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How do you measure innovation in outsourcing?

Outsourcing can have its benefits, but how often do we bother to measure the actual value of our outsourcing relationships? Or the innovation they deliver? In Europe, at least, the answer is: not very often.

According to a study conducted by business consultancy services provider, Cognizant and the UK's Warwick Business School, about two-thirds of companies don't attempt to measure the value of innovation gained via outsourcing. The study encompassed 250 chief innovation officers (CIOs) and chief financial officers (CFOs) in Europe, and examined their attitudes about outsourcing for innovation.

Ironically, most CIOs and CFOs seem fully aware of the benefits that outsourcing brings. More than 60% of CIOs turn to outsourcing companies for innovation and 50% said they would be willing to pay more for an outsourced service that enables them to maintain innovation within their industry. Threequarters of respondents (70%) also believe that innovation achieved through outsourcing contributes to their organisation's financial performance. The study also notes that more is being spent on outsourcing now than at any other point during the past.

Speaking to PTE in an interview, Sanjiv Gossain, UK MD of Cognizant, explained the problem in greater detail. "While businesses are clearly turning to outsourcers to aid and deliver innovation within their organisations, many are missing a major opportunity to demonstrate the successful impact that this innovation is having within the organisation. This can only mean that money is being wasted by investment into innovation initiatives that are not delivering tangible results."

So why are so few companies actually measuring the value and innovation that they get from their investment?

Defining the problem

One major hurdle lies in actually finding a method to successfully measure the value of outsourcing and the innovation it delivers. "The problem comes with defining innovation and educating businesses on how to successfully measure it to prove its impact on the company's bottom line," Gossain told PTE.

Ilan Oshri from Warwick Business School explained that the management of innovation is a key weakness in many businesses. However, Warwick Business School is now in the process of conducting qualitative research among C-level executives in more detail to put a figure on the value of innovation and further investigate the links between outsourcing and client organisations. The final findings will be available in a report later this year, available for download at www.valueofinnovation.com.

This isn't the first time that Cognizant and Warwick Business School have examined outsourcing issues. In 2009, they conducted a study about the benefits of outsourcing beyond the one-time cost saving. The results revealed that less than half of CIOs and CFOs try to calculate the impact of outsourcing on their business. If you missed out on this then you can catch up in the October and November 2009 issues of PTE, available on our website www.PharmTech.com.

"This new research into innovation, and the accompanying academic report due later this year, is a natural extension of our former study," said Gossain. "Modern outsourcing relationships now offer and deliver far more than just cost savings. Clients are now looking for more value from their outsourcing partnerships and innovation is a big part of this. This is a shift we are seeing across the industry."

Modern outsourcing relationships should help a business to innovate, and metrics should be established at the very beginning. It is also important to appraise any financial benefits that outsourcing for innovation offers.

"In order to drive repeatable innovation, companies need to establish a framework with their outsourcing partners to determine their objectives and formalise the innovation achieved," said Gossain. "Developing metrics will also help the C-level share the results and prove the worth of outsourcing-led innovation."

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