This article was published on September 14, 2013

Why outsourcing innovation is going to be big for the tech industry and beyond

Why outsourcing innovation is going to be big for the tech industry and beyond
Paul Jozefak
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Paul Jozefak

Paul Jozefak is co-founder and managing director of innovation laboratory Liquid Labs. Paul Jozefak is co-founder and managing director of innovation laboratory Liquid Labs.

Paul Jozefak, co-founder and managing director of innovation laboratory Liquid Labs, argues that outsourcing innovation will become a mainstream business practice and a key driver of growth, specifically in the tech sector. While he clearly has a business interest in companies outsourcing their innovation, we feel it’s an argument worth noting.

Innovation within large corporations is often slow and ineffective. Corporate bureaucracy creates inertia, stifles creativity and instills a fear of failure in employees. Management of this process is usually driven by short-term goals and influenced by internal politics.

In contrast, most startups are not burdened by these problems and are characterised by their speed and innovation. The question business leaders should consider is how to capture the startup spirit and drive their innovation. One solution is to outsource innovation, not subjecting it to potentially stifling pressures such as hitting quarterly targets.

Outsourcing can either be via a specialist external group, such as Liquid Labs, or a separate division within the same company, such as cloud-based email provider SendGrid’s innovation division SendGrid Labs. This division is run separately from the revenue generating part of the business and its remit is to identify developer problems and build solutions to them.

Why would you outsource innovation?

There are a number of instances when outsourcing innovation is a viable and attractive option. For example, say company ‘X’, a finance company, is rapidly losing market share to competitors who are gaining an edge by providing  automated services via mobile phone apps . Unfortunately, X has no experience in developing this type of technology or any understanding of what other options are available.

X could spend months recruiting specialists to develop a product which matches it competitors. These new recruits will undoubtedly spend their first few weeks learning the internal process and politics of the company. When they do put together a proposal for a new product, the internal bureaucracy at X will kick in. It may be several more months before this product reaches the development stage and it will most likely not be in the form originally envisaged by its designers.

In the meantime, X’s competitors have either improved their product or launched a new service.

An alternative for X is to go to a specialist company. X can ask an innovation lab to quickly find a solution which does not just match its competitors, but gives it an edge. The very nature of an outsourced innovation process lends itself to speed. It is not constrained by the ‘corporate process’ of slideshows and steering group meetings.

An innovation laboratory focuses on building and testing, retargeting budget as necessary and scaling the team as appropriate, all without time-consuming board or committee approval. This limited hierarchy also frees up staff to think creatively and eschews the fear of failure that inhibits large companies.

From a purely practical point of view, outsourcing the process of innovation is usually the most cost-effective option. Innovating in-house is an expensive process with capacity and time consumed prodigiously. Hiring and keeping top talent is an incredibly hard task and can drive up costs further.

A growing trend?

Given the wide-ranging advantages outsourcing innovation offers, it is not hard to see why it is set to become a mainstream business practice. Large corporations will either outsource to specialist companies or form separate subsidiaries. Budgets for innovation will no longer be treated as a line-item forgotten as research and development but will be considered as a separate, strategic investment in the long-term vision of the business.

The tech industry is likely to be the first sector to fully embrace outsourced innovation as the process lends itself very well to software development.

Older industry sectors, such as banking and insurance, will take longer to adapt, but when it does happen, it is likely to happen to a far greater extent. This is because while most tech companies are geared towards innovation, banks and insurers are often distracted by a myriad of other business interests, putting innovation on the back burner. When the benefits of outsourcing innovation become apparent to these businesses, they will hopefully embrace it wholeheartedly.

Over the next few years outsourcing innovation may become as common and as intuitive in certain industries as outsourcing communication, manufacturing or accountancy. The mixture of financial and practical benefits, coupled with economic pressure and disruptive technology, makes outsourcing innovation a compelling new option for businesses.

Image credit: Thinkstock

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