Introducing The New New Outsourcing Julia Kotlarsky, Ilan Oshri and Leslie P. Willcocks

With this blog we welcome to this regular series of articles on the New New Outsourcing.  Every month over the next year we will be posting a substantial piece that describes and assesses our latest research findings. Across this first year the constant theme will be innovation. And indeed a key part of the new, new outsourcing is a move away from the traditional outsourcing cost-service trade-off  towards a new focus on the collaborative  cost/service/innovation continuum. A key part is also a focus not just on a service area’s performance but on larger, business outcomes. As we shall see, all this requires radical changes in attitudes, mind-sets and behaviours. In the course of the coming year we are going to meticulously set out what the new new outsourcing amounts to, and how it can be delivered. We will be using case examples and robust research evidence to substantiate the mistakes to be avoided, and what works in practice.
What we have been capturing in our most recent research is the slow maturing  of outsourcing, its goals and practices. Figure 1 captures the four observable phases that client organizations pass through in their outsourcing management evolution.  In looking at Figure 1, undue optimism in the earliest stage often results in a debased form of contract management we call ‘contract administration’.  In Phase 2 clients tend to be able to manage the contract, but it is only in Phase 3 that they really begin to focus on how to leverage the supplier beyond the contract.  In all this, most have learned the hard way, by making mistakes, finding out what works and what does not across two or three generations of outsourcing.  The wise ones have been ‘smart in their ignorance,’ taking an incremental route into more  outsourcing, learning as they go, limiting their risk exposure, building up their understanding and also their retained capability to run a sourcing regime aligned with their business strategy and imperatives.  By 2011 a critical mass of organizations had reached, or were reaching for, Phase 3, at least in their management of information technology outsourcing (ITO). There has been a shorter learning curve for business process outsourcing (BPO) and offshoring, effectively encompassing the period from 1999 to 2013, and this has translated into organizations lagging behind in these outsourcing practices. By 2013 nearly half of client management with BPO arrangements were at or approaching Phase 3.

image01Figure 1 The Global Sourcing Learning Curve 1989–2013 (developed from Lacity and Rottman).

Winding the clock back a little, by late 2008 all organizations outsourcing or contemplating outsourcing stood on a cusp of the decision—whether to follow a traditional cost–cutting route under recessionary conditions, with limited payoffs, or make a step–change towards sustainable cost reduction together with business–focussed innovation.  In Figure 1 we call this step–change ‘collaborative innovation.’ The continuing recessionary climate in many economies has only made this decision harder – surrender to the cost cutting exigencies of the moment and the things outsourcing is traditionally good for, or invest in a long term different way of operating.
In the first three months of our GlobalSourcing.org blogs we will be covering this theme of collaborative innovation. By 2013, in just over 25 years the ITO and BPO markets  had grown from US$10 billion  to exceed  US$450 billion in annual revenues globally. In that time research studies show growing success where limited outsourcing objectives on cost and service have been pursued. However, the record on innovation, cost plus innovation, and strategic advantage from outsourcing has been more disappointing. Our first three blogs, by Leslie Willcocks and colleagues, will cover the practices of organizations selected across economic sectors in Europe, North America and Asia Pacific for their uncommon performance on achieving, through outsourcing, innovations in their IT functions, in business process use and  in delivering strategically valuable new products and services.
The first blog, Towards Collaborative Innovation, maps the thinking and practices  behind the breakthroughs these organizations had all made in moving from traditional outsourcing relationships to adopting collaborative innovation with their suppliers. Collaboration is a co–operative arrangement in which two or more parties work jointly in a common enterprise towards a shared goal. It is signalled by close partnering behaviours developed over and for the long term, distinguished by the high trust, flexibility, reciprocity risk sharing and investment of resources and time essential if high performance  is to be achieved. Our first blog  finds that  deep collaboration with pro-active suppliers is a fundamental pre-requisite for achieving three kinds of innovation. Firstly, there are Operational innovations, that is  technology, work and personnel changes that do not impact firm–specific business processes. Secondly, there are Business Process innovations that change the way the business operates in some important ways.  Thirdly, there are Strategic innovations that significantly enhance the firm’s product/service offerings for existing target customers, or enable the firm to enter new markets.  In outsourcing, the collaborative capabilities of all parties determine the type and degree of innovation possible. Only deep collaboration makes large business process and strategic innovations feasible. Without an innovation focus, outsourcing can achieve cost-cutting mostly of a one-off kind, or at best cost efficiency – similar service at lower cost.
Our second blog, Case Studies in Innovation Through Outsourcing, demonstrates firstly that much can be learned from the construction industry which responded to 1990s crises in using multiple suppliers by moving towards more collaborative practices. These are illustrated in the major project of building Heathrow Terminal 5. Here, the commitment to a ground–breaking contract—the T5 Agreement in which the client held most of the risk—set a principle for the way of working.  The right leadership, ongoing client involvement and a focus on getting integrated teams to perform to a world–class standard has meant that the British construction industry eventually delivered a success story. A notable factor was the way in which the client managed down risk and managed in opportunity for its suppliers.
Three other cases – in the telecommunications, oil and mail industries - illustrate the principles at work  in major ITO and BPO service arrangements. Dutch telecoms company KPN had over ten suppliers but did not believe they could outsource innovation. Rather, acting as planners and facilitators and monitors, they worked collaboratively with the suppliers challenging them to achieve innovations through co-creation. Thus they found ways of using the innovation power from the supplier network where there were  real capabilities, whose potential could  be released where there was a higher level goal for everyone, something that could be only achieved by joint effort, with everyone standing to gain something. Statoil Hydro,  the Norwegian-based oil and gas major, looked for suppliers who understood the business and brought distinctive capabilities to each area. They established together and joined the same road map. They drew up contracts that were not too tight, allowing innovation and pro-activity by the supplier, and together continually looked at ways to improve systems and processes. Spring Global Mail - a world leader in the provision of international mail services for business – stressed the key roles of trust, established through delivery,  and new forms of organizing if innovation with suppliers was to be  an outcome that made the business better. Contracts needed to allow things to be done differently, and both sides had to have leadership that stepped up to the problem creatively when things went wrong.
In a third blog on Leadership for Innovation,  drawing on these and many other researched cases, Leslie Willcocks and colleagues  identify a fourfold process for how effective collaborative innovation can be delivered. Leadership shapes and conditions the environment in which requisite contracting, organizing and behaving can occur.  Leadership deals with adaptive challenges and must be at all levels in each of the collaborating parties.  Leadership also changes the approach to risk in order to share and manage down risk and manage in opportunity. New forms of contracting are required to secure successful collaborative innovation.  Such contracts share risk and reward in ways that provide incentives for innovation, collaboration and high performance to achieve common goals. Organizing for innovation requires more co–managed governance structures and greater multi–functional team working across those organizations and people responsible for delivering results.  Team working now requires the ability to collaborate within a client organisation, between client and supplier and between suppliers in multi–supplier environments. Leading, contracting and organising in these ways provides incentives to change existing modes of performing and enables collective delivery of superior business outcomes.  Collaborative innovation is most effective when it generates high personal, competence–based and motivational trust amongst the parties.  High trust is a key component and shaper of the collaborative, open, learning, adaptive, flexible and interdependent performance style required. To summarize how the necessary transformations can be achieved, this third blog concludes with  ten lessons that emerge from the collaborative innovation research.
Across the course of the year  we will be reporting on related research as it is completed. This includes projects on high performance BPO, cloud computing and innovation delivery capability that we study from vendor perspective.
[i]Haried P and Ramamurthy K (2009) Evaluating the Success in International Sourcing of Information Technology Projects: the Need for a Relational Client-Vendor Approach. Project management journal 40(3), 56-71.
[ii] (Lacity & Rottman, 2008) op. cit.

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