Tuesday, May 24, 2016

Playing the Innovation Card

Playing the Innovation Card

In 1964, U.S. Supreme Court justice Potter Stewart famously characterized pornography with the quote, “I know it when I see it.”  The same is true for innovation in the art of commercial services.

I’ve been party to hundreds of commercial outsourcing arrangements – serving on the side of the buyer and on the side of the services provider.  Invariably, the topic of innovation arrives at the table from one party or the other.

Enterprise buyers seek to assure themselves that any resulting contract won’t yield “same mess for less” by challenging the contending providers to commit to a process whereby innovation in the services is confirmed and committed.

In a reinforcing fashion, the industry service providers, eager take the bait, offer up vague and unspecific promises of future features and functions that evolve with the broader market.

I liken these conversations to mutual assured misunderstandings, and ultimately disappointment and dispute. In short, both parties are speaking without communicating – and setting expectations that will fail to be met.  Buyers think that evolution of the services is baked into the price, while providers think they’ve locked down scope with a menu of future options available for additional fees.

The guidance I apply to these situations starts with the buyer, and the principle that nothing good comes without a cost. If innovation in the services is important, then it is essential to understand how that innovation is funded.

Buyers/Subscribers to an outsourced service are expecting that they are the beneficiaries of investment made by the services provider to serve a market of customers.  That is, there is leverage in the service model that spreads costs relating to the design, evolution, and delivery of the services across a multitude of like-minded buyers.

With this model in mind, it is reasonable to expect that the service provider is continually testing the market that it is serving to understand future opportunities to enhance and evolve the features and functions, drive down service costs, and improve the risk profile of the services it is delivering.  That’s just good business practice, right?

Well, if the commercial arrangement is viewed (by either party) as being “bespoke” (custom-made to fit a particular buyer), then the economic logic erodes rather obviously.  My caution to buyers: if you’re the only subscriber to a service, then innovation will take the form of specific and defined commitments that can be measured and priced distinctly.

But that’s not the way that most companies want to buy innovation in a services arrangement.  They don’t want to pay extra for unique and proprietary enhancements. They want the innovation to come as the market evolves with new capabilities.

Once this economic reality is appreciated by the buyer, it’s time to focus on buying “As A Service” offerings that are established in the marketplace and which are serving multiple subscribers. That orientation yields a very focused conversation with the contending service providers and removes much of the ambiguity around the term innovation.

The counsel I provide to ambitious service providers is to be very well-prepared for this form of discussion with an educated and informed buyer.  Pretenders will be smoked out quickly and failure to pass the test of a worthy innovation model will likely result in disqualification for further consideration.

The successful services provider will frame the topic of innovation through four dimensions that are directly relevant to the buyer’s future-view of the services continuum.  They include:

  • The reach that the service provider has as they serve markets and sense innovative ideas to assess and invest in over time. This is an important test – whether the provider is serving a broad enough base of customers with essentially identical services.
  • The cost of acquiring and developing those ideas, and the funding sources for such investments. Service providers need to affirm that they have an investment model in place.
  • The risk involved in trying to turn them into marketable products, including processes for customer engagement. The risk of innovation is worth emphasizing, and using as a key selling point with the buyer. And,
  • The speed with which the new features and functions can be brought to market. This often entails promotion of partner relationships, innovation laboratories, lighthouse clients, and the like.

Innovation need not be a four-letter word.  It is a central thesis of true “As A Service” contracting conventions. Aspiring service providers can use this topic to differentiate from lesser-prepared competition, but the sales process must be genuine and transparent around the topic.

Conversely, buyers who want assurance that innovation is baked into the services need to insist that the principle of buying market-defined offerings is applied in the source-selection process with prominence.

In these way, both parties will know innovation when they see it.

Peter Allen applies many years of operating experience as a top executive and strategic advisor for companies of all shapes and sizes, with focus on technology-enabled business services. He is now Chief Evangelist at Peter Allen & Partners and Senior Advisor for Alvarez & Marsal.

Image: midwest.communications

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