A The Random House Dictionary defines the word innovation as the introduction of new things or methods.
When applied to the world of outsourcing in 2004, that translates to the development of innovative processes that save time and deal with money in new ways, while adding service and support. Plus it means creating new businesses that can more freely operate in the outsourcing arena.
For example, General Electric Co.'s early November announcement that it will sell a majority stake in its global outsourcing business to two U.S.-based private equity firms indicates one major innovative trend – to spin off an internal operation into a larger outsourcing entity.
According to Scott Bayman, president and chief executive of GE's operation in India, “GECIS has been reorganized for global expansion and accelerated growth.” Adds Pramod Bhasin, president and CEO of GECIS, “The move will give GECIS unrestricted access to the world market.”
This kind of expansion is what happened for two successful outsourcing firms: Black Mountain Group, an outsourcing advisor and services provider in the global human resources sector, and AIGT, a provider of utility-based IT management solutions.
For Black Mountain Group founder Stephen Medici, the decision was evolutionary. Medici was the compensation and benefits manager for Credit Suisse First Boston (CSFB) in 1994 when that financial services company first began considering outsourcing its benefits administration. In an interesting twist, instead of hiring an outside company, CSFB spun off its own department. So, with the go ahead of CSFB, Medici quit the company, formed Black Mountain and hired his entire staff of nine. CSFB became Black Mountain's first client.
For American International Group Technologies (AIGT), the story is a similar tale of branching out from where it started into new business areas. Historically, AIGT had been taking care of information processing at its umbrella company, the American International Group, Inc., a huge U.S.-based international insurance and financial services organization. In 1995, however, AIGT began working with non-AIG clients.
“We felt this was a good move because it gave us the chance to defray our costs by building scale, and it gave us the opportunity to keep our skills sharper and deeper than we normally would as an internal provider,” says AIGT President Paul Madarasz. “Our new clients had different platforms and application suites than we were supporting.”
Since then AIGT has developed an innovative and pioneering strategy – utility-based pricing for IT services. “Viewing computer infrastructure as a commodity is a trend that will continue to grow over the next couple of years,” says Madarasz. “Companies will ask themselves: Why are we negotiating with vendors? Why are we expanding functions and managing computing capacity? Why are we handling tasks that can be more cost-effectively achieved by factoring them out? Why are we continuing to handle tasks that, if outsourced, would give us the time and money to focus on other value-added business areas?”
The idea of utility computing is one of the hottest trends around, according to Doug Tuttle, director of the Global High Technology Practice of Deloitte Consulting. Speaking recently to Electronic News, he said, “the basic idea is to move computing toward a utility pay-for-use model in which users can tap into vast pools of computing power and use only what they need, paying only for the bandwidth processing and applications that they actually use. For customers, it promises virtually unlimited resources with little need to invest in computing power of their own. And it's there when they need it.”
“The idea that you pay for what you use is a big change for the way things usually work in IT,” adds Madarasz. “We have worked hard to create a very simple relationship with our clients. There is not a lot of extraneous billing for different items; everything is included in the cost from migration to account support. That is a big innovation.”
Moving from a fixed-cost, asset-based payment plan to a variable cost, non-asset based payment structure was a huge innovation for FedEx Kinko's Commercial Solutions. The firm, which provides document outsourcing services to organizations, offers a “pay as you go” service, says Chris Ahearn, vice president of marketing and strategy. “The way we deliver that is by utilizing our network of over 11,000 locations worldwide,” he says.
Usually, in this business space, if you hire a company for document services it resides inside your firm and takes up property, plant, equipment and real estate, says Ahearn. In addition, it doesn't matter if your demand ebbs and flows. With the fixed-cost model, you are still paying for the service. With the variable model, you pay only for what you use and create. Plus, the large FedEx Kinko's network speeds up the process incredibly.
For example, one client – one of the tenth-largest marketing companies in the world – had to develop and deliver time-sensitive marketing material to Singapore. Traditionally they printed it in the U.S. and shipped it over – which took three weeks. With FedEx Kinko's, it was created in the U.S., and then sent electronically and produced in the local area.
This process took 48 hours. It also saved the company 50% of the cost. “They didn't really even care about the savings. What really made a difference to them was the ability to move faster and get a jump on their competitors,” says Ahearn.
An innovative approach to the delivery of services is also a very important part of Black Mountain's success. They call it “High-tech and high-touch.” “No one will distinguish themselves in this business by having a better major medical plan,” explains Medici. “That is a commodity. But, delivery of that plan is crucial.”
That is why Black Mountain has embraced the model of high-tech, high-touch, first introduced by visionary John Naisbitt. In his bestseller, MegaTrends, Naisbitt observed, “Whenever new technology is introduced into society, there must be a counterbalancing human response that is high touch or the technology is rejected.”
Where the high touch fits in at Black Mountain is with its attention to service. The service center hubs are actually manned by people who answer the phone and are tasked with getting to the bottom of the problem.
“We have a very focused, white-glove approach to HR outsourcing. First, we have people, not decision trees. We are not letting calls go to voice mail, we promise answers within a set number of hours and get back to the person,” explains Medici. Second, the company concentrates on two areas of expertise: employee benefits administration and employee design and planning.
According to Medici, “there is an increasing demand for the innovation that can be brought to the table when combining high-tech with high touch.”
Transforming the supply chain is the innovation behind outsourcing firm PFS Web. As more and more companies do business on-line, the firm saw a need to develop a supply chain infrastructure that takes care of everything from the transaction component on the website to the inventory management, shipping and behind the scenes details that make the difference between success and failure for many companies.
“We take care of the demand point, all the way through to delivery,” says CEO Mark Layton. Plus it doesn't matter if the transaction is business-to-business, business-to-consumer, or both. “With manufacturers today, segments of the business require consumer skill sets and at the same time a big portion of pipeline goes B to B,” explains Layton.
A case in point is a manufacturer of cable modems that was still using the traditional supply chain model (circa 1999 or so). The units were made in China, flashed with software for the designated networking mode then moved over the water to the U.S. From manufacture to arrival at the port took 45-50 days. Since modems are in a rapid technological advancement segment, during that time the technology often changed, rendering the shipments useless.
“Our solution allows two major benefits,” says Layton. First the products are manufactured as generic units in China and shipped as a “brick,” a large, dense package that costs less to move. “Then PFS Web can flash the software to match the order, package it as retail and move it down the line,” he says. The approach eliminates wasted time that allows for technology obsolescence and saves money, he adds.
Finally, moving into a totally new business space is another example of innovative outsourcing. That is the case with Sales Focus Inc. Still in somewhat of an early adopter mode, the company becomes an extension of its clients' sales force, says president and founder Tony Horwath.
“We develop a dedicated, fully-managed sales force in 45 days or less,” he says. “On the front end, the company builds a tactical sales program to launch any product.”
Then the salespeople are 100% recruited, trained and managed specifically for each individual client. “This is a true one-on-one relationship,” Horwath adds.
In today's competitive climate, innovation is more than just an important element to success. It is a requirement. From new pricing structures, all the way to developing new businesses, outsourcing companies are well on their way to satisfying the definition of innovation and more.