Collaboration  requires attitudes, strategies and structures that encourage and reward effective innovation. By the same token innovation requires a high degree of innovative collaboration.

Some recent posts from the Horses for Sources blog/website underscore this necessity by showing the difficulty of achieving innovation in the BPO world. Horses for Sources, which I referenced last month in a post about George Kimball’s Outsourcing Agreements: A Practical Guide and its message of “mutual success through collaboration,” is a multi-disciplinary group of analysts and experts specializing in Business Process Outsourcing, Industry Specific Process Outsourcing and IT Outsourcing. CEO Phil Fersht founded the Horse for Sources blog in 2007.

Last month his site began delving into BPO innovation in theory and practice. One view from a commenter said BPO innovation “is more of a must-have cliché that features prominently in corporate presentations and RFP prefaces rather than as a delivered reality which significantly impacts business performance.” That’s because “neither the client nor the service provider really wants it,” the commenter continued. The commenter’s point is that innovation is great so long as someone else is paying for it and so long as the gain is painless.

Fersht says that while this viewpoint represents many of the realities of today’s innovation issues, there’s new data that reflects an “increasing onus” on BPO leaders to find and deliver new, creative ways to find value. In that regard gainsharing is often cited as an innovative way to provide value, but as Fersht says, gainsharing “ain’t the cure it’s cracked up to be because: a. The gain is often difficult to identify and measure in terms of realized business value, or b. The outcome of the innovation often does not result in a tangible business gain.”

In Vested Outsourcing, I describe gainsharing as a concept that shares cost savings; typically it is based on productivity measures and on reduced service costs for a specified range of activities. The Vested Outsourcing approach is much broader and holistic than gainsharing alone because it incorporates not only the cost reduction concepts of gainsharing, but also revenue increases, benefits derived from service improvements, inventory reductions, process improvements, and so on.

As Fersht puts it the real-life implications of the three C’s of innovation: collaboration, co-investment and change management need to be fully understood. Failure to understand, implement and achieve innovation puts the BPO in “purgatory,” he says, because expectations are not met.

He continues: A survey of 588 shared services and outsourcing executives, studying the current achievements of innovation within BPO, “serves up a major dose of realism to the global sourcing industry: Buyers want it, but they are not working effectively with their providers to achieve it. And many buyers and providers are pointing the finger at each other.”

The survey, entitled “Are you Achieving Innovation in BPO?” was conducted last month by HfS Research in conjunction with the Shared Services and Outsourcing Network’s (SSON) network of senior finance and operations executives.

Innovation is becoming an important, even critical component for BPO, especially in a fragile, supposedly recovering and gun-shy economy adjusting to whatever new normal is out there.

The survey looked at 134 buyers with ‘significant influence’ over BPO decisions and found that 94 percent of them consider achieving innovation as critically (43 percent) or quite important (54 percent). But BPO buyers and BPO service providers “are equally disappointed with each others’ provision of resources and technology to meet their expectations of achieving innovation.” HfS found that 41 percent of service providers and 41 percent of BPO buyers are “somewhat disappointed” with the accomplishment of innovation expectations.

This translates into a “major concern for the future of BPO services.”

In the study, ‘innovation in BPO’ was defined as the “customer going beyond transactional/operational work to achieve new productivity gains and/or new revenue streams by implementing new practices through unique creative methods.”

Speaking of creative, innovative and beyond the transaction, Vested Outsourcing’s Five Rules stress that innovation requires the parties to work together to achieve mutually measurable and beneficial outcomes through collaborative planning, innovative goals and milestones over time, with service levels that are outcome and not transaction-based.

One key is that for innovation to take off, collaborative pricing and performance measurement models must mature. Rules 3 and 4 are especially pertinent here: Agree on clearly defined and measurable outcomes (Rule 3); and Optimize pricing model incentives for cost/service trade-offs (Rule 4).

Simply put, Vested Outsourcing pays companies to use their brains and technology rather than brawn (i.e., counting transactions or simply filling a seat more cheaply) to grow and innovate, as the economist Robert Solow tells us.

It’s not magic or alchemy: For innovation to occur there has to be a collaborative ecosystem that encourages innovation and then sets it in motion.

Technology and its continuous advances surround us, it’s embedded in our daily lives to a degree that even the most diehard science fiction fans could hardly have imagined even 20 years ago.

Today technology rules, but it wasn’t always that way.

More than 50 years ago Robert M. Solow, a professor at MIT, the next in my mini-series of the seminal economic thinkers that helped spur modern outsourcing, showed us that technology is the driving factor behind economic growth.

Solow’s growth model was first presented in a 1956 article, A Contribution to the Theory of Economic Growth. His premise was that without “technological progress” growth rates for capital, labor and total production would all remain about the same.

In fact, he found that about four-fifths of the growth in U.S. output per worker was attributable to technological progress. In other words, brains matter way more than brawn if you want to spur economic growth.

His work included a mathematical model which showed “technological change” would be the motor for economic growth over the long haul.  Solow’s growth model presented a framework that formed the basis of modern macroeconomic theory.  In fact, Solow won a Nobel Prize for his work in 1987 due to it’s significance.  In his precise and often aphoristic prize lecture, he said:  “Insiders are sometimes the slaves of silly ideas,” which to me is an early take on the value of thinking outside the box.  “You never know if you have gone as far as you can until you try to go further,” he continued.

For today’s outsourcing firms, the lesson I see is that most outsourcing agreements are transaction-based, meaning that a service provider gets paid for every activity – be it a rear-end in a seat to answer a call, two hands for packaging, or fingers for filing.   If economic growth is achieved from “technical change” then companies that outsource should focus their efforts around paying suppliers for their brainpower and not their brawn, or simply to perform an outsourced activity.  After all – if companies outsource because they believe that another company can do the work better, faster or cheaper – why are today’s deals so focused on simply doing activities?

I’m thinking specifically of Vested Outsourcing’s  Rule #1, which says we should should Focus on the What Not the How, and the next two, Rule #2, Focus on Outcomes and Rule #3, Agree on Clearly Defined  and Measurable Outcomes.

Those rules flow into directly into Vested Outsourcing’s basic mission and they address a big problem I describe in Ailment #2, The Outsourcing Paradox, where a company that decides to outsource can’t really let go and feels it has to define requirements and work scope so rigidly that the outsource provider ends up executing the same old inefficient, transaction-based processes.

That’s not progress, technological or economic.