21 September 2016

Outsourcing - innovation, risk and opportunity

“Innovate or die”. We’ve all heard it, nobody seems to know who first coined it, but everyone understands it. Our businesses must constantly be better, cheaper and faster or inevitably, we’ll be overtaken by our competitors (à la Kodak, Blockbuster, and the entire motor industry if it doesn’t keep up with Google and Über). 

In our connected world, innovation should be easier than ever. At the click of a button, we can access more information in a day than history’s greatest thinkers could in a lifetime, and talent is readily available to support us anytime, almost anywhere in the world. 

However, we also live in a specialist economy of outsourced delivery. Our businesses are increasingly little more than customer relationship wrappers around multi-supplier products and services. By ourselves we can’t even do what we do today, let alone innovate to do better tomorrow. 

We need innovative service partners who can enhance our businesses, and yet innovation is conspicuously absent from most service partnerships. Commercial models that support efficiency, improvement and optimisation rarely promote the more valuable strategic innovation we need in our markets.

These binary commercial models - if you deliver X then I’ll pay you Y - work well when buying defined services with specified levels of improvement and costs savings, but are fundamentally flawed when we want innovation. 

Unlike ‘X’ deliverables, innovation inherently defies specified outcomes and defined measures. At the outset, we can only expect to develop vague ideas that will necessarily fail many times in execution before we succeed. Edison knew this, having only succeeded in making an electric lightbulb after 10,000 attempts, yet almost 140 years later, we’re still struggling with uncertainty.

But here’s the thing. Innovation has an inherent risk threshold below which nothing happens. Think of this risk threshold as room temperature and innovation as bacteria. Put food in a freezer and it stays below the risk threshold. Great if we want no bacteria, but what if we want penicillin? 

The key to innovation in our service partnerships lies in defrosting our binary commercial models. We must accept more risk.

At this point though, it’s tempting to run away from innovation  when most of us automatically think risk is bad  but if we do, we’re misunderstanding our risk threshold. We only need accept sufficient risk to promote our service partners’ innovation. Once we do, additional risk really is only bad, because risk and innovation are not proportionately related. After some point, more risk doesn’t equal more innovation, just as jumping from a plane without a parachute probably doesn’t equal more fun.

So, although we have to accept the inherent risks of innovation, we don’t have to accept all risks and move to the opposite extreme of buying time and materials based consulting. In fact, we’re paradoxically less likely to incentivise innovation if we do, because under this model our service partners’ rewards are in no way linked to innovation.

Which must mean, of course, that successful commercial models for innovation fundamentally depend on shared risk and reward. Both parties must benefit from the innovation, but both must also be prepared to invest  and potentially lose. 

It’s not at all surprising then, that the best commercial models for innovation are teaming or joint venture based, when partners each contribute resources (people, know-how, intellectual property) into a single team tasked with developing innovative proposals for joint exploitation. Done well, these models bear the closest resemblance to a dedicated innovation team within one organisation, while also benefitting from specialist expertise from outside. However, there are still a couple of potential spoilers to avoid.

Crucially, joint innovation models don’t work when teams are tied to specific defined outcomes, which sounds obvious, but our default binary risk management setting can often lead to quantitative “innovation targets”, such as X proposals per quarter. But innovation is qualitative. It doesn’t matter how many proposals are developed. We need only one to change the game.

Funding also causes confusion. Joint innovation should not be built into our service partners’ pricing in any way whatsoever. If we pay our partners to innovate with us we are merely buying consulting, they are not investing in innovation, and we’ll have unwittingly created a binary, supplier-customer relationship, whereas successful joint innovation relies on shared risk and, when we get it right, shared reward.

At the end of the day, though, we have to appreciate that we cannot guarantee innovation under any commercial model, and counter-intuitive as it may seem, we should not seek to.

Without risk, innovation doesn’t happen, so we shouldn't eliminate risk from our commercial model. If we do, we are only guaranteeing failure, which can only logically mean our innovation risk is actually an opportunity for success, or put another (simpler) way, we can risk innovating, or guarantee not innovating.

This is really the most critical point to understand in developing commercial models for service partner innovation. We are not buying innovation from our partners, but offering the opportunity to innovate with us for mutual benefit. Knowing this enables us to easily focus on shared risk and reward, and away from binary supplier-customer commercial principles. When we do, we remove the barriers to innovation and stack the odds of success more in our favour.

No comments:

Post a Comment