Outsourcing Business Processes for Innovation

The number of companies that outsource critical business processes to outside suppliers has been growing significantly worldwide. In 2012, companies outsourced some $309 billion of services - activities including finance and accounting, human resource management, procurement and legal services - and the overall volume has been growing at a rate of around 25% annually. Although many organizations initiated business process outsourcing (BPO) as part of an effort to reduce costs or acquire new skills, it has since evolved into much more. Today, senior managers want more than short-term cost savings, and they are skeptical of big-bang improvements. In relationships companies classify as high performing, the authors found that service providers perform ongoing innovation projects that deliver substantial long-term improvements to the client's operating efficiency, business process effectiveness and strategic performance. These types of innovations require companies and service providers to work together. BPO providers do not need incentives to improve their own revenue or margins, but they do need them to focus on the client's performance. The authors found that both clients and providers identified several important measures, including mandatory productivity targets, innovation days and gain sharing at the project level, as the most effective incentives. Other approaches involved making sure that providers know that they don't have a lock on the business and introducing special governance provisions, such as committees dedicated specifically to innovation. While partners may incentivize innovation by using mechanisms such as productivity targets, allocating innovation days and agreeing to gain share on innovation projects, the authors argue that innovation won't happen unless clients and providers implement a more comprehensive process that combines acculturation across different organizations, an engaging method for generating ideas, adequate funding and a system for managing change. Perhaps the most significant factor in BPO innovation, however, was whether the right people were in place to drive the dynamic innovation process. The authors found that an effective leadership pair - one person from the client organization and another person from the provider organization - went a long way toward invigorating the innovation process. In the high-performing BPO relationships the authors looked at, the leaders were experienced and capable, with high levels of credibility, clout and power within their own organizations.