Having decided that they can and should outsource parts of a business that are noncore, business leaders must now consider innovation. Can it, too, be entrusted to someone outside the organisation?
The answer is both yes and no - it depends on what aspect of innovation we are talking about.
For me, innovation is made up of three elements: creativity, invention and exploitation. In the business world these elements will occur in three distinct forms: product, process and business concept.
Creativity is largely the result of scientific research conducted in academic institutions and research establishments and the results often have no immediate business application. Some companies contract or sponsor such research in the hope that the results might lead to a breakthrough in new product development. Examples are experiments in nanotechnology and genetic engineering.
The second stage of innovation is to turn new discoveries into inventions that have commercial potential. These may emerge from the academic world, but more often they are the creation of innovative individuals or specialist development organisations. Examples are the exploitation by Apple and Microsoft of the graphical user interface and computer mouse developed by the Bell Palo Alto Research Centre. It is possible for companies to outsource this work successfully to universities or institutions such as the CSIR.
What the business world is really interested in is turning available inventions or ideas into new products, processes and services that will add to their profits. It is possible to outsource or contract for this process, but detailed knowledge of the specific business, its needs and those of its customers is essential.
There are plenty of new ideas for products and ways of doing things out there. You do not have to start from scratch . But the process itself still has to be driven effectively from within the company.
The initial success of companies like Dell, Amazon.com and Federal Express was related to their development of a new way of doing business, or business concept innovation - something that is impossible to contract out.
Innovative ways of doing business are usually quickly imitated, however, and success depends on how the leading players capitalise on their "new way" to drive down transaction costs or develop new products, making it difficult for more traditional competitors to catch up. This is where product and process innovation kicks in and where carefully managed opportunities for contract outsourcing lie.
The success of companies such as Sony, Cisco, 3M and Microsoft is largely dependent on product innovation. Their long-term success lies in their ability to bring new products to market.
Product development can be done by someone else. Flavour and fragrance companies, for example, will develop products for clients, such as food recipes and formulations for cosmetic products and household cleaners.
As product development slows and competitors catch up, companies need process innovation - finding lower-cost methods to improve productivity.
An important source of this form of innovation is usually found within the business itself. The key is not so much in contracting with external parties, but rather in mobilising the company's own workforce to be receptive to new ideas and to come forward with their own ideas. Where companies do outsource, it is unlikely that the team that delivers day-to-day services will have an innovation capability or culture. Their expertise will be operational excellence and incremental improvement. Companies should look beyond traditional contract terms and identify practical mechanisms to make innovation work in a long-term outsourcing deal.
Ultimately, though, The boardroom is where the final responsibility for innovation should lie. The management of innovation requires distinct skills that are often beyond the preserve of a contract partner.
- McBain writes in his personal capacity.
