Innovation Driven Outsourcing

Cost driven outsourcing is passé. Hagel and Brown (see “What India and China Can Teach Us About Innovation.” , Optimize, 2005) argue that companies with global ambition must focus on innovation driven outsourcing. Authors contend that contrary to the widely held belief about India and China doing low end, routine jobs in IT services or manufacturing respectively, both countries have scaled up their outsourcing expertise, innovating business process and employing creativity in outsourcing core business process.

The authors identify three primary misconceptions about innovation for the above belief. First, business executives in general perceive innovation to be a new product or service that can be marketed. While, this undoubtedly is true, executives fail to understand the importance of innovating business processes. For example, say Dell finding an efficient way of cutting delivery time. Modest improvement in business processes may have a huge impact on the bottom line if these activities have to be done often.

Second, business executives are biased towards breakthrough or disruptive innovations and have low regard for rapid and incremental innovations. The reasons could be their misplaced belief of disruptive innovations to be inimitable and immensely profitable. While this may appear to be true, the authors reason that rapid and incremental innovations are difficult to copy and also bring sustained profitability. In support of their argument, the authors cite the example of Dell and Toyata, who fearlessly talk about their business processes, unworried about competitors catching up with their ceaseless incremental innovations.

Third, most of the executives have a very narrow, firm centric approach towards innovation, focusing on employees to be the only source of innovation. However, this perception is slowly changing with companies findings ways to collaborate with customers, business partners, and also people in general to generate ideas or solve business problems.

In light of the above, expansive meaning of innovation, the authors state that India and China have done immensely well in mastering distributed innovation by practicing rapid and incremental innovations. While China have mastered the art of open production, India is said to have honed their skills at open distribution. At the heart of open production and distribution is the splitting of business processes into independent modules, where performance or output is clearly specified and work on each module can be done independent of any other. Participants in this global process network are free to innovate their processes, so long as they meet the end specifications or performance. For example, say manufacturing process of a product has 10 modules. Business partners responsible for each module are free to experiment with their business processes so long as the output specifications are met.

This captures the essence of authors’ definition of innovation being not only disruptive product and services, but also about betterment in business processes. Further, business process innovations can be rapid and incremental, difficult to imitate too. Lastly, innovations does not have to organization centric, business partners should be co-opted in the innovation processes. The authors cite examples of Western companies waking up to this broader definition of innovation. Nike and Cisco are revamping their operations, deploying global process network to speed their innovation process through collaboration.

[Summary Prepared by: Sanjeev]