to practice time management, or project management, etc., it makes us all more successful.

    Tracey’s last blog post..StartupNation thinks we’re number 1!

  4. Eric D. Brown says:

    Hi Tracey: Thanks for the comment. Great insight!

  5. Being in an IT Outsourcing company, I d obelieve that innovation and outsourcing should go together. We always try to learn new things and do news things that will benefit our clients.

  6. Outsourcing is often seen by companies as a way of handing off the less value adding parts of their business to allow them to focus on the invention and scaling of new business. Geoffrey Moore has written about this recently. What is not covered to much depth is the new ideas and innovation that these partners bring if they are included in more 'upstream' conversations.

  7. Thanks for stoppying by and sharing your thoughts. I agree that outsoucing and innovation 'should' go together, but they very rarely do in the real world. The business of outsourcing almost forces innovation to take a back seat to cost control and revenue.

  8. Hi Edward – thanks for stopping by.

    Outsourcing is seen as a way of focusing on core assets but many organizations fail to realize that your non-core assets still require innovative ideas to help you grow and compete in those areas.

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