Outsourcing is a big buzzword these days for good reason – it offers companies a treasure trove of benefits when done right. But many business leaders are missing out on one of the most powerful advantages of all: outsourcing as a secret weapon for innovation.

Let’s face it, for most large organizations, innovation doesn’t come easy. Endless meetings, office politics, slowing growth, quarterly targets…it’s hard to think outside the box when you’re stuck inside one! As a result, innovation often ends up on the back burner.

But outsourcing certain business functions gives you an ejector seat out of that box! It’s like gaining a whole team of innovation consultants ready to shake things up. Working with outside partners unshackles you from old ways of thinking and operating. Now you can see new opportunities everywhere.

I’m getting ahead of myself though. Let’s start with the basics – what is outsourcing and why is it worth considering in the first place?

The Benefits of Business Process Outsourcing

There are several advantages that make outsourcing conducive to innovation:

Reduced Costs and Improved Efficiencies

Outsourcing lets companies take advantage of third-party providers’ lower cost structure, economies of scale, process expertise, and specialization. Outsourcers often have sophisticated technologies, capabilities, and insights from serving other clients that can lead to significant cost and efficiency gains.

Freeing up capital and resources allows companies to reallocate budgets towards innovation initiatives. The cost savings from outsourcing non-essential functions also provides funding for incubating new ideas, technologies, and businesses.

Access to Specialized Expertise and Technology

Innovative companies require skills, knowledge, and capabilities they often lack internally. Outsourcing providers employ specialized talent and make significant investments in technologies, analytics, and process improvements.

Tapping into the outsourcer’s expertise and technical infrastructure provides access to capabilities, tools, systems, and ways of working that may not be feasible for the organization to build up internally. This amplifies the company’s ability to innovate.

Ability to Focus on Core Competencies

Outsourcing non-critical areas enables concentration of effort and investment on the organization’s true differentiators and competitive advantages. Leading companies outsource commodity functions that are easily replicated in order to focus their people and resources on core innovation activities like R&D, product development, customer experience, and entering new markets.

Letting partners handle back-office processes allows internal teams to dedicate their time and energy towards driving breakthrough innovation in the business’s most mission-critical domains.

How Outsourcing Enables Innovation

There are a few key ways outsourcing sparks greater innovation:

Frees Up Resources for Innovation

As discussed above, outsourcing reduces costs and provides access to capabilities that would be expensive to build internally. The resulting savings in budget, talent, technology, and management attention can be channeled towards innovation initiatives.

Having an outsourcing provider manage non-core areas like HR, IT infrastructure, facilities management, and financial processes frees up resources that can be deployed for exploring emerging trends, developing new offerings, and disruptive innovation.

Provides External Perspectives

Outsourcing exposes the organization to the vendor’s specialized expertise, new ideas, and best practices gained from working across multiple industries and clients. An outside perspective can challenge conventional thinking that limits innovation within companies.

Partners with a wide-ranging client base can share insights into emerging technologies, evolving customer needs, and innovative processes that inform an organization’s innovation roadmap and priorities. The cross-pollination of knowledge accelerates innovation.

Allows Low-Risk Testing and Experimentation

Being able to rapidly test and iterate on innovative new offerings requires flexibility and agility that is difficult within the structural constraints of large established organizations. Outsourcing provides a less risky platform for piloting cutting-edge solutions and getting customer feedback before fully rolling out and investing resources in scaling up.

For example, partnering with an outsourcer to jointly develop and test emerging technologies like AI, machine learning, IoT, blockchain, etc. for specific use cases allows innovation to happen, while avoiding potentially wasted investment on premature or excessive in-house fixed assets and infrastructure. Successful solutions can then be scaled through the partner or eventually brought fully in-house once validated.

Keys to Unlocking Innovation Through Outsourcing

While outsourcing holds great promise for enabling innovation, it does require a strategic approach to realize the full benefits:

Choosing the Right Processes to Outsource

It’s critical to take time upfront to carefully determine which business processes can gain the most from being outsourced. As a rule of thumb, non-core support functions and commodity-like processes tend to be better fits, as outside partners can achieve optimal economies of scale and bring technology advantages.  

Conversely, core proprietary processes that represent true strategic differentiators should generally be retained in-house – these could include R&D, specialized engineering design, analytics-driven customer insights, and other capabilities that set the company apart competitively.

Analyze each process across factors like strategic importance, cost structure, need for control, and potential for innovation to determine where the optimal balance lies between outsourcing vs insourcing. Those activities which can gain the most from outside perspective and emerging technologies represent prime outsourcing candidates.

Selecting the Right Outsourcing Partner

It’s critical to choose outsourcing partners who are strongly positioned to drive innovation within your relationship, rather than settle for vendors who just aim to maintain status quo. Be selective about partners who are at the forefront of applying new methodologies and technologies within their field. 

Prioritize relationship-focused partners who take a consultative approach, demonstrate thought leadership, provide meaningful insights, and collaborate on solutions that push boundaries. Make sure to establish agreed-upon innovation goals, metrics, and incentives to drive continuous improvement and creative thinking.

Building Effective Governance and Collaboration Models

Effective governance, relationship management, and knowledge sharing models must be priorities in any outsourcing partnership aimed at enabling innovation. These foundations allow maximum value creation from the arrangement over time.

Some best practices include clearly defining responsibilities, expected outcomes, decision rights, and dispute resolution mechanisms upfront. Maintain open communication channels at multiple levels and address potential cultural barriers early. Set regular reviews and create frameworks for leadership from both partners to engage closely on evolving innovation priorities.  

Promoting Knowledge Transfer and Cross-Training

While an outsourcing vendor brings critical outside expertise, the client organization should take care to still retain essential internal capabilities and institutional knowledge within critical domains – even those being outsourced. Encourage talent exchanges, job rotations, cross-training programs, knowledge sharing workshops, and process documentation to facilitate two-way learning.

Leverage the outsourcer’s specialized skills through initiatives like management mentoring, coordinating on implementation of new technologies, and developing the professional capabilities of staff in roles related to outsourced processes. A little knowledge transfer goes a long way.

Risks and Potential Pitfalls of Outsourcing

Despite its many potential benefits, organizations considering outsourcing should be aware of these common risks:

Loss of Organizational Knowledge

If critical skills and institutional knowledge relating to key processes only reside with the outsourcing vendor, it can gradually erode the client organization’s own ability to innovate and compete in that area long-term. Mitigate this risk by deliberately keeping certain skills in-house and focusing on knowledge transfer.

Hidden Costs Accumulating Over Time

Factors like training, knowledge transfer, governance, unexpected transition costs of services, and contractual changes can sometimes add up to major unexpected costs over the lifespan of an outsourcing deal. Outsourcing doesn’t automatically reduce expenses – organizations need to budget for these contingencies.

Less Control and Oversight

Outsourcing vendors have multiple clients and their own priorities to balance, so they may not dedicate as much focus and resources to innovation for your business as they should. There is inevitably less visibility when processes take place outside the organization.

Partnership Breakdowns

Without diligent relationship management, conflicts can arise around economics, performance issues, lack of alignment, and changes in strategic direction that derail the outsourcing relationship. Both partners must work hard to sustain positive dynamics for innovation to flourish.

Being proactive on governance, communication, knowledge sharing, and relationship management is key to addressing risks and making outsourcing deliver on its promise.

Best Practices for Driving Innovation Through Outsourcing

Forward-thinking organizations can follow these best practices to maximize the innovation potential of their outsourcing partnerships:

Define Innovation Goals and Metrics

Have clearly defined innovation objectives, success metrics, and tracking mechanisms for the outsourcing relationship. Establish processes for surfacing ideas and create clear pathways for proposing pilot projects and innovations, even as a vendor.

Incentivize Innovation

Incorporate specific incentives, gain sharing, and rewards for identifying innovation opportunities, achieving cost and efficiency gains, and developing innovative new solutions into the partner agreement. Recognize and celebrate innovative thinking on both sides.

Maintain Critical Internal Capabilities  

Keep selected essential capabilities and resources in-house so institutional knowledge stays within the client organization, despite outsourcing. Strategically insource certain roles to inject new thinking and balance external innovation with internal capability building.

Build Flexibility Into Contracts

Work together to adjust scope, economics, delivery models, and resources over time to fuel ongoing waves of innovation over the outsourcing lifecycle. Avoid locking into rigid long-term contract parameters and terms that constrain innovation down the road.

Making these practices priorities will allow companies to sustainably drive maximum breakthrough innovation through well-managed outsourcing.

Real-World Examples of Outsourcing-Enabled Innovation 

Let’s look at some well-known examples that illustrate how global leaders leverage outsourcing partnerships to complement and enhance internal innovation:

Apple’s Manufacturing and Supply Chain Innovation

Apple maintains flexible outsourcing partnerships with contract manufacturers like Foxconn to ramp up mass production of new iPhone models globally. This allows Apple to focus intensely on design, software, and other internal innovations, while partners enable rapid scale up and commercialization.

Nike’s Materials and Process Improvements

Nike has relied on supplier innovations in materials, textiles, and manufacturing processes to develop proprietary fabrics like Dri-FIT and Flyknit that were incorporated into athletic clothing lines. This transformed performance standards across the industry.

Pfizer’s R&D Productivity Gains

Pharma giant Pfizer engages specialty outsourcing firms for clinical trial management, data analytics, and other R&D capabilities. This provides extra bandwidth for internal teams while also accessing leading experts at outsourcing partners.

GE’s Software Innovation Offloading 

GE leverages outsourced software developers to rapidly prototype and test new data analytics applications, IoT solutions, AI capabilities across aviation, energy, manufacturing, healthcare and more. Their innovation comes to market faster as a result.

These examples demonstrate how some of the most innovative companies leverage strategic outsourcing partnerships to complement and enhance internal innovation initiatives.

Conclusion

When approached thoughtfully, business process outsourcing can be a powerful catalyst for innovation within organizations. It relieves companies of non-core functions, provides access to skills and knowledge, and creates opportunities to experiment with emerging technologies and new ideas.

However, organizations must take care to choose the right activities to outsource, select partners who prioritize innovation, nurture open cultures, implement strong governance, and keep critical capabilities in-house. Managing the associated risks and following best practices outlined here will allow companies to leverage outsourcing for maximum competitive advantage.

The potential to drive step-change improvements through outsourcing-enabled innovation makes BPO an essential strategy for leaders to embrace in today’s highly dynamic business environment. However, realizing the full benefits requires focus, commitment and vision to execute it strategically.