Outsourcing and Innovation Michael Weeks Saïd Business School University of Oxford © 2003, Michael R. Weeks – All Rights Reserved

IT – Then and Now Automate Technology Competencies Generalized Knowledge Cost Reductions Technology Knowledge Acquiring Knowledge Transform Human Competencies Specialized Knowledge Value Creation Strategic Knowledge Continuous Learning

© 2003, Michael R. Weeks – All Rights Reserved Innovation from Outsourcing Is this a paradox or a necessity? Does anyone really expect innovation? What kind of innovation do they want – incremental or radical Is anyone happy with their innovation outcomes?

© 2003, Michael R. Weeks – All Rights Reserved The Innovation Process Client Supplier Relationship Innovation - Sourcing Strategy - Core Capabilities - Formal R&D Structure - Workforce Development - Attitudes to Innovation - Length of Contract - Innovation as a Goal? - Obligations - Power Sharing - Division of Risks/Benefits - Trust -Types of Innovation - New Technology Development/Adoption - New Business Processes - New IT Management Processes - Benefits - Lower Costs/Efficiency -Competitive Advantage - Perceptions of Innovation - Expectations of Innovation - Client-industry scope - Knowledge Transfer Practices - Scope of Services Delivered - Workforce Development - Attitudes to Innovation

© 2003, Michael R. Weeks – All Rights Reserved Alignment of Interests Three categories of Alignment – Natural, Unimportant, Unnatural How do we make sure that our goals align with our outsourcing partner?  Different steps for each situation Natural Alignment – easiest category – metrics are difficult but not terribly important Unimportant – metrics become the key driver – telephone services is an example where alignment can sometimes be considered unimportant Unnatural – Relationship management becomes critical – Expectations and perceptions must be managed constantly

© 2003, Michael R. Weeks – All Rights Reserved Prerequisites for Innovation - Trust Trust is required for innovation Typically starts out high- initial euphoria over completed deal Top management must set the proper expectations Starts decreasing with initial operational difficulties Begins to recover after relationship matures Typical Trust Life-cycle Trust Time - Years

© 2003, Michael R. Weeks – All Rights Reserved Prerequisites for Innovation - CIO Some organizations think that an outsourcing deal eliminates the imperative for a strong CIO Strategic direction can typically only come from the CIO – someone must aggregate all the competing requirements for resources Firms without a strong CIO tend to complain that their outsourcer is not proactive with innovative ideas

© 2003, Michael R. Weeks – All Rights Reserved Prerequisites for Innovation – Absorptive Capacity What is absorptive capacity? Are we an intelligent customer? The role of retained IT – Technical Troubleshooter or Horizon Scanner  Frequently the outsourcing firm feels that the retained IT personnel “get in the way”

© 2003, Michael R. Weeks – All Rights Reserved Prerequisites for Innovation – Absorptive Channel and Process How do we get ideas into the relationship?  What communications processes are in place  How broad are those processes What do we do with these ideas?  Is there a defined innovation process?  Project management skills are key?  Leadership must shift role from supervisor to sponsor/champion

© 2003, Michael R. Weeks – All Rights Reserved Risks and Rewards Risk management is not risk elimination Risk sharing must be sorted Value estimation is difficult  Outsourcing brings cost transparency  Outsourcing does not bring benefit transparency Reward sharing arrangements tend to be less difficult— however, realization of rewards is difficult to measure Even the most savvy customers cannot always resist the temptation to focus on costs and not value Again trust rears its head – Risk/Reward sharing requires trust

© 2003, Michael R. Weeks – All Rights Reserved The Innovation Paradox Trust is required for innovation Operational efficiency tends to build trust Innovation disrupts the status quo which causes operational difficulties Operational difficulties decrease trust Therefore, a highly innovative environment risks weakening trust Therefore, creating an environment of ‘continuous innovation’ becomes extraordinarily difficult

© 2003, Michael R. Weeks – All Rights Reserved Summary - Overcoming the Paradox Contracts are great at spelling out service requirements—but they are not great at specifying roles and processes Communication channels must be clear with the necessary breadth and depth Strategic direction must come from the client CIO—not the outsourcer Managers must be conscious of the different roles (i.e. supervisor and sponsor) required in order to foster innovation

© 2003, Michael R. Weeks – All Rights Reserved Thank you! Michael Weeks Saïd Business School University of Oxford Park End Street Oxford OX1 1HP Telephone: +44 (0)