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Innovation Through Outsourcing: Achieving the Seemingly Impossible

Outsourcing innovation may sound counterintuitive. After all, how can you outsource something as important and intrinsic to business success as innovation? Yet companies have been doing it for years, with varying degrees of success.

In this post, we’ll explore the debate around outsourcing innovation, look at how to assess potential partners, discuss contract considerations, and provide a framework for getting the most out of an innovation outsourcing engagement. Buckle up, because we’re about to challenge some preconceived notions!

The Great Outsourcing Innovation Debate: Can It Really Be Done?

Here’s the million-dollar question – can you truly achieve innovation through outsourcing?

The traditional view is that innovation is an internal capability that cannot be externally sourced. However, research shows that companies can and do gain access to innovations via external partners. The key is finding partners with specialized skills, insights, and assets that complement internal capabilities.

That said, there are some common pitfalls that torpedo many outsourced innovation efforts:

  • Unclear goals: The client doesn’t communicate what innovation means in the context of business objectives
  • Wrong partners: Partners lack the appropriate culture, skills, and experience to deliver
  • Poor metrics: Traditional outsourcing metrics don’t fit innovation projects

The core challenge lies in reconciling the service mentality inherent in outsourcing and the open-ended nature of innovation. Service engagements aim to tightly define scope and outcomes. Innovation resists specification, with fluid outcomes.

Still, done right, outsourced innovation can provide huge advantages:

  • Access skills and assets not available internally
  • Cost savings compared to internal R&D
  • Faster time-to-market with innovative offerings
  • Ability to experiment and take risks

The question then becomes: how can we structure outsourcing relationships to nurture collaborative innovation?

Building Internal Innovation Muscles

Before looking outward for innovation, firms must cultivate internal capabilities. Innovation leaders like Intel use staged approaches to build global networks of innovation centers, supported by robust infrastructure and processes.

Key steps include:

  • Gain executive sponsorship
  • Set measurable goals
  • Build culture and processes that facilitate innovation
  • Obtain external funding and talent
  • Maintain momentum via early wins

This internal foundation allows firms to drive systemic innovations requiring tight coordination across products and business units. It also provides leverage when collaborating with external partners.

Tapping Into External Innovation Sources

Once internal capabilities are established, companies can complement them by tapping specialized external partners. Firms take various approaches:

Buy or license innovations: Acquire or license patents, technologies, and IP from 3rd parties.

Invest in startups: Take equity stakes in startups to participate in emerging spaces.

Joint R&D: Partner with other companies or academia on shared innovation goals.

Crowdsource: Leverage user communities to ideate and co-create innovations.

On-demand talent/tools: Contract external specialists and vendors to support internal R&D.

Opening up to external innovation requires a new “co-shaping” mindset focused on collaborative value creation versus go-it-alone approaches. Used judiciously, external partnerships provide shortcuts to innovations and skills that would take years to build internally.

Assessing Suppliers’ Innovation Abilities

Selecting the right innovation partners is critical. Rather than accepting generic claims of innovation expertise, clients should probe potential suppliers on five key aspects:

  1. How they define innovation: Do they take a broad strategic perspective or limit the view to operational improvements?
  2. Innovation strategy: Do they take a systematic approach across accounts and offerings?
  3. Methodology: Is there a proven framework for achieving innovation consistently?
  4. Organizational assets: What skills, investments, and executive support enable their innovation practice?
  5. Metrics: How do they measure innovation outcomes and value delivered?

Suppliers that pursue innovation systematically, provide thought leadership and quantify results are more likely to deliver. One-off project capabilities are less indicative of sustainable innovation partnerships.

Crafting Win-Win Innovation Contracts

Even with the right suppliers, innovation requires appropriate contractual frameworks. Traditional outsourcing contracts focus on service levels and risk reduction – anathema to innovation.

For incremental innovation along defined vectors, contracts should specify:

  • Target outcomes
  • Rewards for exceeding targets
  • Governance processes for managing projects

For open-ended radical innovation, contracts need flexibility. Options include:

  • Joint venture agreements
  • Milestone-based pricing
  • IP licensing/revenue sharing models

In both cases, risk-reward sharing principles are key to fostering sustained collaboration. Companies able to overcome zero-sum mindsets will go further.

Building Relationships to Sustain Innovation

Contracts provide structure, but relationships unlock innovation. Several factors help:

  • Executive leadership – Leadership commitment sets the tone for partnerships
  • Incentives – Gainsharing, innovation days, productivity targets drive behaviors
  • Governance – Joint oversight builds institutional alignment
  • Trust – Personal connections foster a willingness to take risks

While essential for radical innovation, relationships play a secondary role in incremental projects. In this case, contracts and defined processes take precedence.

Measuring Innovation Value

If you can’t measure it, you can’t manage it. Quantifying innovation outcomes is crucial but challenging. Some approaches:

  • Incremental: Assess contract KPIs, operational improvements, and client satisfaction
  • Radical: Benchmark against competitors on profitability, market share, brand value
  • Qualitative: Survey partner satisfaction, intention to collaborate again

Innovation success leads to broader impacts – new business models, services, and revenues. Tracking systemic effects requires business-level scorecards, not just project metrics.

An Innovation Outsourcing Framework

Based on extensive research, we’ve developed a six-step “Innovation Ladder” framework for getting the most out of outsourced innovation:

  1. Strategize – Articulate innovation goals and scope
  2. Design – Define measurements and contracting approach
  3. Assess – Evaluate supplier innovation abilities
  4. Contract – Embed innovation into agreement
  5. Relate – Build relationships to sustain innovation
  6. Measure – Track and quantify innovation outcomes

This full lifecycle approach integrates innovation into outsourcing strategy and governance. Although presented sequentially, steps can be customized based on innovation objectives and relationship maturity.

Evolving to Innovation Ecosystems

Leading companies increasingly work with portfolios of specialized partners versus single suppliers. Well-orchestrated “innovation ecosystems” provide:

  • Access to cutting-edge skills and assets
  • Flexibility to tap expertise on-demand
  • Shorter time-to-market for new offerings
  • Accountability via competition

Participants include large multi-service providers, niche specialists, startups, and gig economy talent.

Managing ecosystems requires the development of three key capabilities:

  • Digital maturity – Ability to consume and integrate innovations
  • Vendor management skills – Optimizing networks of collaborators
  • Relationship building – Cultivating strong ties with diverse players

Done right, distributed innovation networks significantly boost outcomes versus going it alone.

Outsourcing Innovation IS Possible

While challenging, outsourced innovation delivers outsized benefits to firms that purposefully cultivate collaborative relationships and flexible governance models. By leveraging partners strategically, companies gain speed, cost efficiency, and access to new ideas.

Approached haphazardly, outsourced innovation is a non-starter. Our framework offers practical steps to set up productive partnerships that accelerate innovation output over the long term.

The future favors the bold. Companies that overcome not-invented-here mindsets to creatively engage partners will win. The choice is yours – will you master outsourced innovation, or be disrupted by those who do?

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