Suppliers and innovation – our challenge.

Yesterday, I sat on a panel at 360 IT, a big infrastructure event. One of the questions I got asked (I paraphrase) was "supplier innovation – do you want it, and expect it?".

My answer to this question was what you'd expect. Of course we want innovation from our supplier base.

But I tempered my answer with a caveat, and that is we don't often get innovation from our supplier base.

Big firms always tend to write very big contracts for stuff. We do that because it means we can get the best price. We'll often add some kind of "innovation" or "transformation" part to the deal, as if by doing so we'll magically get all the new stuff we'll ever need.

Practically speaking, though, you almost never get anything other than the basic service or commodity you paid for when you do this. And that's not really the fault of the vendor.

Lets say, for example, you've contracted to have your technology operations outsourced. You ask for innovation, and the vendor naturally shows up with lots of great ideas about how they can do technology better. Its the sensible response, and perfectly reasonable that a vendor would want to innovate around the services that they're presently providing.

The thing is, making something a little bit better that's already working is usually not that interesting to us. The fact is this: when you buy services from a vendor they either work or they don't. It is only in the latter case that anyone other than the relationship management team spend any management time on the service and that's usually staggering from crisis to crisis, not working out how to make things better.

The rest of the time, we're worrying about stuff which has nothing at all to do with the service a vendor provides. Like, for example, deciding the best way to get payments to millions of people, or how to cope with a prospective reform agenda without much in the way of money. In that scheme of things, incremental improvements from incumbent vendors are – I know I'm sounding arrogant – a distraction.

Our reality is there is limited free management time available, and spending it wisely means you have to focus on things that give you the biggest bang for the buck, which is more often than not, some internal meeting or policy or initiative, not something coming from outside.

I accept this is something that large organisations have to become much better at managing. Clearly, when we just write "innovation" into contracts and hope for the best, it doesn't work very well. I think what's needed is for us to take a much more active role in guiding our partners towards things that are materially important to us so they can then show up with propositions that will make a real difference.

Of course this would exacerbate something else, which is that such a practice would naturally focus our attention even more onto a few very large suppliers with whom we do most of our business. Considering we want to be much more active with a range of organisations, both small and large, this is not really a good thing.

I actually don't have an answer. But I'd love to hear from any of you in the comments who have suggestions. If you were trying to advance the supplier-innovation agenda, and trying to make your business more accessible to a broader range of vendors, what would you do?

8 Responses to“Suppliers and innovation – our challenge.”

  1. September 23, 2010 at 6:41 am #

    Good post James.
    We want business innovation, not technology innovation. We understand our business, the supplier understands the technology; that's the relationship. Expecting significant proactive business innovation from suppliers is flawed.
    If we want innovation from suppliers we must drive it – and give them scope to deliver (wiggle room). We must explain our vision, strategy, challenges etc. and work through them with our suppliers as "partners". There generally aren't many suppliers that we trust sufficiently to be that open with them.
    Smaller suppliers are less resourced but more flexible. Our relationship with smaller suppliers can be closer and with more senior and talented individuals. Smaller suppliers are more easily manipulated. It is easier to achieve innovation through a diversity of smaller suppliers than through a few large ones.
    Some suppliers welcome customer innovation because it helps them develop better product. Others have a head in the sand "we know best" attitude. Which you choose is an important consideration in awarding contracts or selecting technology, the malleability and openness of the supplier is one of the constraints upon innovation potential.
    IMX & FWIW. Steve

  2. September 23, 2010 at 9:57 am #

    A a technology vendor looking in through the relationships with major outsourcers it seems clear to me that the outsource partner will do what is best for their business, not necessarily what is best for your business. This is a capitalist economy at the end of the day, and the £££ drives behaviour.
    They sign a contract to deliver a service (usually very competitive and at low margins) and their main focus there on in is to deliver the contracted services whilst maintaining a profitable business. Innovation causes change, and changes costs money. Perhaps if the end customer can somehow recognise that there is a cost of change and construct the flexibility in the contract to allow the services to change over time but still remain as profitable, or even better, more profitable for the services supplier to deliver that change. For surely, we understand that IT on its own delivers no value, and that real business transformation relies on more than the IT services innovating and changing, it relies on the whole business innovating and changing, and there is a cost associated with that change. If you can capture the cost of change, the benefits to the business of changing, and somehow share in those benefits with the supplier (I am talking outsource or services supplier here rather than technology vendor) then there will be a clear carrot for those suppliers to chase and innovation that benefits the business (rather than looking like a cool but of technology) will follow.
    Wendy Carstairs

  3. September 23, 2010 at 12:45 pm #

    James, thank you for sharing this concern and posing the question. You've had two very good replies.
    May I suggest that you ask another question: "How can I (i.e. you) influence and change the constraints of existing Government IT procurement practice in order to incorporate effectively the innovations I need."
    I suspect you know what you would like to do, but have hands tied!
    A clue is to acknowledge that successful businesses attempt to meet the aspirations of their customers' customers and construct their business model accordingly. Such a business model reveals the whole business ecosystem in which they operate and enables and empowers change despite the inherent unpredictable behaviour (dynamics) of the participating contributors. Furthermore, this is a zone that may still be very uncomfortable for conventional enterprise architects, where much learning still needs to be done and whose influence is considerable.
    Modern approaches for moving to the use of 21st century management principles and leaving behind those devised in the 19th century are now available.

  4. September 24, 2010 at 2:28 am #

    Wendy makes an astute point:
    They sign a contract to deliver a service (usually very competitive and at low margins) and their main focus there on in is to deliver the contracted services whilst maintaining a profitable business.
    We can write whatever we want into a contract, but if what we write is not compatible with the suppliers business model then we'll be sadly disappointed. The constraint here, is in finding someone who can do what you want. Sadly, you'll probably have to shape what you want based on who you can find to do it.
    Take outsources for example: the trucking companies of the IT world. They want to keep the trucks moving, while avoiding spending money on tyres. They actively resist change to the truck, as it comes directly out of their (rather thin) profit.
    The economics for an outsourcing arrangement usually mean that the first three years of a five year contract have the outsourcer recovering their investment in setting up the relationship (transition costs, buying hardware, training etc.), while the last two years are profit (minus operational costs). If you go to them three years in and say "I've heard that cloud/virtualisation is an innovative way for us to save money" then you'll just get a blank stare. You've just told the outsourcer that you want them to make less profit (or potentially no profit). And any innovation clauses included in the contract (such as sharing cost savings) are usually ignored for similar reasons.
    There's a couple of things we can do about this.
    First, we can try and write the contract around a shared outcome. This is something like David's suggestion to find companies with business models designed to make their customers successful. Rather than write a contract to AM or BPO billing, where the outsourcer is rewarded for meeting an SLA, let them make a click on every transaction collected.
    The problem with this is that it requires a level of sophistication from the supplier which is beyond the skills of 90% of the suppliers (and probably customers) in the market. It's a shared risk situation — yeah, the outsourcer might make a motza in a boom market, but what about a downturn? They need to understand how to manage and hedge that risk. Existing AM style delivery won't work, as it's too inflexible. The customer also needs to be careful that the outsourcer can't game the system to make more money, such as becoming so agressive with collections that they piss off all the people they collect from, which is only really becomes a problem after the contract ends.
    Second, and more practical, is a more nuanced approach to procurement where we slice and dice our IT estate in a way that generates contracts that are compatible with the business models of our suppliers. Rather than thinking "can I outsource that function," we need to think "how do I want to manage that area of business". The sort of service discovery and heat-mapping that Steve Jones talks about would seem to be a good first step.
    The vast bulk of the our business which is commoditized can be passed to a conventional SI/outsourcer/consultancy in a way that works with their business model, rather than against it. The little bits where we want "innovation" for (i.e. the 5-10% of our business needing opportunistic improvement or differentiating) we can (try) and find a supplier which has the same goals as us, and write a contract around a shared outcome. There's not many suppliers who could support this, but that's ok as we only need a little bit of it.

  5. September 24, 2010 at 9:12 pm #

    I was following IT360 last week, and James name came up with a quote saying ‘the old ways do not work anymore’. Reading this blog post left me thinking that ‘the only constant is change’ and perhaps people need to organise around what they are trying to achieve?
    Currently in the IT world we are seeing the introduction of Cloud Computing, it is early days, and as ever lot’s of hype and technology push, but at the same time disruptive in that there is ‘business pull’ for agility and it can invalidate existing procurement models. So who needs to innovate? the IT leadership or the procurement professional – perhaps both?
    We have all experienced organisational change during our working lives e.g. centralisation and de-centralisation, rationalisation, optimisation and simplification. The dilemma is that we need commoditisation in order to be agile. Yet we need diversification often in the vendor space to enable innovation, competition and stimulate creativity and new growth. We might also have a political objective to support and stimulate our SMEs.
    I have been reading something from Mckinsey about different parts of the IT organisation working in different ways rather than one size fits all e.g. one part of the organisation concerned with steady state and another part concerned with innovation and change.
    Perhaps the big frustration is that we all realise the world is changing, but we may not have the empowerment to do anything about it. It could be our colleagues in other areas e.g. procurement or business may not have the same insight or understand the dilemma in terms of how the world is changing very fast and what it might mean?
    Sweated assets that are depreciating very quickly can destabilise a commercial framework once they need to be replaced. An incumbent supplier would not want to be left holding the bag if there was no vision of the future and no new growth. Indeed outsourcers would want to walk away from a non-profitable contract.
    Is there a conflict between having a strategic alliance with a ‘prime’ on the one hand and also open competition? If a strategic alliance is held with a 'prime' then perhaps they should do more in the innovation space as part of the collaborative relationship including introducing or enabling the use of SMEs
    Perhaps this is a time for strategic partners, procurement and IT to get together in a huddle and work through the implications of this emerging new world together?

  6. Chris Hayes
    September 25, 2010 at 7:55 am #

    Speaking as as technology supplier to Banks I can make the following observations:
    1. When negotiating contracts, keep procurement in their place; and that place is not leading the negotiation, it's managing the buying process. They are typically the ones who drive the price down to unsustainable levels, resulting in the supplier focussing on growing the margin rather than looking for ways to innovate
    2. Accept the fact that suppliers make or provide stuff to address a specific need or problem. If that problem changes (say through the output of an innovation forum), then so does the product to fulfill it. And changing product means either you need a new supplier or that supplier has to develop a new product. Both of which aren't quick or easy to do.
    3. I disagree with the comment about innovation only being ok if you can afford it. Some of the best innovations I've been involved in have happened because of a lack of money, not a surplus. Necessity is the mother of invention etc etc. Innovation is a state of mind, not the product of a business transaction

  7. October 2, 2010 at 12:31 am #

    Good post James!
    I think we need to step back to answer your question. Let us not focus too much on supplier, vendor, customer issues for a minute. I think the real question which you are raising is what would be the best way to tackle some of the tricky real life issues. Who plays what role and takes how much responsibility (supplier / customer) is I think next logical question.
    To illustrate, best way to deliver payment to millions of people was one of the examples used in your post. Supplier innovation is one aspect of addressing this challenge. But looking at bigger picture and successful business outcome (which is quickest possible delivery of payment) may be a combination of imaginative business or technical architecture from your team which is delivered by your supplier. Or it may be end to end creative solution from your supplier.
    Yes which approach to choose matters to you as a supplier manager from Governance point of view. But for your business solution consumer it does not matter as long as they get their payment in quickest possible manner. The innovation which suits them is the one which follows their life and makes is simpler for them. The technologies and supplier relationships is simply a means to get there.
    During my recent visit to our Labs in Japan this point became more visible to me than it ever has been. Read more if you are interested – http://eamitabh.blogspot.com/2010/10/technology-i

  8. October 5, 2010 at 8:39 am #

    Thank you all for these comments. I don't think we've come to a workable solution yet, but there is certainly stuff here to think about.

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