CIO Magazine has a nice, long article asking why while outsourcers talk innovation, they really cannot deliver it.
I would like to add 4 perspectives:
a) The best innovations outsourcers can deliver are in their own operations
The outsourcing supply chain is hugely inefficient. In spite of massive scale - as I point out in this note on Utility Computing - outsourcers cannot or choose not to deliver economies from that scale. In case of many western providers it is due to other inefficiencies and in case of many Indian vendors goes towards 45% gross margins and keeping Wall Street happy. Here are 5 areas outsourcers should be innovating their own operations before they offer to innovate their client's environments.
b) Most Outsourcers could not "scale down" to IT innovation projects
Outsourcers do better in big, mature IT spaces - .net, SAP etc where they can build capacity in thousands and sell to clients in units of 10, 50, 100, 500 staff. As I wrote in the MAGIC framework, IT innovation is often about small, intense teams and edgy, alpha type technology. Few large outsourcers could scale down - and forward - to consistently deliver value on such projects.
c) Most Outsourcers do not have an R&D culture
Check out income statements of outsourcing firms. R&D spend is usually a rounding error. Training is their big investment. And more often even the limited R&D applies to marketing efforts e.g. a lab set up to support a particular proposal or a "solution" center where small teams prototype and train on new solutions. They are usually just a training class ahead of client teams on new technologies.
d) CIOs should invest in their own IT and BP staff to move them away from KLO to innovation
Finally, the best IT innovation projects are about improving specific business processes. Corporate LOB and IT staff know company and vertical specific processes much better than any outsourcer can expect to. Sure, you can get some supplemental staff from an outsourcer but get it in small doses. Besides I am a believer in allowing your own staff to evolve from transactional, keep the lights on activities to more challenging, innovation areas. Not every staff member will make that jump, but investing in re-training them on new technologies is to me far better than or investing in outsourcers - who likely trained on the new stuff a few weeks before they arrive on your innovation project.
Most CIOs are focused on squeezing their utility spend to free up innovation dollars. In the last couple of years compliance and security spend has skyrocketed. The urgency to reduce utility spend has never been greater. Outsourcers can do best by helping CIOs in that quest. Hundreds of billions of dollars at stake.
