Sourcing Governance

White paper

Innovation can be learned.

How the IT organization may regain its
position as an innovation partner.
ByJoost Okken and Han Gerrits

The internal IT organization that cannot meet the information demands of the business runs
the risk of becoming marginalized and losing its right to exist. What can the CIO or IT
manager possibly do to win back the confidence of the business and to (re)position his
organization as a preferred partner for innovation?

D a r e t o c h a l l e n g e
Over the past few years, many IT organizations have rationalized their operations, especially
with the aim to save on costs in times of economic decline. A side effect of this
rationalization is that it becomes increasingly difficult these days to meet the new demands
that the business makes on the IT organization with regard to innovation of products and
services. Recently, Giarte observed with regard to this that innovation in practice often gets
stuck in replacement of written off infrastructure through the adoption of proven
technology. And especially now the business views the support of innovation at the
business side by capitalizing on new technologies and introduction of new service
concepts as one of the main objectives of the IT organization. A workstation migration from
Windows XP to the Vista platform is apparently of a different order than exploring and
successfully implementing a new distribution channel for online financial services based on
Web 2.0 technology. Not just the focus but also the success of innovation projects leaves
a lot to be desired: IDC research provides average success rates of only 50%.

From a business perspective, an IT organization that fails on innovation is not a new

phenomenon. Repeatable results of the internal innovation partner based on intended
elapsed time (time-to-market) and quality (time-to-value) have been on the agenda for
quite a while. Over the last few years, however, a series of solutions from establishing a
more process-oriented (ITIL, ASL) approach to adopting more transparent control
mechanisms (Cobit, Balanced Scorecard), to stronger access to the technology base of
providers (through early adopter programmes), has not given any solace in this field. In this
light, it is no wonder that businesses in the year 2008 increasingly express their
dissatisfaction with the contribution that the IT organization makes to the required
innovation effort. This dissatisfaction becomes tangible in a study carried out by Biznez
where innovation management comes forward as the lowest scoring responsibility of the IT
organization. An increasingly more often observed implication, especially in the run-up to
outsourcing trajectories, is that the business considers to bypass the IT organization, and
to place the burden for innovation with external partners. For some time now, external
service providers have been called in as suppliers of partial solutions, but over the last few
years, they are increasingly given integral responsibility as service integrators for the
business. The combination of a dissatisfied internal customer and the visible presence of
more than adequate external substitutes makes IT organizations becoming more and more
aware of the challenge of how to visibly improve its added value. In this field of tension,
improving innovation in a way that makes a difference to the business is of the highest
priority.

Only, where to start? Many of today’s IT organizations are set up to execute existing
operations as efficiently as possible, operations that often have been taken care of by the
organization for a long period. Improvement of operational tasks takes place in steps and
with the utmost care in order to avoid technological risks. Therefore, extensive test
procedures are in this case befitting. However, this method of working does not work well
in the domain of business-oriented innovation. When a new online service is developed, the
team that is involved wants to be able to make changes on a daily basis in order to refine
the service, preferably after regular consultation with (potential) customers. This demands
different test procedures. Differentiation of procedures and policies for supporting both the
existing operations as well as creating the flexibility for innovation activities beyond the
known competences are required. Uniform processes and procedures become seriously
restrictive as the internal customer does not just expect predictable output of the existing
IT services portfolio, but also requires a partner that supports technology-driven innovation
of products and services for end customers. The preferred innovation partner of the
business will have to make an enduring impression of its innovation power, which requires
a focussed and committed investment in the areas of strategy, process and sourcing.

—2—
 1. Innovation strategy
If the IT department really wishes to improve on supporting innovation initiatives, it will first
have to recognize that innovation strategies have different domains: The exploitation
domain where improvement is an ongoing process and where risks are avoided as a matter
of principle and the exploration domain, which has a more discontinuous character and
where risks are consciously sought out. Exploitation is synonymous with service lifecycle
management whereby the service provisioning is constantly worked on and improved,
without the customer’s experience and the service provision concept drastically changing.
The customer gets the service he expects, accustomed to an incrementally improving level
of quality. Exploration is about entrepreneurship, about lifting the added value of the
organization to another level and surpassing customer expectations. The IT organization
that recognizes the importance of this distinction also understands that these domains
each require their own policy and procedures.

Innovation domains

High

Front-end
Value chain
exploration
exploration
New service concept
Entirely new services
New pricing model
New functionality
New client interface

Degree of
innovation for
the business

Exploitation Back-end
exploration
Continuos service
improvement & adoption New architecture
of technology New service delivery
components system

Low

Low Degree of innovation for High

the IT organization'

When formulating the innovation strategy and establishing spearheads in the different
innovation domains, it is essential to match the required innovation space in the IT services
portfolio to the need for improvement and innovation as set by the business. In this
consideration, the dynamics of the market and maturity and life span of the business
portfolio are the main benchmarks.

—3—
 2. Innovation process
Innovation leaders view the transformation process of good ideas into valuable products
and services as a funnel, and they know that the entrance to that funnel has to be wide and
offer space for both business as well as supplier signals. They have also learned that the
constant supply of good and not so good ideas has to be processed as soon as possible if
they wish to use their staff’s brainpower effectively. In our experience, professionals
working for knowledge-intensive IT service providers are indeed natural innovators, as they
constantly seek to improve the service portfolio. The innovative IT organization utilizes this
positive quality, on the one hand by promoting the articulation of good ideas, while on the
other hand by being very clear on possibilities and expectations. Therefore, the innovation
process deserves a higher level of formalization without killing creativity. Solutions such as
an idea management process, incentives for innovative behaviour, different control
mechanisms and rules for different innovation domains, and a limited but transparent set
of decision-making criteria in the hands of a decisive innovation board contribute strongly
to an effective process.

3. Sourcing innovation
Decisive innovation also demands a clever innovation sourcing strategy in which the core
competencies of the IT organization (such as specific platform knowledge and insight in
the functional side of business processes) are complemented by the competencies of third
parties.
The entire innovation process offers opportunities for external sourcing, for example when
accessing market knowledge and new technology but also when executing projects. An
effective sourcing approach to sourcing for more explorative innovation is the partnership
model, where the IT organization acts as the main contractor for the business and manages
to challenge their partner into being more than just a provider and to share risks. ‘Smart
sourcing’ is also a matter of clever use of available in-house human resources.

The innovation funnel: transforming internal and external signals into valuable services

Signals Ideas Proposals Concepts in development Available services Delivered services

—4—
The mixture of required knowledge and motivations in the fuzzy entrance of the innovation
funnel, in which ideas and concepts are processed and tested, is different from the one
needed for the execution-oriented exit, where development, testing and project
management are important skills.

The right way of sourcing innovation is of course strongly related to innovation strategy. An
organization that is predominantly exploitation-oriented requires a different palette of
competences than a business that focuses on value chain exploration. Business logic
alone should dictate strategic priorities in the different innovation domains. The IT
organization that ignores this dogma and clings on to its historically acquired innovation
style and preferences is doomed to loose its status as innovation partner of choice. The IT
organization that has not only become competent in innovation, but is also driven by
business innovation opportunities, will not let this happen.

How innovative is your IT organization? A maturity model

1. Innovation-averse
· Innovation outside the comfort zone is preferably avoided, the disappointments are still
too tangible, or the taboos too strong
· The norm is cautious adoption of proven technology within a clear-cut service package
2. Innovation-conscious
· A number of chance successes have resulted in innovation looking a very attractive
proposition
· Willpower alone often proves to be insufficient for implementing innovation projects
within the expected time and quality
3. Innovation-competent
· Success in innovation projects has become largely achievable and repeatable
· The IT organization has gone through the growth process that enables it to be the
regular innovation partner of the business. External competition, however, is still lurking
4. Innovation-prone
· The IT organization constantly strives to increase its keenness in providing innovative
services. Innovation efforts expand in breadth as well as in depth
· Awareness of one’s own limitations in knowledge, skills and capacity result in a
preference to seek cooperation with external partners
5. Innovation-driven
· The collective awareness of the value, the challenge, but also of the ‘fun’ of realizing
distinguishing and business-oriented innovation based on IT is strongly developed
· The dividing lines between IT and business become faint, the IT innovation strategy is
the business strategy

Each organization hopes that their internal IT provider offers maximum support in
professional innovation. Internal partners are preferred over external ones but in case of
prolonged disappointments, they rightly look for outside alternatives. In that case,
outsourcing the IT function is the obvious choice. A decade of mixed experiences with
outsourcing teaches that in some cases the remedy is worse than the illness, especially
when no cadre organization remains capable of effective governance of demand and
supply flows. Therefore, outsourcing is an indirect solution to the problem of a faltering
innovation function. Direct investment in one’s innovation power is in most cases a more
effective and a more permanent solution. Innovation can be learned.

—5—
 About the authors
Joost Okken is practice leader innovation management for management consultancy firm
Quint Wellington Redwood. Han Gerrits is professor of E-business & IT Industry at the Vrije
Universiteit Amsterdam and CEO of Innovation Factory.

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