1 INNOVATION OUTSOURCING AMIT KAPOOR MBA – Class of 2007 WHAT? WHY? HOW?

2 Agenda WHAT is innovation outsourcing WHY is it necessary – a buyer and supplier perspective HOW can it be made possible, given the challenges HOW WHAT WHY

3 Process categorisation HOW WHAT WHY Auxiliary process High maturity process Low maturity process Core process Strategic Key operational High-potential (Innovative) Support Importance to current business Importance to future business LOW Adapted from: Ward & Daniel, Benefits Management, John Wiley & Sons HIGH LOW O u t s o u r c i n g l i f e c y c l e Outsourcing innovative processes is the most challenging proposition & needs to be well-thought

4 Evaluating the need for innovation outsourcing HOW WHAT WHY The onus of making innovation outsourcing happen lies with the supplier Access to new knowledge and technology. Insulation from risk of failure Deliver increased business value Market maturity in IT outsourcing. Buyer inclination to grow value Buyer Needs Supplier Needs VERY IMPORTANT IMPORTANT VERY IMPORTANT URGENT VERY URGENT URGENT

5 Challenges in innovation outsourcing HOW WHAT WHY Outsourcing innovative processes is the most challenging proposition & needs to be well-thought Supplier capability and credibility Account Manager GoalsLack of capability Contracting terms not favourable Supplier margins shrinking Supplier’s lack of incentive Buyer’s difficulty in contract termination Buyer’s risk of sharing innovation strategy with supplier Potential of information misuse IPR issues Buyer’s risk of transferring responsibility Supplier’s risk of negative news exaggeration Outsourcing - a whipping boy Possibility of Domino effect Overhead caused by flawless delivery pressure Any innovation sourcing model must mitigate these challenges while addressing buyer & supplier needs.

6 CAPABILITY – Build capability HOW WHAT WHY Partnership needs investment INNOVATION GROUP Innovation experts Sales support professionals Domain experts Diversity Cross-functionality Creativity Innovation audit Hidden needs analysis Idea generation Product roadmaps TEAM PROFILETEAM ATTRIBUTES TEAM ACTIVITIES Example: IBM

7 CREDIBILITY – Develop credibility HOW WHAT WHY Academic attestation & assistance provides the quickest route to gaining credibility for suppliers. AT SUPPLIER’S END AT BUYER’S END Develop academic partnership To develop competencies within its own innovation group. To conduct supervised initial innovation workshops with customers. To keep the supplier abreast of latest management thinking on innovation, given that it is an evolving subject. Example: Cranfield Centre for innovative products and services. Span boundaries higher up within buyer organisation Create incentives for account managers to focus on acquiring higher end innovation work. Prepare existing accounts for innovation outsourcing service offering.

8 CONTRACTS – Innovate contracts HOW WHAT WHY Contract innovation will lead to lowering customer apprehensions about outsourcing innovation. WHAT’S OUT WHAT’S IN Transactional / Tactical partnering Fixed-bid and T&M contracts IPR ambiguity Post-contractual future profit split ambiguity Strategic partnering Shared risk contracts IPR shared 50/50 between buyer and supplier. Post-contract termination date for profit split

9 Implementation timelines HOW WHAT WHY The innovation sourcing model proposed is viable Q1Q2Q3Q4 Hire innovation group members Preparation Phase Rollout of service offering Develop competencies in innovation group Conduct innovation workshops with existing clients with academic support Work on innovation sourcing contracting terms Q5 Self-sustained growth Identify academic partner Prepare existing clients for new service offering through account manager Carry out service improvement based on initial client feedback Source new clients Build innovation sourcing knowledge base Conduct innovation workshops independent of academic support

10 Thank you HOW WHAT WHY Question Time

11 HOW WHAT WHY Backup slides

12 Auxiliary process High maturity process Low maturity process Core process Strategic Key operational High-potential (Innovative) Support Importance to current business Importance to future business LOW Adapted from: Ward & Daniel, Benefits Management, John Wiley & Sons HIGH LOW FIGURE 1 – Process Categorisation Outsourcing lifecycle

13 Source: “Business value creation through IT” (Accenture 2003); Gartner 2001 IT Spending and staffing survey FIGURE 2 – Spending smarter AB % 83% 70% Operating existing IT 60% Operating existing IT 40% Dedicated to value creating IT 30% Dedicated to value creating IT LaggingLeadingLaggingLeading 100% Global industry average

14 FIGURE 3 – The product lifecycle curve applied to outsourcing

15 FIGURE x – Application Development and Maintenance market

16 FIGURE 4 – Average Deal size in the first quarters

17 Adapted from: Everest Research Institute, Bernstein research FIGURE 5 – Buyer’s value in a typical outsourcing deal Grow Volume Grow volume Continue growing volume Grow value of the relationship Point of divergence Outsourcing ratio Optimal Outsourcing ratio Value Supplier’s goal Buyer’s goal Buyer’s value from labour arbitrage

18 FIGURE 6 – Innovation effects on Smirnoff’s product lifecycle Units sold Years Adapted from: Diageo Annual Reports

19 FIGURE 7 – Pro-outsourcing vs. Anti-outsourcing articles Source: Deloitte Research Report (Calling a change in the outsourcing market)

20 Source: IBM Innovation for Collaboration presentation, 2007

21 FIGURE 8 – Summary

22 FIGURE 8 – Innovation sourcing roadmap for suppliers ACTIVITY CHART ON TIMESCALE Q1Q2Q3Q4 Hire innovation group members Preparation Phase Rollout of service offering Develop competencies in innovation group Conduct innovation workshops with existing clients with academic support Work on innovation sourcing contracting terms Q5 Self-sustained growth Identify academic partner Prepare existing clients for new service offering through account manager Carry out service improvement based on initial client feedback Source new clients Build innovation sourcing knowledge base Conduct innovation workshops independent of academic support