Incentivising innovation

  • Published on: 23 September 2015
  • By: Peter Nowottny

The most common complaint across all outsourcing relationships is the lack of innovation delivered by the supplier.

No doubt one of the factors which influenced you to outsource in the first place will have been the supplier’s plausible assertions that their broad customer base puts them in the perfect position to identify best practice and innovative approaches and then invest in and deliver pioneering solutions at acceptable cost and risk.

However, an honest appraisal of your situation is likely to show that nothing (or very little) which is both innovative and practical has actually been brought to your account by the supplier for some time. The few innovative projects which have been implemented have probably been suggested by your team or even by the business, rather than by your supplier.

Just like cholesterol, there are both good and bad varieties of innovation:

  • ‘Good innovation’ – delivers value to the business by improving the cost-effectiveness and responsiveness of your IT service, the bottom line of the business, or the end-customer experience.
  • ‘Bad innovation’ – innovation for its own sake, typified by those blue-sky pilot projects which are paraded at the six-monthly visit to the supplier’s innovation centre. This type of innovation may be popular but is likely to be a long way from fruition, insufficiently robust to be implemented, and quite possibly about to be superseded by an app already installed on your iPhone. Even worse, it is usually irrelevant to and disconnected from the needs of your particular IT set-up, your particular business or your particular end customers.

Undoubtedly there are examples where suppliers have successfully delivered significant good innovation to their customers – indeed, you may well be aware of one or two in your own industry sector. However, in most cases, your supplier is failing to bring innovation to your account, at the same time as they appear to be delivering it successfully to their other accounts. Award winning industry suppliers may seem prima facie relevant to your situation in terms of security, automation, analytics, social media integration, big data, omni-channel etc. so why is this not happening on your account?

The harsh truth is that this is not all the fault of your supplier. Much of the responsibility for this situation may well lie with the way a supplier relationship is managed and how you incentivise your supplier.

How does it actually benefit the bottom line of your supplier to invest real time and effort in identifying and then delivering innovation to your account? The high quality resources required to do this effectively are in short supply and needed across multiple client accounts. So, is there a direct pay-off for any value actually identified and delivered through innovation? Do you have an overall relationship scorecard with appropriate weight on good innovation and value delivery, and does this scorecard actually link to any hard commercial benefits for the supplier e.g. gainshare or increased probability of additional business?

Don’t forget to include some stick as well as carrot. Does the failure to deliver innovation lead either to direct commercial penalties or indirectly, through the relationship scorecard, reduce the probability of additional business e.g. through reduced access to the business or loss of preferred supplier status? Is there ultimately a provision to terminate the contract as a material default if there is sustained failure to deliver innovation?

Clearly at the heart of incentivising innovation lies the need for you to identify and include objective measures of good innovation within the contract and the relationship scorecard.

This is often dismissed as being just ‘too difficult’ and therefore gets abandoned or deferred and then forgotten. Alternatively innovation ends up being measured by easy proxy metrics such as the required number of innovation sessions per year or access to X hours of senior experts on topics to be agreed i.e. ticking the box on demonstration of clever stuff. This only encourages bad innovation though. Transformation innovations, however, can deliver significant value within your particular business context and actually be implemented as a transformation or addition to the core service or as a significant business project with a high return on investment.

In our experience at Quantum Plus, it is perfectly possible to devise a set of appropriate and practical measures to drive good innovation and include these at the heart of the contract and in an overall relationship scorecard. An example metric might be the proportion of transformational service improvement plans and transformational value-add business projects which are identified by the supplier rather than the client, which are practical and significant in terms of adding material value, and which have sufficient financial justification to be approved by the client.

So, if you want to enjoy a model supplier relationship which delivers significant good innovation to your account, do not expect this to happen without some well-crafted incentivisation on your part. The onus is on you to set up a contract and performance management framework which measures and incentivises value delivery through innovation and place this at the heart of the relationship – with the right mix of stick and carrot.