Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

Achieving Step-Change in Outsourcing

Q MIS
Uarterly Maturity: Toward Collaborative
E xecutive Innovation1

Edgar A. Whitley Executive Summary

London School of
Economics and This article describes the collaborative innovation practices used by outsourcing
Political Science (U.K.) clients and their suppliers, based on insights gained from 26 organizations with a
mature sourcing capability drawn from Europe, the U.S., and Asia/Pacific. We present a
collaborative innovation framework comprising the four practices (Leading, Contracting,
Leslie Willcocks Organizing, and Performing) that these client organizations have adopted to achieve
London School of the “step-change” in outsourcing maturity that is needed to make collaborative
Economics and innovation a reality. Three cases of information technology (ITO) and business process
Political Science (U.K.) (BPO) outsourcing arrangements are described to illustrate these practices. The article
concludes with lessons that emerged from our multi-year study that can be used to achieve
the step-change needed to move to collaborative innovation in outsourcing.

INNOVATION AND COLLABORATIVE OUTSOURCING

There is a trend for outsourcing relationships to become increasingly managed and
leveraged as strategic assets, with clients looking for business ideas, innovation, and
environmental scanning from their suppliers and a much greater focus on business,
not just technical, outcomes. The indicators of this can be found in recent research:2

●● More rigorous planning and measurement of outsourcing relationships

●● More contracting based on values, behavior, and client demand
●● Suppliers becoming more entrenched in their client’s business—including
supporting the client’s mainline services
●● Suppliers becoming a client of the client and identifying new sales
opportunities.

This strategic direction sees added-value outsourcing relationships as the norm.

Collaboration in a strategic sourcing context means that the supplier and client
proactively work together and share the risks, in flexible, integrated ways, to achieve
high performance on significant, mutually rewarding commercial goals.

Where does innovation fit into strategic collaborative outsourcing? According to

Weeks and Feeny3 IT outsourcing “neither ensures nor negates innovation.” Instead,
MISQE is the outcomes are likely to depend on “certain attributes within client and supplier and
Sponsored by in the relationship between them.”4 Implicit in this claim is the realization that, for
many clients and suppliers, these attributes are under-emphasized and hence that a
“step-change” in client organizations’ outsourcing maturity is required. Achieving this
step-change means that the attitudes and behaviors of people in clients and suppliers
will have to fundamentally change.
1  Carol Brown is the accepting Senior Editor for this article.
2  See, for example: Cullen, S. The Contract Scorecard, Gower, 2009; Lacity, M. C., Khan, S. A., and
Willcocks, L. P. “A review of the IT outsourcing literature: Insights for Practice,” The Journal of Strategic
Information Systems (18:3), 2009, pp. 130-146; Lacity, M. C. and, Willcocks, L. P. Information Systems and
Outsourcing: Studies in Theory and Practice, Palgrave Macmillan, 2009.
3  Weeks, M. R., and Feeny, D. “Outsourcing From Cost Management to Innovation and Business Value,”
California Management Review (50:4), 2008, pp. 127-146.
4 Ibid.

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 95
Whitley and Willcocks / Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

This article provides insights into how companies Figure 1 depicts the four phases we have observed
achieve the step-change in outsourcing maturity client organizations passing through as their
through practices that enable a process that we management of outsourcing engagements evolves and
call Collaborative Innovation. Our findings are matures. Undue optimism in the earliest phase often
based on the experiences of innovative outsourcing results in a debased form of contract management we
relationships entered into by 26 organizations call Contract Administration. In Phase 2 (Contract
operating in Europe, the U.S., and Asia/Pacific Management), clients tend to be able to manage the
selected specifically for their relative maturity in contract and focus on costs, but it is only in Phase 3
sourcing capability (see the Appendix for more (Relationship Management) that they really begin to
details of the research, which was conducted between focus on how to leverage the supplier’s capabilities
2008 and 2011). We present a framework of the beyond the strict confines of the contract. Most
four practices required to achieve collaborative outsourcing clients have learned the hard way,
arrangements that foster innovation, and describe by making mistakes, finding out what works and
three case histories, drawn from our sample, that what does not, across two or three generations of
illustrate how these practices are being applied. outsourcing. The wise ones have been “smart in their
ignorance.” They have taken an incremental route
into more outsourcing, learning as they go, limiting
OUTSOURCING AND their risk exposure, building up their understanding,
INNOVATION: STILL ON THE and retaining the capability to manage effectively
the sourcing process to ensure it is aligned with their
LEARNING CURVE
business strategy and imperatives.
Research into outsourcing has tracked the evolution of
By late 2008, most organizations outsourcing or
the IT services and business services markets since its
contemplating outsourcing stood on a cusp of a
modern beginnings in 1989 with the seminal Eastman
decision—whether, in a recessionary climate, to
Kodak deal in the U.S. According to a meta-analysis
follow a traditional cost-cutting route, with limited
of two decades of this research, cost reduction and
payoffs or make a step-change toward sustainable cost
the desire to focus on core capabilities are the most
reduction together with business-focused innovation.
frequent motivations for outsourcing, and there has
In Figure 1, we call this step-change to Phase 4
been strong success in achieving these objectives.5
Collaborative Innovation.
Strategic outsourcing motivations such as commercial
Note that Figure 1 shows how the general outsourcing
exploitation and innovation have been studied far less
maturity of organizations has evolved from 1989
frequently.6 However, the published research on IT
to 2011. However, organizations tend to be much
outsourcing (ITO) and business process outsourcing
more mature in their ITO, with most currently in or
(BPO) to date indicates there has been a very patchy
approaching Phase 3 (Relationship Management),
record when more transformative, multiple objectives
and much less mature in their BPO and offshore
have been attempted.7 Indeed, some researchers
outsourcing, due to lack of experience and lack of
suggest that long-term BPO risks include low rates
transfer of learning. Where a specific organization is
of innovation and the loss of innovation capabilities,
on the learning curve in 2011 depends on its retained
particularly if suppliers are asked to assume some
capability, the number of generations of outsourcing it
responsibility for business process innovation.8
has gone through, and the degree of learning absorbed
as well as the objectives being pursued.

5  Lacity, M. C., Khan, S., and Willcocks, L P. “A review of the IT Our research began by reviewing organizations that
outsourcing literature: Insights for practice,” The Journal of Strategic were moving, or had moved, beyond Phase 3. In
Information Systems, (18:3), 2009, pp. 130-146.
6  Lacity, M. C., Khan, S. A., Yan, A., and Willcocks, L. P. “A particular, we focused on organizations that had made
review of the IT outsourcing empirical literature and future research a step-change and exhibited a fundamentally different
directions,” Journal of Information Technology, (25:4), 2010, pp. 395- client role with new attitudes and behaviors to achieve
433.
7  Lacity, M. C., Khan, S. A., and Willcocks, L. P., op. cit., 2009.
collaborative innovation with their ITO and BPO
8  Shi, Y. “Today’s Solution and Tomorrow’s Problem: The suppliers.
Business Process Outsourcing Risk Management Puzzle,” California
Management Review (49:3), 2007, pp. 27-44; Windrum, P., Reinstaller,
A., and Bull, C. “The outsourcing productivity paradox: Total
outsourcing, organizational innovation, and long run productivity
growth,” Journal of Evolutionary Economics, (19:2), 2009, pp. 192-
229.

96 MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 © 2011 University of Minnesota
 Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

Figure 1: The Global Sourcing Learning Curve 1989-20119

Client
Outsourcing Collaborative Phase 4:
Institutionalized/
Innovation
Maturity Commercialized
Focus on Value-added

Relationship
Management
Phase 3:
Contract Relationships mature
May renegotiate, switch suppliers
Contract Management Richer practices emerge
Administration Focus on Costs, Quality
Phase 2:
Phase 1: First relationships
Hype and Fear Best and worst practices emerge
Focus on Costs

1989
Time/Value

DEFINING COLLABORATIVE resources and time essential if high performance on

individual and shared goals is to be achieved.11
INNOVATION 9

All successful outsourcing is based on a good

Studies of ITO and BPO engagements over the last
working relationship. But deeper, more trust-based
15 years have regularly reported that the rhetoric of
relationships are required if external resources
strategic relationships, partnering, and innovation
are to be used for more sophisticated, risk-
are very rarely converted into practices and superior
bearing and critical services such as large-scale IT
outcomes.10 It is therefore important to understand
development projects, business process changes, and
what is meant by collaboration and innovation and
technology innovations. A sense of the difference is
how outsourcing clients see the roles of suppliers and
communicated by the following comments made by
themselves in facilitating the step-change in sourcing
some of those we interviewed:
maturity needed for a new performance agenda.
“The standard behavior in an organization
is everybody does their job, they deliver it,
Collaboration
and then somebody else goes and creates
Collaboration is a co-operative arrangement in which the same thing over and over again; but
two or more parties work jointly on a common with collaboration comes leverage. In
enterprise toward a shared goal. In the context of collaboration, you will be welcoming an
business relationships, collaboration signals close advance from me to be able to find out how you
partnering behaviors developed over and for the did it and to share it with me. Partnering is an
long term. These behaviors are characterized by the ongoing relationship where you are leveraging
high trust, flexibility, risk sharing, and investment of the skills that your partner has and learn from
them. Leadership is key in making progress in
9  Figure 1 has been developed from Lacity, M. C., and Rottman, J. W. collaboration.” (IT Development Manager,
Offshore Outsourcing of IT Work, Palgrave Macmillan, 2008. Insure 2)
10  Dibbern, J., Goles, T., Hirschheim, R. A., and Bandula, J.
“Information systems outsourcing: a survey and analysis for the 11  Our definition of collaboration is consistent with strategy
literature,” Database for Advances in Information Systems (34:4), 2004, literature but not with earlier outsourcing literature. See also Kern,
pp. 6-102; Kern, T., and Blois, K. “Norm development in outsourcing T., and Willcocks, L. P. The Relationship Advantage: Information
relationships,” Journal of Information Technology (17:1), 2002, pp. 33- Technologies, Sourcing and Management, Oxford University Press,
42. 2000.

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 97
Whitley and Willcocks / Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

“What we need is collaboration from our systems, remodelling of the IT infrastructure,

suppliers. If they are competitive [pushing new IT staffing arrangements, or introducing
their own agenda], then we have a very special agile systems development.
meeting and say this behavior is unacceptable; ●● Business process innovations change the
you have to work together.” (Director of way the business operates in some important
Innovation, KPN) ways. Examples include fundamental changes
to business processes and relationships with
In these new relationships, clients see suppliers as
customers brought about by implementing
having an integral proactive role in collaborating to
CRM applications; IT-enabled changes in
innovate:
project management systems that change the
“A proactive partner is aligned in thinking basis on which parties would design, develop,
with you and comes up with new ideas and and deliver big projects; and IT-based billing
innovation. They think for me. They say we system innovations that create new linkages
can do it like this, and it will cost you that, between accounting, maintenance, service
and we can do it with these people in this time. fulfillment, and customer reporting.
They make a whole business case, and I just
●● Strategic innovations significantly enhance a
have to say, okay, we do it, or we don’t do it.
firm’s product or service offerings for existing
That’s being very proactive.” (Senior Contract
target customers or enable a firm to enter new
Manager, Insure 1)
markets. An example would be to introduce
“We have established a roadmap to become technology into a casino to automate (and
world-class within shared services. But of thus speed up) roulette games and so increase
course, when we do that, we need to have revenues from “high rollers.” Another would
sourcing partners that are on the same be technology for remote monitoring of autos
roadmap and are willing and able to change to pre-empt mechanical breakdowns and to
and to be innovative.” (Head of Service enable an auto parts distribution company to
Delivery, StatoilHydro) be proactive in delivering spares.

Innovation A FRAMEWORK FOR

Innovation is the introduction of something new that COLLABORATIVE INNOVATION
creates value for the organization that adopts it.12 The
literature on innovation talks of product, process, and Our case studies suggest that four fundamental
organizational innovations—that is, new products (or practices underpin effective collaborative innovation:
services), new ways of doing things, and new ways Leading, Contracting, Organizing, and Performing.
of organizing and managing people. Innovations are As shown in Figure 2, these four practices are cyclical.
also characterized as incremental (a series of small
changes), radical (large, transformative change), or 1. Leading shapes and conditions the
revolutionary (game-changing).13 collaborative environment for Contracting,
Organizing, and Performing at all levels
Weeks and Feeny14 offer client-focused definitions in each of the collaborating parties. The
more suited to what collaborative arrangements Leading practice also changes the approach
with business and IT service companies are trying to to managing risk: both parties share the
achieve. They identify three types of innovation: responsibilities for mitigating risks and
exploiting opportunities.
●● IT operational innovations are technology,
2. New forms of Contracting are required to
work, and personnel changes that do not
ensure successful collaborative innovation.
impact firm-specific business processes. For
Such contracts specify how risks and rewards
example, IT operational innovations might
will be shared in ways that provide incentives
include new e-mail platforms, new operating
for innovation, collaboration, and high
12  The definition was developed by Intel’s IT Innovation Group for performance to achieve common goals.
in-house use. See Westerman, G., and Curley, M. “Building IT-Enabled
Capabilities at Intel,” MIS Quarterly Executive (7:1), 2008, pp. 33-48. 3. Organizing for innovation requires more co-
13  Davenport, T., Leibold, M., and Voelpel, S. Strategic Management managed governance structures and greater
in the Innovation Economy, Wiley, 2006; Mckeown, M. The Truth
About Innovation, Pearson. Education, 2008. multifunctional team working across the
14  Weeks, M. R., and Feeny, D., op. cit., 2008. ibid, pp. 127-146. collaborating organizations. Team working

98 MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 © 2011 University of Minnesota
 Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

Figure 2: Four Practices Underpin the Collaborative Innovation Process

1. Leading Shapes
Delivers
collaborative
innovation
environment

Collaborative
4. Performing 2. Contracting
Innovation

Secures
Supports
collaborative
teamwork 3. Organizing behaviours

now requires the ability to collaborate Leadership for Collaborative Innovation

within a client organization, between client
Leadership, which is important for all forms of
and supplier, and between suppliers in
outsourcing, creates the environment for collaborative
multi-supplier environments. Organizing
innovation in outsourcing engagements. In earlier IT
for collaboration also means assigning
outsourcing deals, especially the long-term “strategic
responsibility for delivering results.
alliances” signed in the 1990s,15 innovation was
4. Leading, Contracting, and Organizing in these invariably cited as something the client expected and
ways provides incentives to change existing the “world-class” supplier could and would deliver.
modes of Performing and enables collective Study after study, however, has found no evidence
delivery of superior business outcomes. of innovation in such deals.16 For example, even in
Collaborative innovation is most effective what is considered a relatively successful finance and
when it generates high personal, competence- accounting outsourcing deal at a major oil company,
based, and motivational trust amongst the one study17 reported an IT executive who said:
parties. High trust is a key element and shaper
“We are not getting dynamic innovation, to
of successful collaboration, which requires
say the least, on a continuing basis. After the
the client-supplier relationship to be open—
initial burst of creativity, it went flat.”
based on learning—adaptive, flexible, and
interdependent. One response to this problem has been to create
Each of these four practices is not unique to special “innovation funds” that suppliers can bid
collaborative outsourcing; they are found in many for. However, research has found that even large
partnering arrangements. For example, while innovation funds have rarely produced lasting,
Contracting is clearly an element of all partnering
arrangements (including general outsourcing), 15  Examples include EDS-Xerox, IBM-Lend Lease, BAE-CSC, and
the form of Contracting required for collaborative UBS-Perot Systems.
16  Cramm, S. “Does Outsourcing Destroy IT Innovation?” HBR Blog
innovation is very different from that found in Network, available at http://blogs.hbr.org/hbr/cramm/2010/07/does-
conventional, cost-focused arrangements and requires outsourcing-destroy-it-in.html 2010; Overby, S. “Three reasons why
a step-change in organizational attitudes and behavior. your outsourcer won’t innovate,” CIO Magazine, July 19, 2010.
17  Lacity, M. C., and Willcocks, L. P. Global Information Technology
The four practices are examined in more detail below. Outsourcing: In Search of Business Advantage, Wiley, 2001.

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 99
Whitley and Willcocks / Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

important innovations.18 The same applies to many specialists can be hired. But as more work becomes
joint venture and equity share initiatives designed “adaptive,”19 more stakeholders need to be engaged
partly to stimulate innovation. They disappointed with defining the problem and working together
invariably because they were mere add-ons to mainly on arriving at and implementing a solution. An
fee-for-service deals where, in practice, both clients adaptive challenge is a problem, often difficult to
and/or suppliers prioritize service and cost issues specify precisely, where the gap between values and
above innovation issues. Thus while these initiatives aspirations on the one hand and circumstances on the
claim to espouse innovation, in practice, they tend to other cannot be closed by the application of current
encourage low levels of sustainable development and technical know-how and routine behavior. Adaptive
performance transformation. challenges require experiments, discoveries, and
adjustments from many parts of an organization.
Contracting for Collaborative Innovation Innovation then, can be viewed as essentially a
A major issue in Contracting for innovation is the response to adaptive challenges, where problems
need to frame contracts so they provide incentives and solutions are unclear. Meeting these challenges
for sharing knowledge and best practice across all the will require a multifunctional team working in an
parties involved. There are real dangers in contracts environment where learning is vital and innovation
that lead clients to become overly reliant on their will usually be necessary and where a general
suppliers for technical and business innovation. business goal rather than precise metrics points the
Moreover, contracts structured around cost and service way forward. Organizing the required collaborative
issues do not encourage the supplier to innovate. As behaviors in a way that will shape the context and
a result, the supplier focuses both on selling extra process by which all this can happen is essential for
services to increase its margins and on solving today’s enabling collaborative innovation in outsourcing
pressing crises and operational problems. deals. Moreover, the more radical and business-
focused the required innovation is, the more that
A significant issue is the approach taken to risk in Leadership should be provided primarily by the client.
Contracting. Traditionally, both client and supplier
look to transfer as much risk as possible to the other
party. The actual distribution of risk depends on Performance Change for Collaborative
negotiating power, but if it is skewed to the detriment Innovation
of one party, it can damage both the relationship and Leadership, creative Contracting, and Organizing
performance and can severely curtail innovation. in new ways to support team working are the
A range of practices and behaviors can be used— fundamental building blocks for the performance
for example, in cost-plus contracting—to convert changes needed to undertake collaborative innovation.
performance into partnering and collaborative
innovation. The Performing practice of the collaborative
innovation process is determined by the underlying
Our research shows a step-change in Contracting is cultures of client and supplier. A coercive and
required if collaborative innovation is to be fostered secretive culture, focused on short-term gain and cost
in outsourcing deals. The greater the innovation reduction, can be very limiting in terms of what can
ambition, the more this is likely to have a distinctive be achieved by either party. Recessionary conditions,
risk-reward component in the Contracting practice. such as those prevailing during the period of our
study, can put pressure on organizations to regress to
Organizing for Collaborative Innovation this default position. But as Max Mckeown suggests,
a crisis is a terrible thing to waste, and the best way to
Providing Leadership to shape a collaborative deal with a recession may be to innovate your way out
environment and supporting this by Contracting of it.20 Cultural change can therefore come about as a
practices that share risks and encourage collaboration result of a crisis, but lasting collaborative innovation
is not sufficient to make collaborative innovation a draws on Leadership, Contracting, and Organizing,
reality. Significant organizational challenges must also
be addressed. Technical work requiring the application
of existing specialist know-how and techniques can
be outsourced relatively safely, assuming competent
18  Weeks, M. Information technology outsourcing and business 19  Heifetz, R. A. Leadership without easy answers, The Belknap
innovation: An exploratory study of a conceptual framework, Oxford Press of Harvard University Press, 1994.
University, Ph.D. thesis, 2004. 20  Mckeown, M., op. cit., 2008.

100 MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 © 2011 University of Minnesota
 Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

which create rising levels of trust, team-working, and in network operations. The significant cost reductions
hence performance.21 generated by this simplification were reinvested in
revenue growth, leading to improved margins.
Performing as trusted partners is a key component
for collaborative innovation. Although studies have In 2009-10, KPN had four major outsourcing
noted that there is no such thing as instant trust suppliers, together with over 10 smaller suppliers
in outsourcing, it can be built over time through either on short-term contracts or brought in to
demonstrable performance. supplement capability where needed. The major
suppliers provided a mix of technical, development,
The following three case studies, drawn from our project management, and consultancy skills.
research sample, illustrate how the four practices of
the collaborative innovation process are being applied. Hans Wijins, Director of Innovation at KPN (and
one of the few interviewees in our study whose title
formally included responsibility for innovation),
THREE CASE STUDIES OF suggested that KPN had espoused a policy of
COLLABORATIVE INNOVATION recognizing the importance of innovation as a key part
of its organizational strategy. For Wijins, the maturing
The case studies illustrate how three organizations of the global outsourcing services market had now
perceive and practice collaboration with their made it possible to do very large jobs and make large,
outsourcing suppliers. Although in each case, the strategic innovations:
organization was seeking to achieve all three types of
“You can’t outsource innovation. Our
innovation defined earlier—IT operational, business
responsibility is for time to market, for business
process, and strategic—our descriptions emphasize the
development, for innovation; we must have the
pursuit of strategic innovation goals.
architects. We don’t outsource our vision. But
we really do believe that innovation can only
KPN be done if we use a lot of capacity outside of
KPN provides high-quality telephone, Internet, and the company. I really believe that (as a client)
television services and products. It is also an all- we have to use the knowledge and the power
around provider of information and communications from places like India.”
technology (ICT) services. Based in the Netherlands,
KPN serves both homes and businesses. Domestic For KPN, innovation in outsourcing deals is related
consumers in the Netherlands purchase fixed and to what new opportunities and capabilities it brings
mobile telephony, Internet, and television services. to the business. For example, Wijins noted that cost
Business customers use an entire array of innovative cutting was not the main goal for outsourcing network
and reliable services that include everything from operations:
telephony, Internet, and data traffic/management “We are looking to suppliers that can help us
to the management of ICT services. In Germany, in transformation—and not only in the existing
Belgium, and elsewhere in Western Europe, KPN’s network. It has to be a combination of cutting
services consist mainly of mobile telephony. The costs and innovation together.”
company made a profit of €2.5 billion ($3.54 billion)
in 2007 on annual sales of €12.6 billion. He saw KPN as being responsible for creating the
strategic innovation plan for the next few years.
In the 2009-10 financial year, KPN’s business in the He felt that a lot of sector-based innovation in the
Netherlands underwent a radical transformation. telecoms industry was no longer succeeding and
The All-IP network, which had been announced in that KPN had to find cross-sector innovation in the
March 2005, moved into its final phase with the future. The goals for such innovation had to be very
implementation of a new access network. In addition, clear, and this started with board-level Leadership.
KPN decided to radically simplify its business, both As Wijins explained, the first step was the strategy to
at the front end in retail segments and at the back end market, and the next was the architecture:
“As an example, we put the design teams from
21  Willcocks, L. P., Cullen, S., and Craig, A. The Outsourcing
Enterprise: From Cost Management to Collaborative Innovation,
the several suppliers together in one building,
Palgrave Macmillan, 2011. For other examples, see Kern, T., and Blois, and in five months together, they built the new
K., op. cit. 2002; Koh, C., Ang, S., and Straub, D. W. “IT Outsourcing IT solution. Designing, building, and testing
Success: A Psychological Contract Perspective,” Information Systems
Research (15:4), 2004, pp. 356-373.
their own parts are the responsibilities of each

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 101
Whitley and Willcocks / Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

supplier; we have the integration function and international company. It focuses on innovation in
the architecture.” oil and gas exploration and production to recover
valuable resources that were previously thought
KPN draws on various sources of potential innovation unreachable. StatoilHydro’s oil and gas portfolio
from its network of suppliers, and Wijins noted that ranges from development projects to mature fields.
this went beyond IT innovation: The group is the second biggest gas producer
“We are only the facilitator. We bring together in Europe and the sixth biggest in the world.
those technologies in IT and in our network StatoilHydro trades in petroleum products, methanol,
and take the products to the customers. We power and emission allowances, and is the world’s
are not the most innovative party. We have third largest producer and net seller of crude oil.
to challenge the suppliers for innovation …
StatoilHydro is a mature outsourcing organization,
and not just on technology but on processes,
especially in ITO, with high-value, multifunctional
products—wherever there is knowledge to be
shared services that have been operational since
released.”
1993. Its IT is divided into two areas—infrastructure
Other KPN interviewees stressed that the company and applications. It uses sourcing to fill capacity gaps
wanted to collaborate and not just manage contracts. and then to move additional competence into the
If an outsourcing client only manages the contract, organization. Costs have never been the driver for
it makes it much more difficult to work with several sourcing as StatoilHydro’s primary focus has always
suppliers: been on addressing capacity issues.

“Collaboration only happens if there is a StatoilHydro does not have a single ITO supplier and
higher-level goal for everyone. We put in the looks for, and expects, extra value from each supplier.
necessary incentives for them to put their best It has two major suppliers and more than 10 other
people on it, and they can’t succeed without suppliers. One of the major suppliers has provided
the help of the other suppliers.” (Director of the IT service desk since 2003. This desk supports IT
Innovation, KPN) and SAP applications in all the company’s geographic
locations. It is based in StatoilHydro’s premises and
KPN’s Contracting strategy was therefore to build on its ITIL-based23 service management processes.
long-term relationships with several partners focused The service desk is also integrated with other
on quality and delivery.22 The company did not want suppliers’ processes.
to outsource everything to one party and say, “Okay,
we are not involved any more.” The board wanted StatoilHydro has established a roadmap to become
to be involved in Organizing KPN’s destiny, while world-class in the provision of shared services. To
facilitating team working with suitable suppliers in its achieve this goal, it needs to have sourcing partners
network in a process of co-creation. that share its innovation goals, are flexible and willing
to change, and are looking for ways to be innovative
Working in this way meant quite different attitudes throughout the contract period.
and behavior were needed from those exhibited
and rewarded in more traditional outsourcing Drawing on its ITO experience, StatoilHydro has
relationships. These components were key to the developed a distinctive approach to Contracting
Performing practice of the collaboration innovation when seeking innovation through collaboration.
process, namely the delivery of a major technical The approach requires suppliers to understand the
innovation in KPN’s network that enabled faster and company’s business needs, which requires changes in
different services to be delivered to end customers. the typical supplier attitudes and behavior. Suppliers
are given the flexibility to “surprise” the client
StatoilHydro rather than being tied to a strictly defined, formal
relationship.
StatoilHydro is an integrated oil and gas company
based in Norway. It is the leading operator on the
Norwegian continental shelf and is an expanding Spring Global Mail
Spring Global Mail (Spring) is a world leader in the
22  Cohen, L., and Young, A. Multisourcing: Moving Beyond provision of international business mail services. It
Outsourcing to Achieve Growth and Agility, Harvard Business Press, is a joint venture company, formed in 2001 by three
2005; Hagel, J., and Seely Brown, J. The Only Sustainable Edge:
Why Business Strategy Depends on Productive Friction and Dynamic 23  Information Technology Infrastructure Library, a set of concepts
Specialization, Harvard University Press, 2005. and practices for IT services management.

102 MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 © 2011 University of Minnesota
 Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

of the world’s most dynamic and respected postal you are in dispute, and trust is lost. That’s why, in
organizations: TNT in the Netherlands, Royal Mail Spring’s Contracting practice, the general outline of
in the United Kingdom, and Singapore Post. With the contract is more important than the details because
its headquarters in the Netherlands (Amsterdam), Spring knows that suppliers can only make slim
Spring employs 1,100 people in 25 countries and has margins if they do not innovate. For Spring, it is not
become the world’s largest independent cross-border important to have innovation mentioned explicitly in
mail distribution company. It uses its creativity and the contract because Hijzen knows his suppliers will
experience to find solutions to the most complex seek to innovate. The choice of suppliers and trust in
cross-border mail requirements. Spring’s customers them comes before the formal Contracting process. As
include some of the world’s largest senders of cross- Hijzen noted, this trust is created by a particular form
border mail. of Leading :

Spring’s CFO, Wouter Hijzen, pointed out that, while “In Spring, we always say it’s a team. It’s not
the company has three major suppliers and many a family. You have to work together, but you
smaller ones, it itself is an outsourcing company. It don’t have to sleep together.”
takes over responsibility for all the mail operations of
Before it outsourced, Spring had achieved maximum
its customers. Clients choose Spring to operate their
cost-effectiveness from its back-office functions. The
businesses more efficiently and cost-effectively. The
big reason for outsourcing was because it couldn’t
company is constantly innovating in the way it offers
make further savings. Outsourcing therefore wasn’t
services, including developing the remailing business,
about cost savings or efficiency gains, but to make IT
where Spring is the biggest service provider. Its role as
and finance better and to make the people better.
an outsourcing service provider has provided Spring
with major insights into its expectations of its own
suppliers. As Hijzen told us: LESSONS LEARNED: MOVING TO
“You establish trust through delivery, but when COLLABORATIVE INNOVATION
it goes wrong, you have to show Leadership.
Taking responsibility is the beginning of In Figure 2, we presented the four fundamental
Leadership. If you keep telling people what to practices of an effective collaborative innovation
do, they will never become leaders.” process: Leading, Contracting, Organizing, and
Performing. The three cases described above have
Spring’s in-house finance function was outsourced provided specific examples of each of these practices.
in September 2008, when the company signed a Based on the experiences of these three firms,
nine-year contract with one supplier. Spring has also together with supporting evidence from the remaining
outsourced all its IT services across the world to a 23 organizations we studied, we have identified
TNT company. four lessons that can be applied when moving to
collaborative innovation.
For Hijzen, innovation is nothing more than behaving
and looking at things differently. It doesn’t necessarily
have to concern a new product or service. The 1. Client and Supplier Should Jointly
finance outsourcing deal is a case in point, as Hijzen Develop a Higher-Level Goal
explained: Collaborative innovation in outsourcing requires a
“We have outsourced to make ourselves better; higher-level goal that can only be achieved by joint
that’s the main thing that triggers innovation. client-supplier efforts. Defining such a goal requires
We didn’t have an electronic system to approve a particular form of Leadership that recognizes
invoices. We couldn’t afford it; it was just too that strategic innovations can be achieved only in
expensive to build it for ourselves. But the situations where everyone stands to gain something.
supplier had one. We now make use of that. Invariably, the supplier has capabilities that need to
I don’t think it’s innovation for them, but it is be exploited in innovative ways for the benefit of the
for us.” client.

For Hijzen, trust is most important; without it there 2. Design Contracts to Include the
can be no innovation. Trust is built by novel forms of
Sharing of Both Risks and Rewards
Organizing, which involves “letting some things go.”
If you have to keep referring back to the contract, Successful collaborative relationships arise when
vendor contracts are designed to include the

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 103
Whitley and Willcocks / Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

sharing of both risks and rewards. Contracts that CONCLUDING COMMENTS

are too tightly specified squeeze out any chance
of innovation. Contracts should therefore focus on Based on the experiences of the organizations
business imperatives (the “what”) but also allow for we studied, we have developed the collaborative
adaptability in how these are achieved (the “how”). A innovation process framework depicted in Figure
particularly striking example of this was provided by 2. The four practices of this framework—Leading,
one of our interviewees at StatoilHydro: Contracting, Organizing, and Performing—are
qualitatively different and systematic ways that can
“Innovation comes from a supplier that
be applied by organizations to make the step-change
surprises me! I always say to my people and
in their outsourcing maturity to move to Phase 4 of
to our suppliers ‘surprise me.’ I want them
the outsourcing learning curve shown in Figure 1. Our
to be proactive. They do it before you ask
research suggests that these practices are necessary
them.” (Rune Aase, IT Senior Executive,
to make Collaborative Innovation in outsourcing a
StatoilHydro)
reality.

3. Define Co-Managed Governance

Structures that Support Teams APPENDIX: RESEARCH
Collaborating on Adaptive Work METHODOLOGY
Collaboration requires client and supplier personnel,
We studied 26 organizations between 2008 and 2011.
and personnel from different suppliers, to work
These organizations were selected because of their
together in teams on adaptive work. Co-managed
considerable outsourcing experience and sourcing
governance structures are required to support
management maturity. They covered a range of major
such team working. When establishing teams, it is
industry sectors and were drawn from medium, large,
important to differentiate between technical work
and multinational corporations based in Europe, the
that can be delegated to specific suppliers and
U.S., and Asia/Pacific. As shown in the table with
adaptive work that requires people from the client and
the profiles of the 26 organizations (see below), five
suppliers. Adaptive work requires collaborative and
were achieving only IT operational (O) innovations
open relationships between team members that value
through new forms of collaboration. The other
sharing and learning and are based on mutual benefit.
21 were involved in deep collaboration that was
delivering IT operational (O) and business process
4. Ensure the Relationship Between (P) innovations. Eight of these were also delivering
Client and Suppliers is Based on Trust strategic innovations (S).
Collaborative innovation can only succeed when the For each organization, we interviewed at least
relationship between client and suppliers is based three client and supplier stakeholders, all highly
on and sustains trust between all the parties. There experienced outsourcing practitioners, about
are three types of trust: personal, competence, and outsourcing models, choices, and their actual
motivational.24 Personal trust is the confidence an practices. Follow-up interviews were carried out
individual has that someone else will work for the in late 2010 and early 2011 to gather the latest
good of the relationship, based on that person’s information on innovation outcomes. In total, we
integrity and adherence to moral norms. Competence- conducted 86 interviews and studied numerous
based trust exists when one party has confidence that supporting documents supplied by the participating
the other will be able to successfully deliver their organizations.
allocated tasks and responsibilities. Motivational trust
is where both parties believe the rewards and penalties Analyzing the experiences of these 26 organizations
they experience are geared toward the achievement enabled us to identify common themes, practices,
of joint goals—a “win-win” situation. Complete and principles, which we have distilled into the
trust, involving each of these three areas, can be collaborative innovation process framework depicted
achieved only by adopting the four practices of the in Figure 2. In the table below, the rows for the three
collaborative innovation process depicted in Figure 2. cases presented in some detail in this article are
shaded.

24  Weeks, M. R., and Feeny, D., op. cit., 2008. ibid, pp. 127-146.

104 MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 © 2011 University of Minnesota
 Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

Profiles of Study Participants

Revenue, Type of
Employees, No. of
Organization Sector 2010 ITO/BPO Interviewees
2010 Deals *
($US) Innovation
Director of Innovation,
KPN Telecoms $11b 34,000 4 O, P, S IT Manager, Supplier
Relationship Executive
CIO, Transformation
Telco 1 Telecoms $25b 43,000 5 O, P, S Director, Supplier
Executive, CFO
CIO, IT Relationship
Telco 2 Telecoms $65b 85,000 2 O, P, S Manager, Supplier IT
Executive
CIO, IT Operations
Manager, Supplier
Telco 3 Telecoms $6b 13,000 2 O, P Account Executive,
Service Delivery
Manager
HR Director, IT
Defense and
Aero $31b 107,000 2 O, P Executive, Supplier
aerospace
Account Executive
CIO, Service Delivery
Manager, Supplier
Bank 1 Banking $19b 44,000 3 O, P, S
Operations Manager,
Supplier Executive
CIO, IT Strategy
Manager, Supplier
Bank 2 Banking $9.5b 38,000 4 O, P
Business Development
Manager
BPO Relationship
Manager, Senior
Insure 1 Insurance $44b 28,000 4 O, P
Contract Manager,
Supplier Executive
IT Development
Manager, IT Operations
Insure 2 Insurance $9b 18,000 3 O
Manager, two Supplier
Executives
CIO, IT Development
General Manager, Supplier
$5.4b
Insure 3 insurance 2,500+ 2 O, P Account Executive,
(profit)
(market) Supplier Service
Manager
IT Senior Executive,
Head of Service
StatoilHydro Oil and energy $85b 28,000 2 O, P, S
Delivery, IT
Development Manager
IT Director, IT
Energy 1 Energy utility $620m 2,000+ 2 O Operations Manager,
Supplier Executive
* O = IT operational innovation; P = Business process innovation, S = Strategic innovation

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 105
Whitley and Willcocks / Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

Profiles of Study Participants (cont.)

Revenue, Type of
Employees, No. of
Organization Sector 2010 ITO/BPO Interviewees
2010 Deals *
($US) Innovation
$15m IT Manager, Innovation
Energy
Energy 2 operating 100+ 1 O, P Manager, Supplier
exploration
loss Account Executive
IT Manager, General
Energy 3 Energy utility $58b 88,000 3 O, P Manager, Supplier
Operations Executive
IT Director,
Development
Manu Manufacturing $10b 109,000 5 O
Manager, two Supplier
Executives
Car IT Manager, Operations
Distrib components $650m 1,100 2 O, P, S Manager, Supplier
distribution Executive
IT Development
Gambling and
Leisure $2.1b 5,000+ 1 O, P, S Manager, IT Developer,
leisure
Supplier Executive
IT Director, IT
Spring Global
Postal services $5.4b 1,100 4 O, P, S Operations Manager,
Mail
Supplier Executive
CIO, IT Architecture
Manager, Supplier
Mail 1 Postal services $4.8b 35,500 4 O, P
Executive, Supplier
Operations Manager
IT Director, IT
Water 1 Water utility $660m 1,000+ 1 O Operations Manager,
Supplier Executive
CIO, IT Operations
Water 2 Water utility $850m 1,300+ 2 O, P Manager, Supplier
Executive
Sourcing Director,
Public sector $14.4b (total Relationship Manager,
Public 1,500+ 1 O
financial resources) Supplier Executive,
CIO Supplier
CIO, Project Director,
Airport
Aviation $3.7b 13,000 2 O, P two Supplier
authority
Executives
CIO, Operations
Private sector
Health $1.2b 19,000 2 O, P Manager, Supplier
healthcare
Executive
IT Manager, HR
Consumer
Retail 1 $49b 180,000 1 O, P Manager, Supplier
electronics
Executive
CIO, IT Operations
General food
Retail 2 $16b 101,000 2 O, P Manager, Supplier
consumer
Executive
* O = IT operational innovation; P = Business process innovation, S = Strategic innovation

106 MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 © 2011 University of Minnesota
 Achieving Step-Change in Outsourcing Maturity: Toward Collaborative Innovation

ABOUT THE AUTHORS

Edgar A. Whitley
Edgar Whitley (e.a.whitley@lse.ac.uk) is a Reader
in Information Systems in the Information Systems
and Innovation Group at the London School of
Economics (LSE). He has a B.Sc. (Econ) and a Ph.D.
in Information Systems, both from LSE. Whitley is
the co-editor for the journal Information Technology &
People. He is also currently involved in the EnCoRe
project (www.encore-project.info) that is addressing
the role of consent (and the revocation of consent)
as a mechanism for providing control over the use
of personal data. Together with Gus Hosein, he has
recently published Global Challenges for Identity
Policies (Palgrave, 2010).
Leslie Willcocks
Leslie Willcocks (willcockslp@aol.com) is Professor
of Technology Work and Globalization at the
London School of Economics and Political Science,
where he is Director of the Outsourcing Unit. He
is internationally recognized for his research and
advisory work on global sourcing, organizational
change, and IT strategy and implementation. He has
published 33 books and over 2,000 refereed papers
in journals such as Harvard Business Review, Sloan
Management Review, Journal of Management Studies,
Journal of Strategic Information Systems, and MIS
Quarterly Executive. He has advised numerous
corporations and government agencies around the
world. His latest book is The Outsourcing Enterprise:
From Cost Management to Collaborative Innovation
(Palgrave, 2011) co-authored with Sara Cullen and
Andrew Craig.

© 2011 University of Minnesota MIS Quarterly Executive Vol. 10 No. 3 / Sep 2011 107
Copyright of MIS Quarterly Executive is the property of MIS Quarterly Executive and its content may not be
copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written
permission. However, users may print, download, or email articles for individual use.