Outsourcing and Chicago

Chicago is my kind of town! I spent the last few days in the Windy City. While my primary reason for the visit was to continue to gather data for our ongoing research project, BVI (Demystifying the Link between Innovation and Business Value), I did have time to do other interesting things (e.g., eat some good food and catch up with old friends).

On a business related matter, I gave a talk to the students at DePaul University (www.depaul.edu) as part of an executive panel on outsourcing (http://facweb.cs.depaul.edu/yele/CIO-annual-events/2007winter/program.asp). Professor Olayele Adelakun (http://facweb.cs.depaul.edu/yele/) invited me to address his students and guests. I thank him for doing this.

I had the distinct pleasure of giving the opening talk for the panel; the topic I chose to speak about was the future of outsourcing, titled, "Strategic Sourcing: Sourcing of Innovation." For the talk, I drew on material from our forthcoming research project, IRO (Managing Risks for Rewards: The Case of Outsourcing Innovation), and our current project, BVI, along with findings from our past project, I4I (Leveraging Ideas for Organizational Innovation). An excerpt from my talk:

Outsourcing programs are becoming more complex. One aspect of the complexity comes from the kind of work that is being outsourced. Once, companies only outsourced simple, defined, and structured work. Organizations are now venturing into the outsourcing of innovation, and some are even ready to outsource pieces of their core capabilities. Organizations that are prepared to manage these relationships in a strategic manner will survive and thrive in the marketplace.

Some geniuses think they are beyond outsourcing, or even protected from it -- as I recently heard from one executive, "we will never see ourselves outsourcing our [IT] work...we just do not do that." Such thinking is not only dimwitted but immature and shortsighted. Most banks have outsourced large portions of the IT functions; similarly, supply chain functions and HR functions are being outsourced.

Think about this: most defense sectors of nations have begun to outsource the jobs of the military to private contractors. Once, these jobs were sacred and never to be outsourced.

My talk was followed by a presentation from Richard R. Howe (Vice President, Science Applications International Corporation (SAIC)). Richard drew upon his experience in managing outsourcing deals from the perspective of a vendor and provided a lively discussion of the issues that companies face when aligning outsourcing programs. A presentation by John McCord of the Global IT Consulting Group from the PA Consulting Group was next. John discussed results from a recent PA Consulting survey on the state of outsourcing. What caught my attention was the perceptions from the points of view of clients and vendors as to why they engage in outsourcing programs. Seldom do clients and vendors meet eye to eye or agree on what are the drivers of their relationships.

After the three talks, and a small break, we answered questions from the audiences for about 90 minutes. I must say that the audience kept us honest and asked some very interesting and difficult questions. Issues were raised surrounding the management of SLAs (Service Level Agreements), the protection of IP around outsourcing, the political and economic implications of outsourcing, and the management of risks and opportunities around outsourcing efforts. As the evening closed, there was a book signing event: I had the opportunity to sign copies of my book (The Outsourcing Handbook, Kogan Page, 2006). The day ended with Olayele and me, enjoying a few pints at a pub and enjoying the traditional food of Chicago: ribs and steak!

Managing Risks for Rewards: The Case of Outsourcing Innovation - New Proposal Submited

Organizations face a daunting challenge in managing the risks associated with the outsourcing of innovation. Most organizations have realized that they cannot reach business goals by conducting all activities internally. Cooperating with business partners and leveraging the know-how found in an organization's midst is a salient determinant of competitive successes. Many organizations struggle to increase the intensity and success of partnerships.

When organizations outsourced only manufacturing, business partners simply assembled raw materials. Business partnerships then moved to simple knowledge work, as was the case when the outsourcing of software development and IS maintenance efforts became popular in the mid-1980s. Today, leading organizations rely on their business partners for innovation and process goals. The outsourcing of innovation involves engaging with business partners in ways that are significantly binding and have strategic implications.

In all the above cases, we notice several interesting things – (1) in innovation-based outsourcing programs both parties are engaged in developing novel products and services, (2) the chances of the two parties successfully meeting their objectives is very low as the project space is undefined and new, with a greater chance of failure, (3) these alliances are premised on the fact that both parties will gain, and if they gain will share the rents and royalties, and (4) the knowledge sharing and intellectual property issues within (and around) these alliances is emerging and sometimes indeterminate.

This research project aims to examine the issues surrounding the management of innovation outsourcing programs. In particular, we seek answers to the following questions:

1. How do organizations make decisions to engage in the outsourcing of innovation? To this end, we will seek to evaluate the various methods that are used by organizations to identify critical areas, capabilities, and spaces for outsourcing. Research into the goals and objectives of outsourcing for innovation can inform executives about potentials for alignment of goals and objectives with outsourcing partners.

2. How do organizations choose business partners for the outsourcing of innovation? This type of partnership is different from finding a business partner for traditional outsourcing efforts, e.g. the sourcing of manufacturing or well-defined knowledge work. Outsourcing of innovation requires finding business partners who have specialized knowledge in a given arena, and business partners who can work in concert with an organization to come up with new products and services.
Being able to manage risks becomes critical here. A traditional, established organization might seem to be less risky, but the value of such an engagement may not be high. Larger firms may be predisposed towards economies of scale, and may not be interested in tailoring efforts to meet the specifics of the organization. On the other hand, an upcoming firm might be riskier, but the rewards might be higher.

3. How do organizations manage issues surrounding the governance of innovation? Issues here include the development of robust knowledge sharing programs that capture all of the information needed to implement and refine innovations that emerge from outside the organization. Furthermore, what are the procedures in place to secure intellectual property during these outsourcing transactions? Finally, what are the models used to share rewards, costs and incentives with business partners?

4. How do organizations manage their portfolio of relationships? Most organizations have multiple relationships and the management of these can be quite tricky. How do organizations develop models to manage these relationships? Some organizations have created an Office of Alliance Management (e.g. Eli Lilly), while others decentralize the management of relationships to functional groups.

5. How do organizations manage the risks associated with outsourcing of innovation? While the outsourcing of innovation has many benefits, it has an equal amount of risks. For instance, what happens if an organization realizes that the business partner has not lived up to expectations? How are issues surrounding new product development managed? What about the case where a business partner acts with guile and compromises the organization’s intellectual assets?

6. What are the critical success factors and drivers behind successful management of outsourcing programs? Are any of the five issues discussed above crucial to all outsourcing for innovation programs? What differences exist in successful outsourcing for innovation, and can we explain those differences based on the data? The ability to scale innovation projects and to sustain long-term business advantages through this kind of innovation requires an understanding of management processes for outsourcing for innovation.

Measuring Gaps: Innovation

Innovation can increase revenue growth for a company, and according to Mullen's article, calculating the gains and gaps in innovation can give a company a better idea of where they fall with respect to the competition. Understanding if an organization has an "innovation gap" can illustrate new areas for revenue growth. Part of this process involves democratic participation and brainstorming by employees through content management systems. Innovation can decrease operating costs, lead to new products, improve workplace atmosphere and generally affect all elements of a business and its success.

Mullen's article discusses four components to consider when evaluating for innovation gaps: revenue growth, revenue protection, cost containment and disruptive change. Evaluating these elements can greatly assist organizations in making strategic choices.

For other ways of calculating the monetary value of innovation, see the "smart metrics" listed by Baseline: http://www.baselinemag.com/article2/0,1397,818932,00.asp. They include formulas such as "employee suggestion payoff" which is measured as such:

[($ saved or created by employee suggestions/# of employees)/$ costs of IT to support employee-suggestion system]

These kinds of metrics can help to quantify the seemingly impossible, the effects of both far-reaching and short-term, incremental and radical innovation.

See: Mullen, E. "Calculator: The Money Your Innovation Isn't Making," Baseline, Available here: http://www.baselinemag.com/article2/0,1397,743154,00.asp

[Summary by: Chen Ye]

Measuring Innovation

The previous blog entry discussed Boston Scientific and their emphasis on innovation in the domain of medical equipment. Boston Scientific also has a strong program in place to measure and understand innovation and opportunities for innovation. Scott Engle (Director of Emerging Technologies and New Market Development) gave the next presentation. Scott focused his remarks on the methods and metrics used by the organization to identify areas for innovation. His critical point was that the organization needs to be one with its customers. Boston Scientific uses an extensive set of methods to gather ideas and insights from customers, and then uses these to identify areas for new product development. The organization has developed a Customer Perception Matrix to identify and map out customer needs and available products, based on features and drivers. Using this map, the organization can engage in directed innovation.

Another critical points that Scott made was the need to know when an organization has missed opportunities and it is not worth spending the resources to innovate, as a competitor has already secured an advantage.

Richard Traxler (Senior Manager, Technology Planning) gave a highly energetic presentation on the process used by Boston Scientific to conduct evaluations on core versus novel innovation projects. I must say the program that Richard has put in place is by far one of the best that I have seen. Novel projects are put through different review processes than core ones (most organizations still do not do this at all…). In addition, the ways used to start-or-stop these projects, and origination of these projects is also managed differently.

The strong understanding of the innovation process and ways to measure that process were fascinating. Thank you to all at Boston Scientific for sharing your knowledge!

Boston Scientific: The Context

The purpose of my visit to Boston Scientific (Maple Grove, MN) was to learn about the innovation programs that Boston Scientific has in place. On a brisk morning (if memory serves me right, the temperature was a balmy 1˚ F) I attended a nice breakfast reception, followed by an energetic talk by Randy Schiestl (VP, Product & Technology Innovations). Randy gave an overview of Boston Scientific and highlighted the accolades that the organization had won for its innovation programs (2005 Shingo Prize for Excellence in Manufacturing; 2005 Industry Week’s Best Plant; 2006, UBS Investment Research ranked the company number one in Technology Strength in a study of the intellectual property patents). Currently, Boston Scientific has about 28,000 employees spread out in 22 countries, with the headquarters being in Natick, MA. The company has four main divisions: Cardiovascular (which includes Interventional Cardiology, Peripheral Interventions, Vascular Surgery, etc), Endosurgery (Endoscopy, Oncology, and Urology), Neurormodulation, and Guidant. Boston Scientific is an $8 billion dollar company today, growing from $2 million in 1979.

Chris Pelerini (Manager, Technology Development Process) discussed the various communication programs, incentives, and organizational support mechanisms in place to foster innovation; Boston Scientific has an extensive review process in place to mobilize innovative projects. These include reviews by various technical boards, a technology executive committee. Susan Trahan (Director, Portfolio Planning) wrapped up the day by highlighting success factors, critical barriers to innovation, and the next steps in the organization’s innovation programs. Overall, I enjoyed my visit to the Maple Grove area, and learnt a lot from the visit to Boston Scientific. Thanks to all who helped organize the visit!

The Need for Innovation
Randy discussed how the US faces epidemics of obesity and diabetes, and why the need for new less invasive techniques of treating these were necessary. The calling to make less intensive medical devices is a noble one. Employees of Boston Scientific are bound together by their interest in working out problems, coming out with new discoveries, and pushing the frontiers of less invasive medical technologies.

One of the major growth strategies of the organization has been the pursuit of acquiring innovative organizations. This reveals a critical nugget of insight – unlike most organizations, Boston Scientific does not try to immediately merge their acquisitions into their manifold existing operations. Upon acquisition, they allow the acquired entity to run on its own, and then slowly begin a phased integration process. They thus discover and understand the peculiarities of the new organization from an operational point of view. Integration, right off the bat, without adequate time for assimilation and cross-fertilization of ideas is not appropriate. Boston Scientific learnt this lesson through past failures. Most recently, the organization acquired Guidant Corporation, and hopefully they will be able to turn this acquisition into a strategic capability.

New Team Member - Krishnaja Gutta

I am Krishnaja Gutta- Current MSIM student , ISchool, UW.

I am very excited about joining this group and am sure it will be great experience working with varied expertise.Looking forward for the project to get started.

As a new member on board, here's a brief introduction about myself:
I have a masters in Physics and a minors Business Administration prior to UW. Strategy and Portfolio Rationalization in Agile Organizations have been some my major interests since college. Having been in the midst of the "Outsourcing" boom in India, I had an opportunity to witness the various attributes of the practice up close. To this project I would like to bring some of the experience and insights I had gained over the years and research further into the "Outsourcer" (USA) side of the equation and study the where, how and when of global equilibrium of these outsourcing trends and would like to see how the industry can face the risks that when it starts playing around with aspects like innovation.