Increasing business value within outsourcing relationships

Innovation Sourcing

Global Technology Services

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Contents

4 Outsourcing–achangingmarket

5 Innovationtoimprovebusinessvalue

6 Makinginnovationhappen

7 Whatisunderthebonnet?

9 Finnairexploitingmathstodriverevenues

10 Bankingleadershipintechnicalinnovation

11 Summary

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Theleadersintomorrow’soutsourcingmarketwillbe

thosewhocandeliverthegreatestbusinessvalue.

Excellenceinlowcostservicedeliverywillbetakenfor

granted–thewinnersinthemarketwillbethosewiththe

capabilityandvisiontohelpclientsinnovateintermsof

businessandtechnologytoexploitmarketopportunities

andovercomecompetitivechallenges.Acliententeringa

strategicoutsourcingrelationshipplacesgreattrustin

itssupplier.InnovationSourcingisoneapproachIBM

useswhichrecognisesthisinvestmentandensures

thattheclientcanleveragethecompleteIBMequation:

itsworld-leadingresearchanddevelopmentcapability,

industrythought-leadershipandproduct/servicesportfolio.

SuccessfulInnovationSourcingprogrammeswithmany

IBMclientshaveharnessedthebestcapabilitiesonboth

sidesoftheoutsourcingrelationshiptodeliverbusiness

valueanddriverevenuegrowth.

Outsourcing – a changing market

Overrecentyears,sluggisheconomicconditionsand

challengedITbudgetshaveensuredthatoutsourcinghas

beentheprincipaldriverofgrowthwithintheITservices

market.Ithasallowedorganisationstodriveoutcosts,

accessspecialistexpertiseandtechnologiesandto

refocusmanagementskillsawayfromnon-coreITfunctions

towardsthosechallengesdrivingcompetitivedifferentiation.

Outsourcinghasalsobecomewidelyrecognisedasa

financialengineeringinstrument1tosmoothoutITspending

peaksandcreatesavings;theseeitherfalldirectlytothe

bottomlineor,increasingly,fundnewbusinesssolutions.

Overthesameperiod,theglobaloutsourcingmarkethas

maturedsignificantlyandthenumberofserviceproviders

hasincreased.Whilstthereremainsacontinuingstream

of$1B+mega-deals,thestrongergrowthinmoremodest

contractshasprovidedopportunitiesforsmallerservice

providers.Inaddition,variousITcompanieshaveturnedto

outsourcingeithertodiversifyawayfromhardware/software

portfoliosortoreplacethehighermarginconsultingand

projectserviceswhichsufferedasignificantdownturn

in2002-�.

InnovationSourcingisthetermIBMusestocollectivelydescribetheassets,processes,andtechniqueswhichitusesinitsoutsourcingcontractstodriveinnovation.

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WhilstsomeelementsofITservicehavecommoditisedand

createdpricingpressure,thebasicoutsourcingproposition

remainsonewherelong-termrelationshipandbusiness

valuedeliveredarecritical.Indeed,itisasignofthe

maturityofthismarketthatbothsuppliersandclientshave

developedamuchkeenersenseofwhatittakestoensure

thatanoutsourcingcontractsucceedsasarelationship

ratherthanasimpleprovisionofservices.Gonearethe

dayswherecompliancewithservicelevelsalonewas

sufficienttomaintainhighcustomersatisfactionand

marketleadership.Strongrelationshipgovernance,

businessvalue,innovationandwin-winscenariosarethe

currenttouchstones.

Innovation to improve business value

Thelevelofmutualcommitmentandimpliedtrustmakes

strategicoutsourcingrelationshipsunlikeanyotherinthe

ITindustry.Beyondserviceexcellencehowever,what

sourcesofvaluecanaserviceproviderleveragetoenrich

therelationship?Oneansweristoensurethattheclient

benefitsfromprivilegedaccesstoitswidercapability–

notjustthatpartwhichisprovidingthecontractedIT

services.Bybringingtogethercomplementarycapabilities

plusthebestbusinessandtechnicalmindsfromboth

sidesoftherelationship,jointprojectscandriveinnovation

toimprovethebaseITservicesandaddresstheclient’s

broaderbusinessgrowthchallenges.

InacompanythesizeanddiversityofIBMwith

capabilitiesandintellectualassetsspreadacrossits

researchlaboratories,hardware,software,ITservicesand

businessconsultingpractices,thereishugepotentialfor

engagingwithclientsininnovativeprojects.Quiterightly,

IBM’ssizeandcapabilityraiseshighexpectationswithinits

outsourcingclientbase–thechallengeistomeetthesein

amannerwhichiscosteffectiveforbothpartiesandbuilds

upon,butdoesnotdistractfrom,thebaselineservices.

“Ourclientsoftentellmethattheir‘battleiswonabovethelineandnotbelowit’.Theyaresearchingforsolutionsthatwillimpacttherevenuelineandnotonlythecostline.TheywantmorethanjustITservicefromtheirrelationshipwithIBM.ThroughInnovationSourcingweleveragetheentire‘TEAMIBM’todelivergreatervalueandassurebetterlong-termclientrelationships.”

Joe Benaroya, General Manager, Strategic Outsourcing, IBM EMEA

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InnovationSourcingisthetermIBMusestocollectively

describetheassets,processes,andtechniqueswhichit

usesinitsoutsourcingcontractstodriveinnovation.

NotonlydoesInnovationSourcingprovidetheenvironment

tofosterthenecessarycollaborationbutitalsoputsin

placejointgovernancestructurestoensurethatpriorities

areassignedtoinnovativeideas,scarceresourcesare

deployedefficientlytoexplorethemandthat,where

possible,theycanbefoldedintothebasecontractscope

attheappropriatestagewithminimalrisk.

InnovationSourcingcanbepositionedasthethirdofthree

routesfordevelopingthein-scopeservicesduringan

outsourcingrelationship:

• Transition is the initial phase of an outsourcing contract

whereby a client’s staff and assets transfer to IBM – this is

where quick-win cost take-out actions will occur although

the main focus is on establishing a seamless handover.

• Transformation is the longer-term process of developing

the IT service through technology refresh, consolidation,

process redesign and new systems implementation; the

transformation plan underpins the long-term cost model

and services vision.

• Innovation Sourcing is the on-going process of

identifying and pursuing technical and business

innovations jointly with the client. These may directly impact

the baseline services (for example, driving additional cost

reductions) or might benefit the client’s business in some

other manner.

Making innovation happen

No-onewouldsuggestthatinnovationcanbe

merelypurchased–itisacreativeprocesswith

unpredictableoutcomes–thetrickliesinputtingtheright

multi-disciplinaryteamswithinasuitableenvironment.

Metricsneedtorewardcreative,‘out-of-the-box’thinking

andtheportfolioofideasmustbemanagedandprioritised

basedonabalanceofshort-termandlong-termbenefits.

Innovationdoesnotoccurpurelyatthetechnicallevel–

itcanfocusuponnovelbusinessororganisationalmodels.

Forthisreason,acriticalpartofIBM’sInnovationSourcing

processisthedeepindustryandprocessknowledgefrom

theclient’sownbusinessspecialistsandIBM’sBusiness

ConsultingServices(BCS).

WithInnovationSourcing,thereisno‘one-size-fits-all’

approach.HowtotapintoIBM’sbroadercapabilitywill

dependupontheclient’ssize,skills,businessstrategy,

partnershipsandresources.Fromapracticalviewpoint,

clientsmayalsowishtorunanInnovationSourcing

programmeforalimitedperiodtomatchpersonneland

resourceavailability.Forthesereasons,IBM’sInnovation

Sourcingapproachistailoredtoaccommodatedifferent

modelsofinteraction.

AparticularconceptIBMhasdevelopedsuccessfully

isthatoftheinnovationteam,‘i-team’orvaluecreation

centre.Here,IBMandtheclientformajointunitanddrive

brainstormingandworkshopsessionstoidentifyand

developinnovativesolutionswhichcreatebusinessvalue.

Baseduponprioritiesdevelopedwithseniormanagement,

theteamthendefinedetailedsolutions,commission

prototypesandcarry-outrisk-reductioninvestigations

leadingtofullbusinesscasedevelopment.IBMcan

supportthecompletelifecycle,includingsubsequent

implementation,drawinguponspecialistcapabilitiesas

requiredthroughitsBusinessPartners.

Innovation Sourcing is the third of three mechanisms for developing the services within an outsourcing relationship.

Transition

Transformation

Innovation Sourcing

Outsourcing contract 5-7 years

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Theinnovationteamconcepthashadgreatsuccesswith

manyclientslikethosedescribedbelowandisahighly

productivewaytoleverageIBM’sresearchexpertsand

solutionthought-leaders.Thisapproachisalsopowerfulin

thatitprovidesafocusandidentityforthejointinnovation

activitywithintheclient’sorganisation.Theteammightbea

virtualoneorlocatedataphysical‘innovationcentre’.

Asanalternativemodel,clientsmaywishIBMtooperate

in‘pushmode’wheretheIBMteammeetswiththeclient

businessspecialiststhendevelopsaportfolioofcandidate

projectsforpresentationandappraisalbytheclient.

Scopeandimpactneedalsotobeconsidered:doesthe

clientwanttofocusoninnovationswithmoredirectimpact

ontheexistingoutsourcedservices(forexample,new

capabilitiesoradditionalcosttake-out)orisawiderremit

preferred?Doestheclienthaveaveryspecificchallenge

whichmightbenefitfromfreshoutsidethinking?

What is under the bonnet?

SowhataretheseIBMassetswhicharebroughttothetable

tofacilitateandenergiseInnovationSourcing?Leadingthe

programmefromtheIBMsidewillgenerallybeaconsultant

fromIBMBCSwhowillbeabletodrawupondeepindustry

knowledgeaswellasexpertiseacrosstherangeofBCS

practiceareas:

• Strategy and Change

• Human Capital Management

• Customer Relationship Management (CRM)

• Supply Chain Management

• Financial Management

• Application Innovation.

Foradditionalindustryinsight,theprogrammecanalso

leveragetheIBMInstituteforBusinessValue(IBV).

AccessibletoallIBMclients,IBVisafocusforindustry

thoughtleadershipandresearchwithamissiontohighlight

andanticipateindustrytrends,understandtheemerging

technologylandscapeandassessstrategicoptionsforthe

alignmentofITwithbusinessneeds.

Innovation Sourcing and on demand

Theinnovationprocessneedstriggerstofuelthe

intellectualandcreativejuices.Whilsttheimmediate

businesschallengesoftheclientwillbeacrucial

starting-pointandspecifictechnologiesmaybeable

toprovidequickwins,itishelpfulthattheIBM/client

teamsharesalonger-termvisionofhowsuccessful

businesseswilloperateinthefutureandhowtheywill

exploittechnologytodeliverbusinessvalue.

Manyclientswillalreadypossessaviewoffuture

businessscenariosandtheroleofIT.However,to

supplementorindeedchallengethese,IBM’son

demandstrategyplaysacentralrole.

“Anondemandenterpriseisonewhosebusiness

processes–integratedend-to-endacrossthecompany

andwithkeypartners,suppliersandcustomers,can

respondwithspeedtoanycustomerdemand,market

opportunityorexternalthreat.”

ThisvisionunderpinsthevaluepropositionofIBM’s

products,servicesandsolutionsandhasguidedthe

company’sowninvestmentswithitsaimofbecoming

anondemandbusinessitself.Wehavefoundour

industry-specificondemandroadmapsanessentialtool

increatingavisionoftheclient’sfutureoperation.

WorkingcloselywiththeBCSfocal-pointwillbeIBM

researchersspecialisinginInnovationSourcing;theywill

providethenecessarywindowintothelargestcorporate

ITresearchorganisationintheworld.Theyaretheclient’s

guidetoIBMResearch’sintellectualassetsrangingfrom

subjectmatterexpertsandcurrentresearchfocusareas

throughtoIBM’spatentportfolio,laboratorycapabilities

andcollaboratornetworks(forexample,academia,

venturecapitalists).

ToensurethatthefruitsofIBMResearchmakethetransition

toitsmainbusiness,IBMoperatesaportfolioofEmerging

BusinessOpportunity(EBO)projects.EBOgroupswork

withthemainIBMbusinesslinestodevelopprototypes

andsupportprojectswithearly-adopter,flagshipclients.

RecentEBOsubjectsincluderadiofrequencyidentification

andadvanceddigitalmediasolutions.

OtherassetswhichcanbeleveragedwithinInnovation

SourcingareofcourseIBM’shardwareandsoftware

divisionstogetherwitharchitectsexperiencedinbringing

togetherbothhardware,softwareandservicestobuild

industry-specificsolutions.

IBMBusinessPartnerscanalsobecalleduponfor

specialistskillsandcapabilities.

TheInnovationSourcingprocess,likeanysignificant

investment,requiresbuy-infromtheclient’sexecutive

managementteam.Toassistthisprocess,IBMisableto

leverageitsAdvancedBusinessInstitute(ABI)inNewYork

asaforumforengagingseniorclientexecutivesonthe

roleofinnovationwithintheirorganisations.Theseevents

arepartofawidersyllabuscoveringbothleadershipand

ITeffectiveness2.Withmanyoutsourcingclients,IBMhas

leveragedtheABItodrive‘valueinfusion’workshopsasa

time-boxedmethodofexploringinnovationstrategies.

IBM Research

IBMhastheworld’slargestITresearchorganisation

withabout�000scientistsandengineers(includingfive

NobelLaureates)workingateightlaboratoriesinsix

countries.Since199�,IBMhasinvestedapproximately

$�billionperyearinresearch,developmentand

engineeringanditscurrentportfolioof�0,000patents

istheresultof12yearswhereIBMhasconsistently

beenawardedmorepatentsthatanyothercompany.

Itsspecialistsfrommultipledisciplinesareengagedina

diverserangeoffields:

• Communications technologies

• Deep computing

• Display technologies

• E-commerce

• Personal systems

• Semiconductor technology

• Servers and embedded systems

• Storage

• VLSI design.

Mostrecently,ithasdedicatedsignificantresources

toOnDemandInnovationServices(ODIS)whereIBM

researchersteamwithIBMclientstotacklebusiness

challengesininnovativeways.

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Finnair exploiting maths to drive revenues

Finnairisoneoftheworld’soldestoperatingairlines

andcarriesapproximatelysevenmillionpassengersper

year.IBM’slong-termrelationshipwiththecompanywas

extendedin2002throughanoutsourcingcontract;with

technologicalleadershipandinnovationhighprioritiesfor

Finnair,theoutsourcingagreementincludedprovisionfor

anInnovationSourcingprogramme.

OneoftheearlytaskstackledwastoaddressFinnair’s

vastandgrowingdatabasecoveringcustomertraveland

purchasehistories.Howcouldthishithertounusedassetbe

exploitedtogainabetterunderstandingofcustomertypes

andtheirhistoricbuyingpatterns?Takingitfurther,ifyou

couldpredictfuturepatternsandalsounderstandthe

eventualvalueacustomerrepresented,thisinsightcouldbe

integratedintomarketingprogrammesandprocesses.

CRMwouldthenbecomecustomerequitymanagement–

awholenewwaytorunanairline.

WorkingclosingwithFinnair’smarketinggroup,IBMbrought

inateamfromitsZurichresearchlaboratorywhowere

abletodevelopandrefinemathematicalmodellingand

optimisationalgorithmstoinvestigatethedata.

Successhere,andcollaborationwithanIBMpartner,ledto

thedevelopmentofaprototypeforIBM’scustomerequity

managementsolution,whichalreadyhasan�0percent

accuracyrateforpredictingtheeventualvaluea

customerrepresents.

Theimplicationsarefar-reachingfortheFinnairbusiness:

thisapproachcanreducemarketingcostsbyupto

20percentthroughbettertargetedcampaignswhilst

improvingcampaignresponseratestoboostrevenues.

Inaddition,byforecastingfuturetraveldecisions,theIBM

solutionwillimprovetheairline’scustomersatisfaction.

Criticaltothesuccessofthisprogrammewerethemutual

commitmenttopursueaninnovativeagenda,sharingof

theclient’sbusinesschallengeswiththeIBMteamanda

jointapproachtoproblemsolvingcoveringbothbusiness

andIT.OtherareasofjointinvestigationwithFinnairhave

includedflightlogisticsanalysisaswellasexploitationof

broadband,digitalTVandradiofrequencyidentification

technologies.TheInnovationSourcingprogrammeatFinnair

drewuponseveralIBMResearchlaboratories,theIBMIBV

andIBMBusinessPartnersaswellasInnovationSourcing

programmeswithotherIBMclients.

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10 11

Banking leadership in technical innovation

OneofIBM’skeyclientsinthefinancesectorinEuropeis

alarge,multi-nationalbankingandinsurancegroupwith

assetsinexcessof€200billion,approximatetenmillion

personalcustomersandonemillioncorporateclients.

Havinggrowninorganicallyinthepastfouryears,its

strategyisfoundedonstrengthandinnovation.IBMwas

thereforeanaturalpartnerwhenthegroupwaslooking

foranoutsourcingrelationshiptohelpitconsolidateand

transformITsupporttothebusiness.Theoutsourcing

agreementbetweenthepartieswasoneofthelargestever

concludedinthefinancesector.

TheInnovationSourcingmodelcentredonaTransformation

andInnovationTeamjointlystaffedandmanagedbythe

clientandIBMwiththeremitto:

• Provide access to IBM’s investment in research and

development (R&D) and expertise with other world-wide

finance sector clients

• Support the client’s decision-making with technology and

market insight

• Propose projects and programmes to improve the client’s

cost-income ratio within three years.

Sinceitsinception,theTransformationandInnovationTeam

hasfocussedonawiderangeofinitiatives,forexample:

• Optimisation of enterprise resource planning (ERP)

solutions to drive cost reductions of 20 percent

• Assessment and development of the group’s

on-line banking architecture by specialists from

IBM’s Haifa laboratories

• Assessment of its enterprise content management

projects – again drawing upon specialists from

IBM’s Haifa laboratories

• Integration of the multiple legacy systems from the

various banks brought together within the group.

ReviewanddirectionoftheTransformationandInnovation

Teamensuresthatitcontinuestodelivervaluebyfocussing

onjointresearchinterests,technologyexploitationand

quickwinstogetherwithknowledgetransfertotheclientin

criticalareassuchase-banking.

11

Summary

Theoutsourcingmarkethasevolvedsignificantlyinrecent

years.Thecompetitiveenvironmenthasbeentransformed

andtherearemoreprovidersabletodeliverthebasics

ofITservice.Asaconsequence,clientpurchasingand

satisfactioncriteriahaveshifted.Thecustomerdialogueis

increasinglyaboutrelationships,businessvalue,innovation

deliveredandleverageoutsourcingpartnershipstodrive

revenuegrowth.

IBM’sexperiencewithclientsreinforcestheimportance

ofinnovationinraisingcustomersatisfaction.Innovation

SourcingistheroutethroughwhichIBMleveragesits

world-classcapabilityinresearch,products,servicesand

businesssolutionstodelivermorebusinessvaluetoits

outsourcingclients.However,asingleapproachdoesnotfit

allcasesandarangeofmodelsareavailablerangingfrom

physicaltovirtualinnovationcentresanddirectedinnovation

versusmore‘blue-sky’approaches.

Innovationisacreativeandnecessarilyunpredictable

phenomenonbutprovidedtheappropriatetechnical,

commercialandorganisationalenvironmentisestablished,

thepay-offcanbesubstantial.IBM’soutsourcingclients

havebenefitedintangiblebusinesstermsfromInnovation

Sourcingprogrammes.

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1 MorganChambers,‘OutsourcingintheFTSE100:Episode2–ImpactonFinancialPerformance’,2001.

2 IBMAdvancedBusinessInstitutesyllabus,ibm.com/ibm/palisades/abi/index.html

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