PA Consulting: Innovation outsourcing requires teamwork

19 August 2014 5 min. read

Innovation is no longer optional, it is a necessity. Market trends are more fluid and challenging at every level, and businesses need to respond by re-inventing and transforming themselves. This innovation also has to go broader and deeper than ever before to bring about a fundamental re-imagining of relationships with customers, products and services. Yet many companies struggle to innovate successfully, whether they try to do it themselves, or whether they involve their suppliers.

For some companies like Apple, Google and the other usual suspects, innovation comes naturally and is part of their DNA. For others, a real change of mind set is needed. This means acknowledging the importance of innovation, incorporating a culture of innovation, and nurturing innovative thinking. For example 3M transformed its product portfolio and its performance by adopting an innovative culture, based on hiring people who “get” innovation, giving people the space to explore new ideas and tolerating mistakes from which lessons can be learned, and better solutions constructed.

Innovation is part of the DNA of succesful companies

The most successful innovators also look outside for new ideas and stimulation. For example, pharmaceutical companies have developed open innovation ecosystems, to identify, accelerate and harness the R&D thinking being developed by other organisations. In the ‘90s, IBM turned around its then-ailing business by opening up its patent portfolio to third parties, to broaden the range of ideas and applications beyond its own thinking, and increase income as a result.

Innovation outsourcing
Another response is to outsource innovation, recognising that suppliers have invested in this area and have a range of skills, ideas and knowhow to offer. The problem is that these arrangements rarely meet expectations. Buyers then tend to blame the suppliers saying they have failed to deliver on their promises. Yet the reality is more complicated. Most suppliers are making big investments in new ideas and new ways of working, particularly in the areas of digital, cloud, big data/analytics and robotics/automation. So, in many cases, the problem is not the lack of innovative thinking on the part of providers, it is the fact that they cannot gain traction for their ideas with their customers.

So, how can businesses leverage successful innovation from their suppliers? The answer lies in understanding that the full benefits of outsourcing innovation can only be realised if customers collaborate and drive innovation with their suppliers.

Innovation outsourcing

Firstly, buyers need to define what they mean by ‘innovation’: do they want to simply do things better, or do better things? When the expectation to ‘innovate’ is thrust upon suppliers, the former is often the outcome, as process improvement is their core business. However, buyers usually want more than that. The problem is that by not defining innovation, the supplier will default to the most convenient interpretation. The answer is to articulate exactly what is expected in a formal agreement to align understanding, manage expectations and lead to the achievement of the desired outcomes.

Secondly, buyers cannot take a back seat, leaving suppliers to drive innovation. It is an activity that cannot be wholly outsourced; it requires active buyer-supplier collaboration. We have found many organisations fail to acknowledge this, which explains why suppliers’ ideas can fail to gain support. There needs to be an understanding that while suppliers may offer innovative technology or process solutions, it is the buyer that needs to make decisions and implement them. True innovation requires a two-way relationship.

Finally, buyers need to incentivise suppliers to innovate with them. While suppliers may not directly ask the question during negotiations, they are bound to think at some stage, “What’s in it for me?” Rewarding suppliers appropriately is crucial, and the more innovative the buyers’ culture, the more open and collaborative they are to suppliers. And therefore, the more effective their incentives are likely to be.

An example of this can be seen in Morrisons supermarket’s work with its supplier, Telefonica. They required a new way to increase the number of customers visiting their stores, without investing in loyalty schemes. By clearly defining what was expected, and working closely with them, Morrisons piloted its Smart Steps analytics technology to identify which households to target with coupons. Following the success of the pilot project, Morrisons is continuing to strengthen the partnership, having decided to implement the innovation nationally, throughout all its stores.

Mike Henley and Milan Shah - PA Consulting GroupAll this underlines that ultimately the responsibility for driving innovation lies more with customers than with suppliers, and they need to get the right culture and leadership in place to support it. Steve Jobs said, “Innovation has nothing to do with how many R&D dollars you have…it is not about the money. It is about the people you have, how you’re led, and how much you get it.” Clients need to apply those principles to their suppliers, allocate time within governance for innovation to be considered, and then to be clear about what they really want. Only then will they be able to create the fertile climate in which real innovation can take root and grow.

An article from Mike Henley, Head of shared services and outsourcing at PA Consulting Group and Milan Shah, outsourcing expert at PA Consulting Group. This article was previously published in Outsource Magazine.