In my initial article, I discussed Smartsourcing, or the need to take outsourcing to the “next level” where overall business value, rather than cost savings, is the key objective. As outlined in that piece, there are six steps to achieving this goal.
In my first two pieces, I addressed step one, Strategizing Innovation , and step two, Creating Metrics, in more detail. Step three, Assessing a Partner’s Innovative Capabilities, discussed the key elements that are necessary in order to identify a vendor’s ability to consistently provide innovation.
This article will discuss the key elements of contractual agreements to ensure consistent innovation, step four.
From a contractual perspective, business process outsourcing (BPO) service providers do not require incentives to develop innovations to improve their own revenue or operating margins. However, they do require specific incentives in order to focus on client performance. Therefore, it is imperative that clients and BPO service providers identify and quantify several metrics such as the following in formal contractual agreements:
- Mandatory productivity, quality and innovation targets.
- Specific definition (s) as to the number of required innovation days per quarter. An outline of activities is preferable.
- Development, management, delivery and refinement of quarterly innovation forums. Again, this includes the specific activities to take place during these sessions.
- The partner’s strategic and tactical approach to incremental and radical innovation. This should include a brief innovation plan.
- Gainsharing at the project level.
- Clear statement that the provider knows that they “don’t have a lock on the business.”
- Introduction of special governance provisions, such as the development of committees dedicated specifically to innovation.
Unfortunately, many BPO relationships are still priced based on cost reduction and resource inputs, such as the number of full-time equivalent employees (FTE) required to perform the services. Although many companies like the simplicity and predictability of FTE pricing, they also recognize that input-based pricing can discourage service providers from innovating out of fear that it will mean significantly reduced revenues.
To overcome this dis-incentive, clients should consider introducing provisions that require service providers to improve productivity by 4 percent to 5 percent per year. Both clients and providers have endorsed this approach.
In addition, many clients and BPO providers are developing business cases and supportive legal documents for each innovation project. This includes agreeing in advance how financial compensation would be awarded to the provider.
As previously mentioned, continuous improvement and innovation are typically included within a clause in the contractual agreement. It requires the BPO service provider to bring forward three to five ideas each year to improve services and technology or save money.
Because these ideas may cause a reduction of the fee to the service provider, these clauses should be supported by gainshare clauses. If there is significant reduction of fees, then a structured program will allow the service provider to also reap some of the financial benefit for a period of time after the idea is implemented.
The challenge with innovation in contracts is that the achievement of the objectives involves both the service provider and the client. Many engagements have such clauses in the agreements, which have never been executed or even thought about by either party.
Continuous improvement and innovation are creative conditions; ideas do not simply materialize out of thin air in the course of service delivery. Every client situation is unique, and potential innovations must be proposed in the context of the situation.
Clients should create a specific focus on innovation in their governance process. This requires that an innovation structure is created and time is set aside for both teams to think about potential ideas, review industry conditions, take input from the service provider’s experience in other engagements and best practices, and come up with proposals that the leadership teams can evaluate.
Marc Kauffmann is the president of The Kauffmann Group, LLC, a management consultancy featured in New York Times best-selling author Seth Godin’s book, “Bull Market: Companies That Make Things Happen.” He has 25-plus years of expertise in the evolution of innovative business practices, market approaches, product/service offerings and information technology. You can follow him on Twitter @Marc81753262 or find him on LinkedIn.