Cost Savings Versus Innovation

Horses for Sources recently published the output of a study which showed that buyers of outsourced services are saving money, but aren’t seeing a whole lot more.

The report stated that over 95% of current buyers of outsourced services view their outsourcing engagements as effective at reducing their operating costs. However, the report also showed that 30% of buyers consider their outsourcing initiatives as being ineffective in giving them access to new business process acumen, and 35% thought that their relationships with their service providers were ineffective in providing new and creative methods of achieving business value.

This begs the question: does the cost of implementing innovation and other value-add services from a supplier impact the cost savings associated with the outsourcing? Or can clients have both cost savings and innovation?

HfS points out that if buyers do in fact care about continuous improvement within the scope of their outsourced contract, they need to seek out a service provider which can prove that they have the discipline, culture and motivation to work with the client over the term of the contract. From a service provider perspective, there are great benefits to having a client who values the continuous improvement and innovation the service provider can deliver. The most obvious is a referenceable, retained client (i.e., given the high cost of sale to acquire a new client, it is far cheaper for service providers to retain a satisfied client).

However, in a world where service providers often incentivise their sales and management teams on the value of their sales or recurring revenue, it would be counter-productive for individuals within such organisations to actively help a client innovate or improve operations if that innovation would result in the client spending less with the service provider each year. Without ensuring that service provider sales teams are equally incentivised to ensure clients are retained, clients may only be offered business process improvements and innovation which do not lower the fees paid the service provider.

And even if a service provider is inclined to support innovation as part of its broader service offering, how is this done?

Service providers cannot act alone in this regard, and need client support, input and often client funding either out of the savings from the outsourcing relationship, or net additional funding if the level of change is substantial enough. Effectively managing a contract and capitalising on the potential for innovation and improvement requires a client to have an effective retained organisation. There is of course an internal cost to clients associated with staffing an effective retained organisation, but it is integral to the success of an outsourcing relationship. At the point of outsourcing, the retained organisation must understand:

• What it is actually passing across to a service provider to perform and manage;
• What currently works within the function and what hasn’t in the past;
• What the importance of the function being outsourced to the company;
• What may constraints there are to making changes; and • Whether the business likely to support a meaningful change management programme.

Without a well-defined plan of action supported by the client side, it is difficult (and almost impossible) to motivate the service provider to continue to improve, and assist them in finding appropriate problem areas to focus their joint attention.

In addition, experience suggests that the service provider teams providing typical, day-to-day run services are not the people to innovate; these teams typically focus on implementing operational efficiencies and cost control (e.g. minimising costs and maximising speed and/or accuracy). True innovation requires “out-of-the-box” thinking and a consulting mind-set. If innovation is what is needed or desired, then the service provider needs to be staffed for that from the beginning.

Unfortunately, service providers do not provide consultants (or consulting-like resources) free of charge, so there is always a cost to the client (whether specifically called out or “in the sauce”) to support such innovation. In fact, there is invariably a cost in simply considering whether there are opportunities for innovation! If the business case at the time the contract is entered into doesn’t include funding – either from the client or the service provider – for innovation and continuous improvement beyond basic improvements in run services, obtaining funding further down the line to spend money on innovation can sometimes be a tricky prospect.

The reality is that innovation and improvement over the basic day-to-day execution of an operation requires the right commitment, resources and funding from both parties. And whilst cost is usually going to be a predominant factor in a company’s original decision to outsource, it is not the only factor. The HfS study showed that 37% of respondents stated that the immediate cost savings are not attractive enough, such that their organisations are refraining from outsourcing IT or business processes over the next 12 months.

However, slightly more respondents (39%) reported that a very important factor in the decision to refrain from outsourcing IT or business processes is that they are unconvinced of the long-term benefits. Clearly, service providers that focus entirely on cost reduction as a sales tool are missing an opportunity to build long-term relationships with clients. Whilst it is more challenging to contract for innovation and continuous improvement, and access to new technology and processes, it is still clearly high on the agenda for clients.