Everyone wants to innovate but where does the money come from?

The 'service and innovation' model can help customers and service providers strike a mutually beneficial relationship

All organisations need to innovate if they are to survive and prosper. The relative urgency of this requirement depends very much on the sector and the organisation's place within it. Firms that are customer-facing or rooted heavily in technology, and organisations that are threatened by disruptive startups - and indeed those startups themselves - will need to invest more in innovation than others.

There are different types of innovation too. There's the business-as-usual incremental type which should yield reasonably predictable returns on investment, and then there's radical innovation - taking an educated punt on something new in response to a novel threat or opportunity. Investing in AI would be an example. As fast-moving technology increasingly shapes our world, more organisations need to be able to make radical changes to stay ahead.

In a recent survey of 300 IT and finance decision makers in EMEA, commissioned by service provider Rimini Street, a full 90 per cent were of the opinion that their organisation should be spending more on innovation than it currently does, with 74 per cent of those believing this priority to be extremely or very important.

Which is all well and good, but where does the money come from? Innovation may not be all about technology, but the two are closely connected - meaning that cuts are likely in other areas of IT areas if R&D is bumped up the list.

Radical innovation may include investing in automation

Behind much of the push for increased spending on innovation is the need for firms to be more reactive to market changes and customer expectations - a.k.a. digital transformation - and to increase productivity. With all eyes on the front-end, any cuts will inevitably take place at the back.

The expectation among those surveyed was that spending on innovation would increase by around 10 per cent rather than the the 14 per cent they believed to be necessary. Which sounds like wishful thinking. IT budgets tend to increase by around 3 or 4 per cent on average after all, and existing systems need to be supported and refreshed.

Low-hanging fruit, mostly eaten

No-one likes spending money on ‘keeping the lights on' however essential supporting legacy systems might be. However, reducing the cost of enterprise IT has been a focus for 30 years, ever since outsourcing arrived on the scene, and much of the low-hanging fruit has been picked. There's only so much sweat that can be wrung out of existing assets, and, and incumbent suppliers brought in to take some of the weight may now be part of the problem. Inertia tends to suit them just fine.

At a round table event organised by Rimini Street, Professor Ilan Oshri of the University of Aukland Business School ran through his report How to Avoid Innovation Paralysis. He argued that flexibility should be a feature of technology R&D budgets given the rising need for radical innovation.

"Firms that keep resource allocation unchanged year after year are more likely to struggle to meet their strategic roles through innovation," Oshri said. "Therefore, seeking flexibility in allocating resources for innovation is in the firm's interest as strategic goals change in line with market and technological change."

To enable this flexibility changes will be required in the way existing infrastructure is supported. Possible solutions include extracting more value from IT, moving to cloud, cutting staff and renegotiating support contracts with existing suppliers. These are uncontroversial strategies and that may be expected to gain the approval of the CFO.

Where the CIO reports to the CFO radical innovation is a rarity

By contrast, those CIOs pushing for investment in AI or automation as a way of saving money may be in for a tougher time. Executives who hold the purse strings are wary of new technologies, Oshri pointed out, adding that in organisations where the CIO reports to the CFO radical innovation is a rarity.

The service and innovation model

This push-pull between steadying the ship and moving in a new direction is not a new problem, of course, but it is one that comes to the forefront when market or social conditions are changing.

As one way forward Oshri suggested a twist on the old business process outsourcing model, in which enterprise IT vendors with expertise in the newer technologies take on some of the radical innovation on behalf of their clients but in a collaborative way, in effect giving the consultancy side away for free in exchange for gaining detailed domain expertise. The ‘service and innovation' model sees firms incorporating innovation into the providers' contract.

"As part of contracting out software assets to a vendor the client firm should seek to create conditions for the parties to collaborate on both incremental and radical innovations," Oshri said.

However, he notes, not all vendors will be willing to take on such a commitment fearing that any failure might damage the existing relationship. Innovation means risk, and rewards are frequently hard to quantify. Suppliers will also be wary of their clients milking them for free consultancy with no intention of moving to a new relationship. These worries can be mitigated by agreeing on clear goals for innovation - be they cost savings or decreased time to market - and sharing the financial commitment.

As an example, Oshri mentioned IBM Watson Health's arrangement with Novartis which saw a mutual exchange of expertise in developing a cancer treatment.

We need to change our mindset from transactional service provision to partnership

"We need to change our mindset from transactional service provision to partnership," he said. "It's not just about providing technology, it's about thinking of your business challenges, thinking about the next wave of technologies, how do they fit into your roadmap. Not a lot of service providers are actually investing in that because they're focused on their margins. But those providers that are willing to invest in their customers are moving towards this service and innovation model."

If the supplier is unwilling to help a firm innovate then it may be time to look to another vendor; if that is not possible contracts can be revisited and a third-party provider engaged to take on those areas where value can be added. Considerable cost savings may be realised that can be invested in further innovation, Oshri suggested.