Dynamic Innovation in Outsourcing

For nearly 30 years, organisations have sought innovation from outsourcing their back office information technology (IT), and latterly also their business processes. There are many reasons that companies of various sizes see the benefit of outsourcing particular aspects of innovation, here defined generally for a business context as deploying new and creative ways of achieving productivity or growth (Coulter and Fersht 2010). Quinn (2000) lists reasons that include limited resources and capabilities within the organisation, a shortage of specialist talent, management of multiple risks, attracting talent in the company’s non-specialised areas and getting to market faster. So how can companies achieve innovation through all the various ways of sourcing available? Often they have an ad hoc approach to innovation, or what Linder et al. (2003) call a transactional approach. This approach, however, often fails to leverage organisational learning and develop innovation capabilities within the client firm as they work with suppliers. Clearly, an ad hoc approach cannot create a culture in which external contributions are accepted or welcomed. Moreover, it is difficult to develop innovative processes and measure innovation outcomes when companies innovate on an ad hoc basis.

As we signaled in Chap. 1, there is a trend for outsourcing relationships to become increasingly managed and leveraged as strategic assets, with clients looking for business ideas, innovation and environmental scanning from their suppliers and a much greater focus on business, not just technical outcomes. The indicators of this can be found in research by, for example, Cullen (2009), Lacity et al. (2009) and Lacity and Willcocks (2009):

This chapter answers the question: how do clients and business process outsourcing (BPO) service providers work together to foster dynamic innovation? Dynamic innovation is a process by which clients incent providers to deliver many innovations each year that improve the client’s performance in terms of operational efficiency, process effectiveness, and/or strategic impact.

So far we have established in this book that nearly any client firm is now taking interest in the following question: how can we achieve innovation from our suppliers? Interestingly, it has also emerged that, while innovation has become a common practice within the firm, the road to achieving innovation from external suppliers is still bumpy. There are numerous open issues that make innovation in outsourcing a true challenge. Let us pick out four major ones emerging from the previous chapters. Firstly, innovation is defined and understood in different ways by the client and the supplier. Secondly, as innovation is delivered via an external party, the implications for the way innovation will be governed and delivered as part of the outsourcing engagement are not clear for many practitioners, though the evidence from the previous chapters gives a strong steer. Thirdly, many still debate whether the contract is an enabler or an inhibitor of achieving innovation. Fourthly, many practitioners remain unclear whether good relationships are the ‘holy grail’ of innovation, or whether contracts can substitute for ‘relationships,’ making good relationships just another contributing factor.

While the early years of Information Technology (IT) and business process outsourcing (BPO) were mainly characterized by a quest for cost savings (Loh and Venkatraman 1992; Lacity and Hirschheim 1993) and a focus on core competences (Quinn and Hilmer 1994), evidence from 2000 onwards suggests that client firms have been seeking added value from outsourcing by accessing suppliers’ competences (e.g. Dyer and Nobeoka 2000; Quinn 2000; Whitley and Willcocks 2011). Mol (2005) argued that “firms are increasingly relying on partnering relationships with outside suppliers that can act as an effective substitute to the internal generation of knowledge and innovation”. Similarly, Linder et al. (2003) and Weeks and Feeny (2008) argued that client firms rely on external suppliers in the search for new ideas. Accepting that innovation is outsourced and offshored, Lewin et al. (2009) studied the determinants driving firms to offshore innovations only to conclude that firms have been entering a global race for talent in which solutions will be sought wherever skills are available. Such observations suggest that innovation may be considered as one of the possible outcomes of outsourcing engagements.

Mitigating risks and achieving collaboration between clients and suppliers have been extensively discussed in the Information Systems (IS) outsourcing literature (e.g. Gopal and Koka 2012). A major concern identified by the extant literature is information and knowledge asymmetries that may result in opportunistic behavior by either side. Indeed, while such concerns have mainly been examined vis-à-vis contract choices (Gefen et al. 2008; Gopal and Sivaramakrishnan 2008), the implications of these studies have relevance for the study of innovation through outsourcing (Weeks and Feeny 2008).

Cloud computing represents a potential crossing point. But we also point out that our research over four years has found time and again that it takes a huge amount of effort to make Cloud work to scale for large organizations, for the long term. It is all too easy to overestimate the likely short-term impacts of cloud computing but also underestimate the long-term effects. Our previous research (Willcocks et al. 2014) suggests five major trends:

As we saw in Chap. 7, cloud computing is a rapidly emerging technology with potentially massive impacts. But organizations have been struggling for some time with how best to gain business value whilst addressing the new challenges of yet another disruptive technology. Whilst there is a growing body of research into cloud computing, there have been very few case studies that analyse the business benefits to organizations. This chapter aims to answer the call for research on business issues relating to cloud computing from both a cloud consumer and cloud provider perspective (Venters and Whitley 2012; Yang and Tate 2012), and research investigating business impact empirically (Hoberg et al. 2012). The research builds on extensive outsourcing research, answering the call for more detailed longitudinal case studies (Lacity et al. 2010, 2016).

Using software to automate tasks is not a new idea, but interest in service automation has certainly escalated in recent years. The popular press is filled with provocative titles like “Rise of the Robots: Technology and the Threat of a Jobless Future” (Ford 2015), “A World without Work (Thompson 2015),” and “I Am Robot: Will Robotic Process Automation Revolutionize the BPO Industry?” Although the term “robot” connotes visions of physical robots wandering around offices performing human tasks, the term as it relates to service automation really means the delivery by software of service tasks previously performed by humans. Service automation comprises a continuum of tools, each designed to automate a different type of task.