Outsourcing: From Cost Management to Innovation and Business Value
Michael R. Weeks and David Feeny
California Management Review, Summer 2008

Over the past 20 years, many companies have outsourced their information technology to outside providers as a way to cut costs.  Now, as those companies face the urgent need for new ideas, they face the challenge of innovating in an outsourced world.

Can CIOs who have outsourced most of their IT meet this challenge, or is outsourcing incompatible with innovation?

In “Outsourcing:  From Cost Management to Innovation and Business Value,” the authors offer a model of innovation within outsourcing relationships consisting of nine key enablers for achieving innovation.

Weeks is an assistant Professor of Management in the Sykes College of Business at the University of Tampa.  Feeny is the Director of the Oxford Institute of Information Management at the University of Oxford.

The authors conducted a two-year study of the effects of IT outsourcing relationships on business innovation.  The research included four primary case studies, featuring three client firms in aerospace/defense and one in the pharmaceutical industry.

What all four case studies have in common is that the companies were seeking innovation — the introduction of strategies, business processes, or technologies that are new to the relationship and are intended to lead to improved business outcomes.

Overall, the research identified nine key enablers of innovation, covering aspects of client capability, supplier capability, and relationship readiness.

The four client enablers are:

  1. Technology skills
  2. Selective sourcing mindset
  3. IT organizational alignment
  4. IT leadership

The two IT supplier enablers are:

  • Business process skills
  • Industry scope

The three relationship enablers are:

  1. Trust
  2. Measurement specificity
  3. Innovation governance

Let’s discuss all nine enablers, starting with technology skills.

It’s important to have a common base of knowledge between the partners to serve as a bridge for the transfer of ideas.

This means that there must be an excellent technology knowledge base within the IT function of the client.  It requires the employment of a number of highly skilled technology experts.

However, at the beginning of an outsourcing relationship, when the focus is on cutting costs, many companies transfer most of the employees who represent t...