Institute for Innovation & Information Productivity

Outsourcers and Innovation

C. Warren Axelrod writes: The lead article in the 15 October 2007 edition of CIO Magazine is “What does it take to get IT outsourcers to innovate?” (see article)  The article addresses the intersection of several critical areas of high value:  outsourcing, innovation and information productivity.

The CIO Magazine article and the online reader feedback on it raise the question as to whether outsourcers can be relied upon to be truly innovative, or even whether it is in outsourcers’ interest to be at the leading edge. Others comment that innovation should be retained within the customer organization as a competitive advantage. Perhaps it is more realistic to expect one’s outsourcers to simply adopt new technologies and methods, rather than come up with their own innovations.  But, if innovation is the application of new solutions (products or services) to meet customer needs, thus creating value, it is perhaps less important that new solutions involve new technologies exclusively; innovation can also result from new uses of existing technologies to address unmet needs.  In this way outsourcers can provide fresh insights that owners of intellectual property may miss.

In my outsourcing book, published in 2004, with the title "Outsourcing Information Security", I disucss outsourcer “expertise” and note that gaining third-party expertise is a major reason to outsource. Often service providers are in a better position to see new technologies and processes than their customers. While this may not represent innovation per se, such injections of new technologies, or knowledge that the outsourcer is able to offer newer products and services, will allow the customer to innovate more effectively, knowing that the service provider has the capability of staying abreast of customer needs and able to support such initiatives.

The other areas are innovation and information productivity. As an Academic Advisor to IIIP, I clearly have involvement here. My particular focus is information or computer effectiveness and productivity, in which areas I wrote two books titled "Computer Effectiveness" and "Computer Productivity" respectively.  While these books were published some 25 or more years ago, many of the concepts are still fresh and relevant today.

The key, from the customer’s perspective, is to ensure that contracts and service level agreements encourage such advances, rather than stymie them. Often, an outsourcer has the incentive to squeeze the last drop of revenue out of older, paid-for technologies rather than engage in costly upgrades. Contracts need to explicitly describe rewards to the outsourcer of implementing more effective and efficient services rather than to discourage them because of potential losses in outsourcer revenue. In the long run, both outsourcer and customer can benefit from an approach that encourages the adoption of new ideas.

Sustainable Economies and the Economics of Growth

Daniel W. Rasmus writes: Even for economies that aren't growing, their plans, their aspirations and their measurements are built on growth. If we ever took the plunge that the green business movement is pushing business toward, then the economics of growth would be hard to reconcile with green economics without the idea of sustainability. In biology, sustainability means two systems coexisting without a negative impact on the other. That is what we are attempting, but we don't have the language of the metrics to understand the relationships between the models. The October 29, 2007 BusinessWeek article "Little Green Lies" outlines what critics find wanting in concepts like carbon credits. We are seeing pushback as well against products like biofuels, where the economics of the green salvation may not yet make sense, and may indeed, not be sustainable, as corn shortages increase the price of tortillas in Mexico (read here more at washingtonpost.com). Another example, as Rob Salkowitz of Emphasis Added just shared in a phone conversation is the rising price of cattle feed, to which I commented on the irony of this just as we also push for organic beef, feed on pure vegetable matter rather than animal protein.

The big question to me, in light of the IIIP's mission, is how to understand performance measurements, be they innovation driven or productivity related, if we change the underlying model of the economy from growth to something else.

In 2050 it is highly likely that the world's population will start to decline. At that point, we can't talk about emerging markets or existing home sales or anything else in the same way, because we would see both the wealth and the demand start to accumulate in fewer and fewer consumers, which would, regardless of growth motivations, cause us to rethink measurements. If we couple that with the desire to create a sustainable economy, and by that, I don't mean two co-existing economic systems, but the planet's systems co-existing with whatever economy we are using in 2050, we have quite a problem figuring out how to measure success.

As I learned many years ago in my U.C. Santa Cruz class called "Modern Utopian Visions" it is very easy to envision a future, it is much more challenging to figure out the path to that future, or to measure success in a way that proves that you achieved what you set out to achieve in your vision.

Innovation and Corporate Governance — and Sarbanes-Oxley

Michael LoBue writes:A recent paper for Houman B. Shadab should be required reading by anyone interested in the factors influencing innovative behavior in organizations.  True, his paper specifically addresses the impact of Sarbanes-Oxley (SOX) on publicly traded companies, but his framework for innovation and governance go well beyond the US-publicly traded companies and transcend size.

His paper, entitled Innovation and Corporate Governance: The Impact of Sarbanes-Oxley, contains a rich list of citations that beyond the value of his impressive presentation of the material, the citations alone represent an excellent starting point for any student on the subjects he addresses.

Mr. Shadab’s conclusions seem strongly supported by the empirical research he’s reviewed:  “…SOX likely reduces the innovative potential of a significant portion of public companies and thereby imposes a social cost in the form of foregone benefits from innovation.”  One obvious question that comes to mind:  “Isn’t SOX just another condition facing firms that they need to factor into their ‘innovative behavior’ if they are going to survive and thrive in the future?”

Other questions:

• Were there any examples of SOX-compliant firms that successfully balanced the trade-offs between providing sufficient informational asymmetries (to drive innovative behavior) and the reduction of agency costs (to manage managerial opportunism)?  If so, do they demonstrate any general characteristics worthy of further study?
• If the basic challenge presented by SOX requirements is the need for external, or objective oversight, are there non-tradition collaboration models worth exploring to address the problem?  For example, the open source software model (Linux), or the virtually unbounded peer-review model of Wikipedia?
• How much of the challenge of seeking, or investing in, innovation is the mindset that the corporation needs to own the innovation?  The implication in this question is that innovations are different from inventions, or other such corporate assets that can be protected.
• Does the recent trend to appoint chief innovation officers have any impact on the ability of public corporations to address the issues caused by agency costs?  For example, can a CX level position, with sufficient resources, better manage the proximity vs. objectivity oversight balance (see Section II. C. of the paper)?

Thank you Mr. Shadab for a very insightful investigation and excellent write-up of the results.

When is productivity a bad thing?

Michael LoBue writes: Michael Hicks, director of the Bureau of Business Research at Ball State University, asserts in this morning's The StarPress.com that "globalization isn't the problem [for job losses]; productivity fueling drop in jobs."

Trusting Mr. Hicks' data and his analysis of the data, one still has to question the basis thesis that "productivity is a problem".  The logical extension of his conclusion doesn't make sense — that by reducing worker productivity we retain local jobs.  Isn't that the logic that justified agricultural subsidies?  You know, farmers receiving government subsidies for not growing certain crops. I believe the only productive outcome of that program was to keep certain politicians in office longer.

Mr. Hicks does conclude with a provocative question:  "The real question about manufacturing jobs isn't why so many have disappeared, but why so many still remain?"  This blog site is interested in hearing about the possible answers to this question.

Thank you, Mr. Hicks, I enjoyed your column.