Seven Questions to Evaluate IT Vendor’s Innovation Capabilities

Businesses are looking for “absorptive capacity,” and innovation capability from their partners.

Evaluating IT vendors is both art and science, besides five common criteria to evaluate the vendor’s attitude and aptitude we discussed earlier, innovation is a key capability for IT vendors to satisfy customers, but some may argue innovation itself is sometimes intangible, even ambiguous, how to manage vendor & trust them to deliver high-quality, flexible, and innovative service?  

Here’re seven questions to evaluate IT vendor’s innovation capabilities.

1. What exactly do we mean by Innovation?

Innovation has a broader definition including process/service innovation, business model innovation, leadership/culture/communication innovation, cost structure optimization, and it’s also tangible and quantifiable. It can be measured on the bottom line for cost saving, or top line growth such as creates new markets and new streams of revenue.

Now every organization strives to be agile, innovation is a level of response to business entities and its challenges, with technology as the enabler, not necessarily a rapid response but a creative, unconventional solution. And by large, it’s situational and varies upon the challenges, and challenges are possibly driven by cost compulsion or business execution/ operating model or infrastructure/skill gaps or regulatory /environmental reasons.

2.  Why do we expect IT vendors to be business innovators?

Every IT project is a business project with clear business goals, especially today's software project is not only for automation's sake, the purpose of many of complex projects are optimizing business processes and deliver the better result with lower cost, so innovation is key from many perspectives.

The innovation capabilities IT vendors can provide to their clients are to connect the dots. Those IT vendors work with their clients across industries, across cultures, accumulate many success stories and, even more, failure anecdotes to benefit their client,  for adopting the best solutions and avoid pitfalls, modernizing legacy application via borrowing the fresh idea from totally different industry or culture.  

In addition, for IT vendors, innovation is the application of technology to customers’ business processes…which means knowledge of business processes is as essential as technology toolkits. The superior IT vendors provide services associated with business processes that the client side depends on for competitive advantage

With the proper structure, accountability, and balance of security and transparency, the digitized work environment that favors innovation, instead of the current status quo, which can be extended to anyone internally, co-innovation partners, or outsourced contractors. Never know where the next great idea, innovation will come from -- geniuses are born every day, often in places we least expect, so it's wise to be open mind and be ready for it.

3. What are Risks need to be considered when evaluating vendors' Innovation Capability?

In most organizations, the risk is the primary reason not to outsource core level innovation. However, it's also true that we live in a very complex web of relationships now in most industries with co-innovation, multi-faceted partnerships, co-ownership of ventures and companies, contracting, etc. etc.  

Customers may also concern about sharing sufficient information regardless of legal protection with the vendor, as for very good reason-- the vendor has a strong incentive to share that knowledge with competitors in selling the same system across the global economy. Thus, knowledge sharing and risk concerns need to be carefully leveraged when evaluating vendors' innovation capabilities.

So systems that attempt to manage the knowledge and innovation process must be not only secure but provide sufficient adaptability to foster innovation with whoever is to be included in the loop, internally or externally, which requires a menu approach tailored to the situation.

 4. Does sharing the rewards result in a bigger piece of pie for every party?

It’s also paradoxical on what works best, motivating the innovators through financial penalty or financial incentives, does sharing the rewards result in a bigger piece of pie for everyone? Well, that's the entire core issue about intelligence, learning, and innovation -- there is a very strong disincentive not to share case studies as what you seek is among the most valuable competitive differentiators in business.

In Reality: The CIO community is frankly not famous for rewarding innovators, but rather rewarding handsomely those who exploit innovators. Most of the real innovators in the enterprise today are absolutely paranoid about sharing anything. For example, global vendors have proven to promote any competitive advantage found in a client otherwise to their entire ecosystem, thereby destroying much of the substantial investment from the client who should have been rewarded for taking early stage risk, not punished. The problem only gets worse as the percentage of market share grows in a particular sector. When a market leader has 20% of the overall market, it's not nearly the problem as when a market is dominated north of 60%-- at that point primarily only one company, or a functioning duopoly, benefit from innovation, and while they can command enormous pricing, there is very little competitive differentiation for customers. That's the situation in most of the enterprise market today.

5. How do you write up SLAs for innovation?

Service-Level agreements are how we make sure we’re getting our money’s worth—and they’re even more important as we move a wider variety of IT functions to outsourcers. However, from the industry survey, just 16% classify SLA as very effective.

At the core of SLAs are service-level targets or objectives—promises made by a service provider to a service consumer, commonly around availability, performance, security, compliance, and data retention. The ability to negotiate SLAs comes down to two main elements: Who has the highest perceived value, and what are the options available to either party? From an innovation perspective, an effective SLA will develop “team” mentality”, capture valuable information/knowledge, if not innovation; incentivize contributions whether used or not; and to prevent costly liability and/or litigation.

The dilemma is: Frequently boilerplate agreements from lawyers tend to prevent innovation, not invite, and only go so far anyway for protection in the real world. That is assuming one is even trying to measure innovation, but most outsourcing relationships probably measure innovation solely in terms of gradually reducing costs or operational innovation over time, thus,  many still seem to believe that measuring it is equivalent to inhibiting it.

6. How to involve EA in Evaluating IT Sourcing Partners?

Architecture is about finding the prioritization mechanism base on defining the risks, constraints, and trade-offs that a business faces. This may not solve the political battle, but it defines the priorities in a logical and visible fashion.

IT vendors, especially outsourcers are usually not exposed to strategic corporate plans, do not control the architectural stack and are tasked with delivering what being considered non-core, commodity services. How do you expect a vendor who does not know your business model intimately, lives the daily challenges and ultimately understand the end client to have a clue about innovation?  Sure they can help streamline development, provide better quality code (one would hope) and deliver at lower costs (perceived lower costs).  But without the intimacy, innovation is insurmountable.

In addition, how can IT vendors technically innovate when their customers insist on maintaining control over the architectural “stack?”? With involving EA to evaluate IT vendors, the biggest leap is expecting them to modernize the business model or finding ways to make technical operations more efficient, maybe, putting together the architectural stack for custom cloud development, perhaps vendors are normally not incentivized to even find operational improvements. With the context of holistic EA, a proper structure can be taken in place, including security parameters, data, and modules that related to each other between the organization, groups, project teams and knowledge worker, vendors can also be instructed to take extra miles, present their innovation capabilities properly.

7. What are the dimensions of innovation in a multi-vendor sourcing situation?

Businesses are looking for “Absorptive Capacity,” and Innovation capability from their IT service providers. They are expecting for vendors to figure out ways to perform the IT lifecycle, whether they are doing hardware or software or a combined integration, with less drain on their organization, they also expect vendors to deliver flexible, innovative and high-quality customer-tailored solutions.

The next generation of IT vendor relationship is about how to well manage the mixed bag of diversified vendors, either cloud service provider, IT consulting firms,  multi-faceted partnerships, co-ownership of ventures and companies, contracting, etc., their expertise are not only technical specialty, more importantly, they can also deliver the outside box thinking & expansive talent pool, culture wisdom and process innovation.

Most of  IT organizations take the multi-sourcing model and manage vendors more strategically-including innovation in the tender process, treating suppliers as strategic partners, crafting output-based contracts, measuring deliverables more than just SLAs.

Posted in: CIO Debate,Leading by Questioning,Vendor Relationship