Are outsourcers stunting business innovation?

Although many companies see outsourcing as a positive force for cost reduction and flexibility, others are arguing that it may be acting as a block to new technological thinking.

Some IT chiefs think their outsourcers are failing to do all they can to roll out new technologies that could ultimately save them money.

About one in three IT leaders, some 35 percent, say existing outsourcing arrangements are blocking innovation and 34 percent believe their supplier could be doing more to introduce fresh technological approaches.

According to John Sheridan, head of IT outsourcing at advisory firm Alsbridge which conducted the research, contracts are the heart of the problem because they do not measure suppliers on the introduction of innovations.

"There isn't the incentive in the current contract structures for them to bring those new ideas to the table. We've talked for donkey's years about contracting for innovation but actually nobody does," Sheridan said.

"Most organisations want the service they've contracted for, delivered at the level that their business requires for the price they've agreed - and all the focus is on doing that," he said.

"To continue to drive down the cost of delivering that service, then the last thing you want to do is put additional investments, resource and ideas into that relationship. But actually that's what you need to be doing."

New ways of delivering outsourcing service

Sheridan said taking out the next layer of cost requires customers and suppliers to explore new ways of delivering that service.

"The customer is going to have to do things differently - they're going to have to consume differently. There's an expectation from the business that they're able to articulate the value that their IT service is delivering to the business in terms the business understands," he said.

"Suppliers can help them do that, but there has to be this two-way street that says, 'Don't keep beating us up with the contract. Let's look at this, let's re-evaluate what we've got on the table and let's see how we can construct it in a way that creates a more collaborative environment'. It's less about innovation and more about collaboration."

The research also found that almost two-fifths of IT leaders felt stuck in the past by their outsourcing arrangements.

In June, an earlier tranche of the Alsbridge research suggested that IT chiefs are struggling to renegotiate IT outsourcing contracts because they feel locked into existing deals - and could be missing out on new technologies such as cloud and big data as a result.

Sheridan said cloud requires investment because the technology base is entirely different, raising the question as to who - the customer or the supplier - will foot the bill.

"The biggest single factor that causes things to fall flat on their face is the investment necessary to migrate into that new environment and to rationalise your existing environment," he said.

Continued focus on cost reduction

Some suppliers are reluctant to have the conversation about footing the bill because could be seen as a distraction from existing contractual regimes, with their continued focus on cost.

"What customers are wanting is an ongoing reduction in the price of receiving a delivered service, which means the revenue stream for their suppliers is going to go down continually," Sheridan said.

"But it's a reducing revenue stream into a business model that is still built around people. If it's still built around people and then you reduce the revenue, you're going to have to change the business model you're operating against. They're using new technologies in an old-fashioned model," he said.

"If you compare traditional outsourcers with the new breed of pure-play public cloud offerings, those cloud offerings are a standard service on a standard box."

According to Sheridan, firms with the right profile will get significant cost saving but most do not because of the complexity of their existing IT arrangements.

"They have built up a huge complex array of boxes and wires and policies sitting around it. Even though they want to benefit from new technologies they have to build those technologies into a bespoke business model," he said.