Put it in Writing! Why the Contract is Key to Enabling Innovation Through Managed Services

As the outsourcing industry continues to evolve and mature, customers will continue to demand more from their managed service providers (MSPs)—particularly in terms of delivering value above and beyond the terms of the agreement.

These expectations include finding new ways to deliver services more efficiently and to help their customers gain a competitive edge, whether the contract stipulates innovation as a responsibility or not. Customers frequently complain that their vendors simply do not bring innovation to the table, meaning they don’t “think outside the box” and fail to proactively address issues or problems.

Source: 2016 Deloitte Global Outsourcing Survey

In addition, customers often perceive their MSPs as being unable to think strategically or offer solutions to address fast-changing business challenges. Indeed, nearly 46% of the respondents in the 2016 Deloitte Global Outsourcing Survey (GOS) cited being “reactive rather than proactive” as the biggest frustration with their MSPs, while 33% cited “lack of innovation” as the primary issue.

MSPs often counter that they do invest time and resources in innovation, but customers don’t respond to their efforts, either letting their ideas sit idle in underfunded project queues or failing to reward them for the added value they contribute. According to the Deloitte GOS results, 29% of customers primarily motivate their MSPs to innovate through positive messaging, while 21% expect them to innovate without any additional incentives. Clearly, there is great disparity in relationship expectations.

The gap between what customers expect, and what service providers actually deliver, highlights the essence of what innovation is NOT: simply maintaining the status quo. With the emergence of disruptive technologies, such as autonomics, artificial intelligence, digitization, the Internet of Things and cloud services, customers cannot afford to wait for service contracts to expire to transform their service delivery models. And, given increased competition and declining switching costs, MSPs cannot wait until contract expiration to infuse innovation into their customers’ environments. Differentiation via innovation is a critical tool on both sides of the relationship, being used to gain competitive advantage on the one hand and retain customers on the other.

Define Innovation
While there is no silver bullet for bridging the gap between expectations and delivery, customers can take some steps to communicate their desires more clearly and to codify the responsibilities of the MSP in delivering innovation. The first of these steps involves clearly articulating what innovation means.

In our view, innovation can be defined as a change to an existing process or technology resulting in measurable customer benefits. These benefits can be qualitative (e.g., improved end user satisfaction or increased business agility) or quantitative (e.g., increased throughput or lower costs), but they must be measurable in some way. Some innovations require investments (e.g., new technology) to produce customer benefits, while some require transformation (e.g., process engineering), while still others may require only subtle changes.

Importantly, innovation is distinguished from productivity gains in that it requires a fundamental change to a process, whereas productivity gains require performing an activity with the same throughput but with fewer resources. Innovation also differs from continuous improvement, where a process or service is completed in the same way but at a higher level of quality. For instance, MSPs traditionally extend continuous improvement benefits to their customers by improving their service-level metrics year over year.

Several developments have recently emerged within the managed services market that meet the aforementioned definition of innovation. These include “as-a-service” offerings (i.e., Software as a Service, Infrastructure as a Service, and Platform as a Service) and public or private cloud services. Through these innovations, many MSPs have developed standardized service bundles, which help their customers to simplify operations and reduce total cost of ownership. Other innovations that MSPs now offer to enterprises include increased use of robotics, analytics, cognitive intelligence, virtual workforces, and software-driven infrastructure—all of which can help to simplify operations, increase financial flexibility, and enable on-demand services consumption.

Additionally, MSPs can define or influence customer experiences through innovations such as wearable technology, the internet of things, mobility, exponentials, and social media. After all, when a customer calls into a contact center, she is often speaking with an MSP representative. Similarly, when an outage to a website, web portal, or mobile application occurs, MSPs are usually involved as well—either as the cause or the solution, or both.

Source: 2016 Deloitte Global Outsourcing Survey

State Your Expectations
To improve business outcomes and service operations in this environment, agreements with MSPs should be structured not only to define what is meant by innovation but also to specify expectations around it. The foundation of a healthy relationship between a customer and an MSP starts with the quality of the agreement. But, according to the 2016 Deloitte GOS, only 21% of respondents discuss innovation as part of their managed service agreements. Traditionally, these agreements do not enable customers to explicitly benefit from innovation, since the language around it is typically vague and does not articulate specific goals and metrics.

Today, an opportunity exists to improve these agreements, bringing together customers and MSPs as partners in innovation. To get started, customers can:

  • Establish an innovation agenda for the service delivery organization in support of the overall corporate vision, and confirm whether current MSP agreements align with it.
  • Establish innovation objectives in conjunction with your MSPs with the innovation agenda in mind.
  • Incorporate jointly developed objectives and supporting “innovation language” into contracts
  • Develop methods for measuring innovation success
  • Collaborate with existing MSPs to determine innovation-driven incentives and penalties
  • Work with your MSPs to identify some desired “blue ocean” innovations that could give both parties a competitive edge and that would be worth the additional risk
  • Regularly track performance against innovation objectives, using metrics such as:
    • Number of ideas generated or business cases developed
    • Percentage of ideas converted into successful service enhancements
    • New and/or incremental revenue generated through service innovations

The Bottom Line
The marketplace is constantly evolving. To keep pace with it, both customers and their MSPs should harness innovation to improve operational efficiencies, drive cost competitiveness, and improve business outcomes. To achieve these goals, both parties should come together within the context of the contract, articulating implied expectations and agreeing upon what it means to be successful in delivering innovation.

by Doug Plotkin, ManagingDirector, and Joe Greiner, Manager, Deloitte Consulting LLP