Innovation Outsourcing: What Does it Mean?

Innovation outsourcing, or open innovation, is having someone from outside the company or an external source propose an existing or new solution. It is a strategy that helps transfer the entire or some part of the innovation process to an external team. The outsourcing tasks can include idea generation for a new product, developing a strategy to convert the ideas into reality, or launching the products or services into the market.

The core crux behind outsourcing the innovation is to focus on one’s strengths while delegating the non-core activities to other specialists. It will allow you to avoid wasting your precious resources or time managing innovation while reaping its value.

While in most outsourcing models, the primary goal is cost reduction, innovation outsourcing differs. It is about looking at new ideas for sustainable product development while ensuring their fruition. As a result, innovation outsourcing allows you to achieve long-term success while providing a competitive advantage.

What are the Benefits of Innovation Outsourcing?

There are many significant organisations globally that have successfully outsourced innovation. But many still have the question of what benefits innovation outsourcing can provide. Therefore, assessing the potential benefits of innovation outsourcing before planning is critical.

Reducing Cost & Risk

Innovation is a complicated process with higher chances of failure than success. On average, the failure rate for innovation is 80-90%. The percentage refers to the new ideas or improvements that do not reap the expected results for various reasons, including lack of vision, failure in adaption, or others. Thus, outsourcing innovation helps in lowering the risk as it minimizes the risk of failure your business can experience.

Similarly, it also helps reduce the cost compared to innovating in-house. You can spend money developing potentially inadequate products when a proven model exists elsewhere.

Time to Market

Outsourcing the innovation is also faster as compared to innovating in-house. The overall process is more immediate, including idea generation, development, and market release. Moreover, this is because you do not have to worry about hiring or development. The chosen vendor will be fully equipped to help you with all the necessary solutions. They will have the right experience and thus utilize their time to optimize the results.

Experts in Field

Another significant advantage of outsourcing innovation is getting specialists who will significantly impact the final product, customer satisfaction, and overall success. Though you might have the business knowledge, it will not be apt for the needed innovation. Partnerships with these specialists will help get the best solutions from these experts during the creation and execution.

Competitive Advantage

Outsourcing innovation helps you in becoming more competitive. It helps make your business stand up against more extensive and profitable companies. Innovation is necessary to take your business to the next level. But for smaller companies, and especially for start-ups managing expensive resources along with cost and time can take much work. Thus, outsourcing innovation will allow your team to focus on the area they specialize in while ensuring you get the best consistency and quality in all the departments.

Flexibility and Scalability

Strategizing your outsourcing helps you quickly and easily scale up your external team in both directions as the project progresses. It helps you with better flexibility when hiring while minimizing the associated risk and cost.

Take Advantage of Mature Processes

Outsourcing innovation lets you focus on getting mature processes and technology from external service providers who have perfected them with time. You can get them and enjoy the benefits without much experimentation. It helps you save money while reducing the effort of starting everything from scratch.

How to Start with A Successful Innovation Outsourcing Program

It is ok not to know how to make outsourcing innovation work and where to start. However, below are some things you must remember while creating your innovation outsourcing program.

Ensure to Define the Goals of The Program Early

The first step that you should follow is understanding the business problem that you have at hand. Next, you should devise a tool to help you solve the problem and set a budget. When starting, defining the program’s goals is critical to clarify what you want to achieve from the outsourcing program. It will also help your external teams to plan their strategy accordingly so that the program can meet the larger goal.

Determine Things You Want to Outsource

The next critical decision you must make is what part of the overall innovation process you want to outsource and what you want to keep with your team. Again, you should assess the strength and weaknesses of your team while making this decision, along with other factors like culture, bandwidth, and business objectives.

Setting realistic expectations from the partnership on what you are willing to achieve is also critical. It will help ensure everyone is on the same page from the start. It would be best to have a transparent understanding of your organization's innovation strategy and how outsourcing the innovation will help you meet the business goals.

Choose the Right Partner

The key to the success or failure of your outsourcing project will lie with your partner. You should note that not all partners are the same, so it is essential for you to conduct your research to find the right partner who will meet your requirements. For example, one vendor might have technical expertise, while another might have professional expertise. So depending on your priority and requirement, you should choose the one more suitable for your project.

While evaluating the potential partners check the industry experience, past clients, case studies, and their services. You should also connect with their account managers to assess their knowledge and if they can provide you with the expected service.

While the task might feel overwhelming, you should take your time to research, compare various providers, and have multiple rounds of discussions with the shortlisted vendors. Choosing a company that will provide you with the right expertise and makes an excellent cultural fit will give you the best result.

Setup a Comprehensive SLA

After finding the right external partner, it is time for you to create a service-level agreement with them. It should enlist the complete details of the overall project along with the scope, goals, timeline, milestones, and deliverables. Again, having an SLA helps ensure everything is handled professionally within a predefined scope. It should also have termination clauses, payment terms, and change orders.

Create a Governance Model

It can be challenging to set up a governance model that will be suitable for both you and your partner, but it is crucial. The governance model shall consist of the R&R of all the parties involved, decision-making, various communication channels, and others. With this, you can ensure no conflicts or misunderstandings between you and the partner as the project progresses.

Check For References & Certifications

While starting with the innovation project, you should look for vendors’ references from case studies of their previous projects. Moreover, you should also check the certifications that they possess when it comes to product quality and data security.

Keep a Close Eye on the Project

As the project starts, you shouldn’t think your work is done; you can sit and relax. However, you must keep a close eye on the project so that it progresses as per the plan. Ensure you are in regular touch with the partners and continue providing feedback as the project progresses.

Define KPIs to Track Results

While the project is in progress or completed, you must take time to define the KPIs that will help you track and measure the results. It will help you determine if the project was successful and if any areas need to be improved. Moreover, it will show you whether you should keep working with the same partner for your future business projects.

Essential Things to Keep in Mind While Outsourcing Innovation

Below are some tips you should remember to reap the maximum benefits of innovation outsourcing.

Please take steps to protect your IP

When you are outsourcing innovation, including idea generation, know-how, strategy, and other intellectual property, it is essential that you prioritize the IP rights. You should discuss this topic during the initial discussions with your service providers and have it mentioned in the contracts as things progress.

Plan an Overall Onboarding Program

Having a proper onboarding plan to ensure that every new team will be up to speed immediately can be critical. Ensure that you add the technical issues like the requirements, goals, and overall roadmap, along with the human aspect of things that will be helpful to the new members.

Establish a healthy relationship with the partner team

While most people focus on the technical or the business aspects, they often ignore the people aspect. Therefore, nurturing a healthy relationship with the outsourced team members is critical. Trust, communication, and setting well-defined goals can be vital to the project’s success.

Planning time is vital

Proper planning is an essential step to take seriously for the best benefits from outsourced innovation. It plays a critical role in the overall operations while helping define the goals, targets, and other KPIs and metrics. In addition, creating a draft requirement will help in effective collaboration and communication with all the stakeholders.

Plan the Knowledge Transfer

Your internal and external teams should connect regularly while exchanging ideas and learning from one another. For that, you should create proper channels for collaboration and communication. Moreover, it would be best to nurture a culture of openly sharing ideas while promoting active and continuous learning.

Innovation Outsourcing: Major Risks

Though the risks are lower in number, they are difficult to determine. Below are some of the significant risks or challenges of innovation outsourcing.

• Possibility of Failure:

While it is true that outsourcing innovation results in reducing the risk your company will be taking, it will only sometimes bring success. Innovation outsourcing has a high failure rate, and most of the ideas fail, but what is critical is learning from them and using them in future projects.

• Broken Strategy & Communication:

One understated risk of innovation outsourcing is strategy and communication. These are critical aspects of an efficient relationship between your and external teams. Therefore, it is essential to have an adaptable and flexible strategy and an effective communication plan for the best results.

• Data Security:

Outsourcing processes or development work that require you to share your data with third parties enhances the risk of breaches or loss.

• Imitability:

When outsourcing, the third party can always create a similar product or tool for your competitors. Thus, it is critical to have the IP rights adequately defined.

Innovation Outsourcing: Major Risks

Though the risks are lower in number, they are difficult to determine. Below are some of the significant risks or challenges of innovation outsourcing.

1 . Pharmaceutical companies use them to make data collection faster.

2 . Automobile companies use outsourcing innovation to bring new demand-based products.

3 . Medical organizations use it to get specialist experience.

Some influential organizations that have used outsourcing innovation effectively are as follows.

• Whatsapp outsourced the app development to experienced developers while the in-house tea focused on administration and customer service.

• Slack used renowned PR agencies and design firms to improve their platform’s appearance.

• Cisco Systems also used innovation outsourcing to drive innovation, increase profit, and reduce risks.

Final Thoughts

The benefits of innovation outsourcing outweigh the risks. Moreover, not outsourcing your innovation is a potential risk in itself. Though in-house innovation is not wrong, innovation outsourcing can offer you a competitive edge that is too large to be ignored. Moreover, the approach will eventually benefit the marketplace and your customers, which is impossible through traditional innovation methods.