Building Innovation into the Outsourcing Relationship

Answer

Building Innovation into the Outsourcing Relationship

Introduction

Global outsourcing is gaining more and more acceptance across all type of organizations globally, yet as the trend gains increased popularity and acceptance, for most organizations, fostering innovation in outsourcing relationships has remained a pipedream (Moon, Swar, Choe, Chung, & Jung, 2010). Outsourcing relationship between client firms and outsourcing companies is the major source of challenges that client firms face in outsourcing environments such as bringing innovation in the contractual relationship, achieving and enhancing business value, and improving business processes while at the same time remaining within business budget estimates (Moon et al, 2010). Like many other organizations, Bentley and Brooks (B&B) outsourcing environment is faced with the key challenge of obtaining innovation from their global outsourcing provider, AlphaCorp. Based on the facts presented in the case, B&B are dissatisfied with the level of innovation and continuous improvement delivered to them by AlphaCorp. Not only is B&B unable to enjoy or realize acceptable level of innovation, but are also unable and find it difficult to measure or even determine the level of innovative services, since their contacts is not clear about what innovations aspects should be measured, let alone how to measure, determine and manage provider quality of service delivery. The company also has misgivings about whether the outsourcing contract should focus more business or process function. The company’s relationship with AlphaCorp is trained further due to additional costs that the outsourcing company may require so as to address B&B’s innovation challenge. The contract between the two organizations does not explicitly address innovation and continuous improvement (CI) issues further frustrating the client firm since this situation makes even harder for them to realize innovation and CI form AlphaCorp. While AlphaCorp had promised, or at least intimated delivery of innovation to the client firm, this has not yet been achieved, at least not without additional costs for the client firm. Worse still, B&B seems not to have mastered well their own business processes further impeding the level of satisfaction they can obtain from their provider, especially with regard to innovation in the outsourcing contractual relationship. From this analysis, it is evident that the relationship between the client firm and the vendor is crucial in overcoming challenges in outsourcing environments. Client firms need to not understand relationship capabilities of the outsourcing organization, but also ensure a strategic, flexible, and clearly defined contractual relationship that addresses innovation and accommodates change. A contract that clearly defines innovation and how to measure it, is thus important as the relationship and degree of trust between the client firm and the vending or outsourcing firm.

Background

In an organizational setting, innovation does not occur serendipitously, much less in an outsourcing contractual relationship (Moon et al, 2013). This is perhaps the reason why it is not surprising that B&B have not been able to realize innovation in their outsourcing arrangements with AlphaCorp. As a matter of fact, B&B is facing a challenge of how they are going to ensure that their outsourcing supplier brings in into their outsourcing arrangement because so far, they are dissatisfied with their services provider’s level of innovation. Additionally, their outsourcing relationship is made more complicated with the fact that the contact between the two companies intimates to oral agreement and promises of the provider bringing innovation, yet in practices, B&B has been unable to extract any innovation from the whole arrangement. Still on their contact terms of service, there is no predefined way on how to measure the provider’s innovation delivery, neither are the measures for innovation. The difficulty that B&B was having in the measurement of innovation has made them not realize most of their objectives of contacting the provider, one of them being increasing business value and reducing organizational costs. Yet another issue and challenge is that B&B are not fully conversant with their own business process yet in business process outsourcing (BPO), its required that both the client firm and the supplier fully understand the BPO, though much effort should come from the client firm and this helps greatly in achieving innovation and realizing most of the outsourcing objectives (Christensen & Raynor, 2003).

For most organizations today, the focus of outsourcing has not been so much on cost reductions as increasing the business value (Oshri & Kotlarsky, 2011). As suggested by Oshri & Kotlarsky (2011), outsourcing contacts are more effective if innovation is clearly defined and paid attention to. Most contracts, however, fail to give innovation the attention it deserves and instead concentrate in defining service level agreements (SLA) as is the case with B&B and AlphaCorp. B&B needs to have assessed the supplier capability to deliver innovation the willingness of the supplier t deliver innovation based on researching first about the supplier, using referrals, and asking other clients who have dealt with the supplier before. A contractual relationship that include how incremental innovation is to be measured makes it easy for the client firm to put the supplier firm to task when innovation has not been delivered since it becomes easy to measure it. The quality of the relationship between B&B and AlphaCorp is a strained one, yet as Moon et al (2013) suggest, relationship between the client firm and the provider needs to be flexible and positive so as to achieve the contractual objectives.

Possible Alternatives

One of the options that the two organizations have to fully benefit from the contractual relationship is to redefine their contact so that it does not only include innovation, but also includes explicit ways on how the client firm can measure the provider’s level of innovation delivery. Such an elaborate framework for innovation will ensure that the provider remains to its end of the bargain since innovation would be firmly incorporated instead of loosely defining it as is the case with the two firms in the case.  This even makes mitigation easy if the provider frustrates the client firm but not delivering innovation or asking for additional costs to do so. Another option to addressing the challenge to build their relationship to be a positive one since as suggested by Oshri & Kotlarsky (2011), a positive relationship is crucial outsourcing relationships and it is in fact imperative for incremental innovation. Managing relationship between the client firm and the provider can be effective since it increases the degree of trust and the level of commitment especially from the side of the provider firm, which promotes delivery of innovation in the client’s business for increased business value (Christensen & Raynor, 2003). Properly structuring the contact so that gray areas are defines such as how to measure innovation is yet another viable alternative that an address the challenges that B&B is facing from their provider, AlphaCorp.

Proposed Solution

The best solution in ironing out the issues between B&B and AlphaCorp is to revise the terms of the contract, and change its structuring since the key problem the client firm is facing is that the contact seems just to have intimated on the delivery of innovation, as opposed to being solidly given consideration in the whole outsourcing arrangement. This is because, as proposed by Oshri & Kotlarsky, (2011), a well constructed contact between a client and outsourcing firm or the provider is crucial even during mitigation, should challenges such as those faced by B&B arise where the provider fall short of delivering innovation in a contractual arrangement.   A well defined and explicit contact, something that is lacking in the arrangement between B&B and AlphaCorp, also ensures that performance metrics for innovation are not just predetermined. However, what innovation aspects to measures are also made known to both the client and the provider, making it easy to benchmark during future contractual relationship, and determine if objectives are being achieved, and to what level (Christensen & Raynor, 2003). While concentrating on SLAs is crucial, having a well defined contract that explicitly accommodates innovation by paying close attention to it will ensure that B&B does not only realize innovation delivered by its provider, but also identify the key performance indicators (KPIs), make the two firms remain committed in the contact, and more importantly, enables monitoring of targets and easy follow-ups.

Conclusion

A good strategy in implementing this solution is to have B&B management and executives fully understand their own business process, since it is through this that innovation can be effectively achieved as it is not the efforts of just the provider, but the client firm, B&B, also has an important role to play, perhaps a more important one. Clauses in their contractual arrangement that are not explicit need to be made clearer since this would make terms or engagement clearer, and the strained relationship would be stabilized for greater organizational achievement.