Outsourcing Business Processes for Innovation

The number of companies that outsource critical business processes to outside suppliers has been growing significantly worldwide. In 2012, companies outsourced some $309 billion of services — activities including finance and accounting, human resource management, procurement and legal services — and the overall volume has been growing at a rate of around 25% annually.

Although many organizations initiated business process outsourcing (BPO) as part of an effort to reduce costs or acquire new skills, it has since evolved into much more. In relationships companies classify as high-performing, service providers deliver substantial long-term improvements to the client's operating efficiency and strategic performance.

These types of innovations require companies and service providers to work together. BPO providers do not need incentives to improve their own revenue or margins, but they do need them to focus on the client's performance. While partners may incentivize innovation by using mechanisms such as productivity targets, allocating innovation days and agreeing to gain share on innovation projects, innovation won't happen unless clients and providers implement a more comprehensive process that combines acculturation across different organizations, an engaging method for generating ideas, adequate funding and a system for managing change.

Perhaps the most significant factor in BPO innovation, however, is whether the right people are in place to drive the dynamic innovation process. An effective leadership pair — one person from the client organization and another person from the provider organization — goes a long way toward invigorating the innovation process. In high-performing BPO relationships, the leaders are experienced and capable, with high levels of credibility, clout and power within their own organizations.