It’s hard to get because innovation is disruptive. It sets off change. Change is painful. Institutions resist change because it’s ambiguous. Implications cascade across many dimensions and across all components of the operating model.
Most organizations’ approach to innovation is episodic. Innovation occurs in unexpected and serendipitous ways. Someone uncovers a new technique, a new source of talent or a new relationship with a stakeholder. An executive gets an idea, a vendor brings new technology or a competitor does something to gain an advantage. All these things create opportunities for innovation. But the ability to get an organization and its business processes and functions to adopt it is hard.
Because change is so painful, organizations find it easier to maintain the status quo. That’s also the case with vendors and third-party service providers.
Why Service Providers Don’t Innovate For Customers
One of the most frequent comments we at Everest Group hear when talking to executives responsible for a service line is “We don’t get innovation. We believe that there is more innovation to be had, but it’s very difficult to get our organization (and particularly our vendors) to not only bring us innovative ideas but also do it in their service lines.”
It’s all very well for a provider or vendor to use an innovative idea to try to take work from other vendors. But that unleashes a huge amount of change. It would be much better if a company’s existing vendors would bring innovation in the services they deliver. Although companies frequently ask for that, they are also just as frequently disappointed.
Companies find it’s much more desirable to get innovation from their incumbent providers than it is to introduce new providers. They don’t want to go through the expense, dislocation and change management of shutting down one provider and standing up another. But it’s hard to get incumbent providers to innovate. They are not incented to bring innovation. They have an incentive to maintain the status quo. Furthermore, they may have incentives to take costs out, but they would rather capture that cost themselves and increase profit margins than bring it through increasing value. They see innovation as a means to charge more, not do a better job.
Some providers try to use innovation to open adjacencies and grow new service areas, but fundamentally this is a conflict. Furthermore, providers struggle with revenue compression. Many innovations create efficiencies and, therefore, reduce the amount of revenue they can get for the same function. That creates a conflict of interest for them. Like all businesses, providers want to grow their revenue as well as their profit, but asking them to innovate is asking them to do something that will shrink their revenue, at least in the areas in which they apply it. They operate in a PxQ = R model (price times quantity = revenue). If you shrink the Q, which is the bigger number, the revenue inevitably falls.
How To Drive Your Service Provider To Innovate
The answer to the innovation dilemma is to think of innovation for every one of your company’s business services (a business process or function) as a journey. Don’t think about trying to drive innovation in big, incremental step changes. That approach is very difficult and ends up
Think of it on an ongoing monthly basis. Set up an environment in which you bring ideas to the internal organization and the vendor community as to how they can change.
Recognize that it’s very difficult to do this in step-change functions. That ends up requiring that your company replace its vendors, which I’ve already discussed as not advisable or, at least, only a second option. If you’re looking to drive ongoing innovation out of your incumbent vendors, you need to approach it as a journey.
Recognize that much of the challenge of innovation is change management. You need data and insight to drive institutional conviction so the organization can understand the benefit and how to overcome resistance and move down that path.
The innovation journey will involve changes in technology, changes in talent, changes in customer experiences and, eventually, change in the business operating model. Company leaders must digest and understand all that change. Thus, it’s important that you break the journey into small steps, feeding the information in consumable pieces. Helping them understand the change involves a lot of persuasion that needs to happen over time. Ask the organization to do only the change it’s capable of doing at the time.
The information you’ll need to provide leaders to get institutional conviction requires:
- Knowing what changes in technology to present to your vendor and your organization
- Recognizing what innovations are happening in the marketplace regarding technology and business processes
- Placing that information into the context of the business service the internal organization or service providers deliver.
- Understanding where your company’s opportunities are.
All this information requires a source of technology competitive intelligence, peer intelligence and ongoing data and facts to help to drive the change that cascades from innovation.
Once you have this information on an ongoing basis, you can introduce the necessary data and facts in digestible pieces to maintain institutional conviction regarding innovation opportunities and approaches on an ongoing basis.
https://www.forbes.com/sites/peterbendorsamuel/2020/01/14/how-to-get-innovation-from-service-providers-and-vendors
