In the first generation of outsourcing contracts this term was a bit of an oxymoron. If it was mentioned at all in was purely as a side note in the contract. Neither party knew how to, nor planned on delivering this aim, but the lack of achieving it is still mentioned as a contributing factor in the dissatisfaction of many executives within the client. Things are getting slightly better in some of the more forward thinking relationships but there is much still to do before both parties can truly deliver on this aim.
Some of the problems are in the pricing structures in any contract. Innovation costs money it is often expected that the vendor will foot the bill. What is even worse is that there are clauses that state that any savings in innovation will be shared between the client and the vendor. So, not only will the vendor pay for it, but they will share any rewards. Innovation in inherently risky so if the vendor has to fund it and there is a chance it won’t work and their margins will be further reduced for no compensation. As you can see this is not attractive for the vendor and so most didn’t actually put any effort into innovation. If any happened it was more as a consequence of changes in the operating norm during the lifetime of the contract. These could be technology or infrastructure improvements brought about by a requirement to upgrade to the latest version of a particular piece of software.
To actually make innovation work, there are a few options. Assign a certain proportion of the cost of the project to innovation. This innovation budget will then be spent in agreement with both parties towards the benefit of the project as a whole. The vendor will actually have money to work with and the client will have a sense of ownership of any work which is undertaken. It could be the vendor’s responsibility to identify and propose areas of innovation investment as they are closer to the day to day running of the project. An alternate benefit is to have the vendor pay for it, but they see all the rewards. In other words, any cost savings or efficiencies as a consequence of the innovation will not reduce the costs to the client.
There is an added benefit to innovation which is often overlooked and that is staff retention in the vendor. Attrition in vendors is often a massive issue, especially in tier 1 markets like India. If staff have an opportunity through innovation to learn new skills or participate in innovative but possibly risky projects then their interest level will be retained and there is more chance of them staying for longer. This is of course a benefit to both the client in that the people delivering the project are retained and the level of service maintained and a benefit to the vendor as they have less cost in continuous training for new members of staff.
Both of these options listed above have to actually make it into the contract. As long as the contracts only mention innovation without actually explaining how it is to be delivered on executives will continue to be disappointed with the results.