I have been associated with the offshore space most of my career. I worked initially on the vendor side in delivery, account management and managing P&L for a region. I then moved into a US delivery organization initially to set up a global sourcing strategy and later on in to managing IT delivery using a mix of employee and third party.
I get a lot of questions on challenges faced by captives, JV's and dedicated development centers and thought this would be a good topic for this blog. This is based on my professional experience and research as well as interaction with colleagues in the industry. I have broken the topic into sections which I believe are core issues.
To keep things simple, when I refer to captives, I am generalizing the discussion of captives, dedicated (and owned) offshore development centers and joint ventures as they perform the same function, operate in the same way and have similar benefits and challenges. I have chosen to compare captives against the top players in the offshore industry. Captives are established by mid to large corporations and the alternative to setting up a captive is to work with a TCS, Cognizant, Infosys type organizations. In fact, as I explain below, captives often have to coexist and compete with these vendors.
Attracting Top Talent - The education system in India generates hundreds of thousands of engineers every year but the general feeling is that this is a case of quantity over quality. One only has to look at the schools the top industry players recruit at (by way of onsite campus events) and it is clear of where these companies believe they can find their top talents. Just to be clear - I am not talking about IIT's and IIM's but engineering schools. And companies like TCS, Cognizant, Infosys and Wipro hire anywhere between 10,000 to 50,000 fresh engineers every year so you bet they have perfected the process to make it efficient and worth their while. I do not mean to degrade or imply that the schools that are not able to attract these companies for campus recruitment are in some way inferior. But if companies want to find top talent - and in large numbers, they are likely to have better luck at some schools than others. There is intense competition to hire the top talent at each of these top rated schools between the big players itself, so it is reasonable to assume that a small company with a no name recognition would have a tough time competing with the biggies in attracting top talent from the top schools. You can still find good talent all over the country but it will take a lot more investment in time and money.
Training - You have to train new employees on process, methodology, standards, domain knowledge as well as update technology skills. Large organizations have dedicated infrastructure (e.g. Infosys's Mysore and TCS's Trivandrum facilities) that are in use pretty much all the time which makes the process efficient as well as cost effective. Smaller organizations cannot maintain dedicated infrastructure and have to pull out resources from other areas for training which impacts normal business.
Growth potential and Retention - Typical captives centers are built for a certain capacity and might take a few years to reach full capacity. However, it is extremely rare, in my experience that these centers continue to grow year after year after reaching steady state and this implies limited growth opportunities for the employees. (Almost) Every single software employee working in India is driven, ambitious, career oriented and looking to be a Project Manager in 4-5 years. This kind of career growth is simply not possible in a steady state captive which results in attrition. Employees who have reached their full productivity levels after 2-4 years are easy picking for competing organizations. This is frustrating for the management sitting in the western world - "It has taken us three years to get these employee to understand the domain - how can they just walk out like that"? Sooner or later this ends up increased compensation and other perks which don't really solve the problem but do alleviate the symptoms.
Costs - Captives, more often than not, follow the parent organizations policies. This would include swanky offices, business class travel, generous entertainment allowance, corporate events and more. I was surprised the first time I heard about a small captives team lunch at a 5 star restaurant but then realized this was the norm. However the biggest cost for the industry has always been labor and this is where the difference is remarkable particularly at senior levels where compensation levels are 2-4 times as much as what the top executives at the top players would make. The situation is even more extreme when organization depute executives from the west to manage these captives and provide top class accommodation and other benefits. The end result is that the per hour development cost of these captives turn out to be equal, if not higher, even though captives do not have sales and marketing costs!
Flexible workforce - It is difficult, if not impossible, for a captive to respond to short term requirements. If a project requires say 50 resources with a new skillset for building a new application, a captive cannot find their resources overnight and, more importantly, cannot release these resources after the project is completed. A larger organization can do this effectively. This limits the effectiveness of a captive to steady state efforts which generally turn out to maintenance and support work or where the long term technology strategy is very clear.
Captives v/s vendor competition - In most organization you will find situations where the captives are asked to compete with 3rd party vendors and this a great way to get a comparison and keep the captives in the game. However captives are cost centers and struggle to provide innovative pricing and upfront investment in emerging technologies not knowing if the projects will come through or not. More often than not, vendors invest a lot in onsite relationship building. As a result middle management decision makers on individual projects prefer to use vendors because of the relationships and track record. The use of captives, in spite of all good intention on part of the corporate organization, is seen as a forced directive and often considered a necessary evil.
Conclusion - Captives make sense when set up to protect IP, trade secrets or propriety knowledge. However the driving factor for the vast majority seems to reduce costs presumably driven by the high gross margins of the top players. The top players have economy of scale and control costs very closely. Although it is possible to replicate this model, it is certainly not easy. Organizations need to evaluate very carefully if these challenges can be overcome - and more importantly, if the effort involved in overcoming these challenges is really worth it.
Tuesday, August 20, 2013
Monday, June 3, 2013
Offshore Outsourcing at Worldspan
James O. Nelson
Director, Enterprise
Worldspan
Ephraim R. McLean
Regents’ Professor and Smith Eminent Scholar’s Chair in IS
Introduction
The outsourcing of computer applications and computer-based activities is not new. Having its roots in IBM’s Service Bureau Corporation (SBC) in the 1930s, the transfer of an internal process or activity to an outside third-party is nearly three-quarters of a century old. It was greatly expanded by Ross Perot and his company, EDS, under the label of “facilities management” in the 1970s. When Kathy Hudson transferred most of Kodak’s computer activities to IBM, DEC, and other companies in the late 1980s, the name given to this undertaking was “outsourcing,” the term that is used to this day.
Following the success of the Kodak outsourcing contract, a number of computing vendors and service providers entered the outsourcing field. However, most of these outsourcing contracts represented merely the transfer of existing corporate IT employees to the outsourcing company or “re-badging” them as it is sometimes called. Often these employees sat at the same desk and did the same work as before; only the source of their paycheck was different.
All of this changed in the mid-1990s, however, largely stimulated by the Y2K frenzy. Lured by the appeal of low-cost IT talent in India and elsewhere, outsourcing vendors began shifting their IT activities from the U.S. U.S.
Outsourcing, in particular offshoring, does not come without its challenges and complexities, such as commercial agreements, immigration, staffing turnover, productivity, and many other factors Companies are beginning to realize that there are indirect costs that must be taken into account. Salaries in India
All of these factors – both positive and negative – faced Worldspan in 2002 when corporate IT management began to explore ways whereby they could address the cost pressures they were facing.
The Company
Worldspan is a leading independent provider of computer services to the airline and travel industry. Its customers include Expedia, Orbitz, Priceline, and Delta Air Lines among others, with 1,860 employees and corporate revenues of $953 million in 2005.
Worldspan’s history dates back to the late 1960s with the development of two airline-sponsored computerized reservation systems (CRS): DATAS II at Delta Air Lines in 1968 and PARS at TWA in 1971. Initially, these two CRSs were for internal use only; but in 1976 TWA began installing PARS in travel agencies, followed by Delta with DATAS II in 1982. In 1986, Northwest Airlines purchased 50 percent of PARS; and in 1990, Delta, Northwest, and TWA agreed to combine DATAS II and PARS to form Worldspan, with headquarters in Atlanta , Georgia Atlanta
The company currently serves nearly 20,000 travel agencies in over 70 countries worldwide; and last year its computers handled 87.2 billion transactions, with an average of 39.6 million unique reservations on the system at any one time. Its peak processing rate is 5,628 messages per second and it has 119 terabytes of online disk storage. Because computer services are the business at Worldspan rather than supporting the business, the importance of providing accurate, reliable service to its customers is paramount. In addition to providing airline systems, reservations, ticketing, and office automation services to domestic and international travel agencies, Worldspan operates the booking engine for over 50 percent of all Internet-based travel-agency bookings in the world.
Why Outsourcing?
In early 2002, Worldspan, like many companies, was experiencing substantial cost pressures; and they began to explore the possibility of outsourcing some of their software development activities. In particular, offshore outsourcing looked especially attractive to them. Moreover, they soon realized that there are other potential benefits beyond just cost savings. In particular, they anticipated achieving three major benefits through offshore outsourcing, all of which they have now realized:
- Acquiring a lower-cost, and yet highly skilled, professional workforce,
- Achieving “process uplift,” or improving the capabilities of the in-house professional staff by drawing on the expertise of the outsourcing vendors, and
- Gaining staffing flexibility, enabling the ramping up – and down – of the workforce in response to market conditions.
Although lower costs were the initial rationale for offshoring, Worldspan quickly realized they were acquiring the services of highly skilled computer professionals, in many instances equal to the skills of their existing workforce (although not always as experienced), all working for well established and respected vendors in India
This led to what Worldspan calls process uplift, or the ability to take advantage of the experience and skills of their vendors to improve the internal operations at Worldspan. One example of this is CMMi certification from the Software Engineering Institute (SEI). Worldspan is currently attempting to achieve CMMi certification for their own organization; and they have contracted with one of their vendor partners, who is at CMMi Level Five, to assist them in this effort. This vendor is an authorized CMMi Assessment and Certification Company and they recently concluded a “gap analysis” of Worldspan’s internal development processes to help them move from Level One to Level Two this fall.
Also, as is true of many organizations, Worldspan, prior to outsourcing, was somewhat insular in their internal processes; they had no basis of comparing their in-house development processes to those of other companies. Outsourcing allowed them to observe the processes of their vendors; and, in certain instances, they found ways to improve they own processes. This cooperation on the part of the vendors to assist with this process uplift is so important to Worldspan that they have it written into the Master Services Agreements with each of their vendors.
An example of one such internal improvement is in “billable hours.” The work of each staff professional is divided into billable hours produced – productive work charged to a specific project – and infrastructure – training, vacations, and other non-billable work. This ratio is a key indicator of the in-house staff productivity. With the opportunity to observe the work patterns of their outsource vendors, Worldspan was able to adopt some of their “best practices” and improve their own internal productivity, thereby increasing the billable hours they could deliver without the need to increase the size of their staff. Before outsourcing, Worldspan was averaging 1,650 billable hours per employee per year. With the assistance of their vendor partners, this was increased to 1,780 hours per year – an increase of 7.9 percent.
Lastly, staffing flexibility is essential, given the extreme economic swings that are occurring in the airline industry which comprises Worldspan’s main business. The ability to expand, or shrink, the size of the vendors’ staff that are committed to Worldspan’s projects, while keeping their internal workforce constant, has proved to be extremely advantageous. The flexibility that this provides would alone justify the outsourcing arrangements that they have undertaken.
A Multi-Vendor Strategy
Initially, Worldspan undertook a small project with IBM in India
This multi-vendor strategy has a number of aspects that have proved to be highly beneficial to Worldspan. They are as follows:
- Not placing all the eggs in one basket,
- A broader pool of resources upon which to draw,
- The natural competition that occurs among the vendors,
- The ability to obtain best-of-breed solutions,
- Built-in benchmarking, allowing comparisons among vendors,
- Through Master Service Agreements, projects can be multi-sourced among vendors, and
- With multiple vendors, a “near”shore/offshore strategy can be pursued.
Invariably, problems will arise in any client-vendor relationship; but if there is only one vendor, the client has few options when such problems occur. With multiple vendors, however, if one vendor falters, the work can be shifted to one of the other vendors. An example of the benefits of this multi-vendor strategy occurred in 2004 when the function of Passenger Name Record (PNR) Migration was outsourced to one of Worldspan’s offshore partners. PNR migration involves the capture and movement of passenger-name records from one system to another and occurs when a travel agency, upon the expiration of a contract, moves its passenger-name records from one development center to another. This occurs quite often and so Worldspan has historically maintained an in-house staff to handle these travel-agency PNR migrations.
When the decision was made to outsourced this activity, the skill sets of each of Worldspan’s outsourcing partners were evaluated and a contract was let to the firm that appeared to have the necessary analysis and programming skills. However, it soon became apparent that, although they had the technical skills, they did not have the specific development tools and, more importantly, the domain knowledge concerning PNR migration; and it would take too long for them to come up to speed with this requisite knowledge. This delay was unacceptable because it severely affected Worldspan’s ability to attract new business, since PNR migration is an important part of travel-agency conversions.
In spite of attempts on the part of the vendor to catch up, the delays made it imperative for Worldspan to move to another vendor. Luckily, one of their other outsourcing partners was already doing some PNR migration work for another company and therefore had both the technical skills and the domain knowledge to begin the work immediately. As an aside, it should be noted that PNR migration work, although an essential component of servicing travel agencies, is not a source of competitive advantage; it is more of a commodity service and thus the fact that the perspective vendor was doing this work for a competitor was not a source of concern.
Worldspan asked this vendor for a bid on the work and received one that it was competitively priced, similar to the contract that was in place with the first vendor. Because of a non-performance clause in this first contract, there were no costs in canceling it and so Worldspan gave a contract to their other vendor partner. The transfer of work was accomplished with a minimum of delay; with a corresponding minimal impact on Worldspan’s customers. As a side effect, the offending vendor’s performance on its other projects for Worldspan improved markedly. Had they not had these well-established vendor relations, Worldspan would have been forced to bring the project in-house, resulting in considerable disruptions.
This illustrates the benefit of having a healthy competition among vendors and the value of benchmarking their performance in the awarding of new and follow-on projects. In order to ensure such competition among vendors, the Master Service Agreements are also written in such a way as to allow multi-sourcing of individual projects among two or more vendors, further increasing Worldspan’s flexibility in project management.
Most vendors, especially the larger ones, will claim that they have all the resources that are needed for any project. In reality, some companies are better at some things than others and their skill sets reflect this expertise. By using multiple vendors, Worldspan has been able to tap into these specialized skills, drawing on a broader pool of resources. For instance, as discussed above, Worldspan entered into a contract with InterGlobe Technologies in order to tap its special expertise with airline reservation systems.
Nearshoring
The last item in the list above introduces a concept that Worldspan has found quite valuable to them, that of “near”shoring. As discussed above, the first decision that companies must make is whether or not to outsource at all; and, if so, how much and will it be onsite – re-badging – or offsite? If it is to be offsite, will it be onshore or offshore? This has typically been the choice pattern. In the case of Worldspan, they currently split their work as follows:
Onsite
· Technical leaders,
· Business analysts,
· System design, and
· Project management.
Offsite
· Application development,
· Testing,
· Maintenance,
· Technical support, and
· Business process support.
In making this division of labor, Worldspan reviewed their internal development methodology, or Framework as they call it, to determine where in the systems development life cycle it would be most appropriate to consider outsourcing. They felt that they must keep the business analysts and application designers close to the business and product strategy organizations in order to capture the requirements close to the source. As long as the in-house analysts and designers do a superior job of defining and capturing the requirements, then Worldspan feels that they can more readily move the subsequent application development activity offsite, whether to another Worldspan location or to a third-party vendor.
Worldspan has maintained remote development centers in both Kansas City and Ft. Lauderdale
application development, testing, and maintenance are attractive candidates for transfer to an offsite location. By using virtual classrooms, VoIP, and instant messaging to connect to remote locations, the coordinating problems are minimized. Each site is integrated into Worldspan’s communication system so a development manager across the country or across the globe appears to be as close as across the hall. Five-digit fast dialing is available to all those locations with which Worldspan does business.
Worldspan’s clerical and order-fulfillment work, what they call Business Process Support, is an ideal candidate for outsourcing. It tends to be repetitive and follows set procedures which are well documented.
So, once the decision was made as to what should be outsourced, the next step was the decision to go offshore to India India Montevideo , Uruguay
- Business hours are similar to those in
- A follow-the-sun development cycle,
- Geographical diversification,
- Reduced costs through a better staffing mix, and
- Fewer immigration and visa processing problems.
Having a development center in Uruguay in a similar time zone as Worldspan’s headquarters in Atlanta offers a distinct advantage over their outsource vendors in India, which are ten hours out of phase with Atlanta. On the other hand, this allows a follow-the-sun development cycle, where TCS in Chennai, India, can work on a project during the day; pass it onto their center in Montevideo, Uruguay, where they work on it during their day; and then they pass it back to Chennai, to start another day – effectively creating a ”round-the-clock” development cycle.
Geographical diversification provides protection against possible disruptions that might occur at a location, and also allows for the creation of special staffing expertise at a particular site. Lastly, because of the lighter demand on the U.S. Consular Service in Uruguay for visas and permits to work in the U.S. – as compared to the huge demand for them in India, often causing delays of months or even years – these documents can be obtained in a relatively short period of time, adding to the attractiveness of Uruguay for the movement of staff to and from Uruguay and the United States
Risk Mitigation
Another aspect of Worldspan’s outsourcing strategy is its attention to risk mitigation (see the table below). Two key aspects of this risk mitigation strategy are governance and measurement. Worldspan has created a Global Resource Office (GRO) charged with overseeing the entire outsourcing program. The GRO is a small centralized group that directly manages the Master Service Agreements and the draft Statements of Work, oversees security at the global development centers, and administers the Service Level Agreements that are in place with each of their vendors. This GRO produces the metrics, benchmarks, time management reports, dashboards, and so forth that are central to Worldspan’s staying on top of their outsourcing relationships. The following metrics are produced by the GRO on a regular basis:
- Performance against budget and against plan
- Average hourly billing rate, combining in-house and outsourced rates
- In-house versus outsourced ratios
- Staffing and skill levels by FTE
- Total hours delivered by outsource vendors
- Vendor hours delivered by category, for both productive and non-productive work
- Vendor productivity rates
- Staff augmentation versus fixed-price expenses
These measurements and resulting reports are reviewed weekly with the vendor representatives. Many of these metrics are integral parts of the Service Level Agreements and thus directly measure the performance of the vendors. In addition, the vendors conduct monthly project reviews with the Worldspan department heads that are sponsoring the work in order to review the performance and challenges from the prior month. From these weekly vendor reviews, to the detailed monthly project reviews, Worldspan is able to take timely corrective actions in order to ensure improved quality and the overall performance of the outsourcing activities.
Risk Mitigation Strategies
| |
7X24 development
|
·Share work among existing GDC around
the world
·Establish some services nearshore
|
Productivity enhancements
|
·Use comprehensive metrics in the
Statements of Work (SOW)
·Have senior-level project leaders onsite
·Shift time-and-material contracts to fixed-
price contracts
|
Cultural Integration
|
·Promote Indian-American cultural
awareness and sensitivity
·Conduct subject-matter-expert (SME)
training onsite at GDCs
|
Billing and Invoicing
|
·Have vendors enter their time directly into
the Worldspan reporting system
·Approve these time reports weekly
·Reconcile these time reports against
vendor invoices monthly
|
Knowledge Acquisition
|
·Introduce a technical “Knowledge Portal”
for the sharing of information
·Establish benchmarks for vendors for
acceptable levels of turnover
|
Security
|
·List all vendor personnel in the corporate
directory
·Have dedicated secure-entry GDCs
|
Some of these risk mitigation strategies, such as 7X24 development, have already been discussed above, as have some of the efforts that have been undertaken to improve productivity. Having senior-level project leaders onsite has been particularly helpful in accomplishing Worldspan’s process uplift initiatives, as has been the establishment of the technical “Knowledge Portal” for the sharing of best practices.
The cultural issues, sometimes troublesome in some offshore outsourcing arrangements, have been faced head-on, with personnel from both sides visiting their opposite numbers, eating their food, partaking in their festivals and events, and thereby developing an awareness and sensitivity of each other’s cultures,
Another issue, often the subject of disagreement, is service billing. Worldspan has addressed this by having all of their vendors post their time reports directly into Worldspan’s system, where they are approved on a weekly basis and reconciled with invoices on a monthly basis.
One risk factor that all companies doing business with Indian outsourcing firms face is turnover. Given the rapidly escalating demand for services and the limited supply of qualified professionals in India
On governance, Worldspan has gone to great lengths, with the assistance of an outside law firm that specializes in outsourcing contracts, to craft detailed Master Service Agreements, Statements of Work, and Service Level Agreements with each their vendors. By having such agreements in place, with deliverables, timely responses, and staff augmentations clearly spelled out, the areas of dispute have been greatly reduced.
Another related effort in governance is the move from time-and-material costing to fixed-price contracts. The first step in this is staff augmentation, where the vendor “augments” the Worldspan staff by doing application development and testing on systems designed by Worldspan. While easier to implement, staff augmentation places a significant oversight burden on Worldspan’s management. The next step is out-tasking, where a much larger percentage of the work is tasked to the vendor, from detailed design through to the delivery schedule, including TQM, training, and project management. Worldspan’s focus today is in shifting its staff augmentation work to the second step of out-tasking. The final step on the road to totally fixed-priced contracts is what Worldspan calls portfolio. This approach bundles multiple activities into an agreement for not just application development, but also for additional services, including maintenance and production support, into a more holistic product life cycle plan, thus vastly simplifying the governance issue.
Lessons Learned
Worldspan has identified a number of factors that have contributed to its outsourcing success; although it is still a “work in progress,” and they are still learning. Many of these critical success factors have already been discussed above; they are summarized here.
Multi-vendor strategy. The decision early in their outsourcing efforts to pursue a multi-vendor strategy has been a key success factor for Worldspan. For the many reasons outlined above, this has reduced their risk exposure, leveraged the natural competition among their outsourcing vendors, and provided a much broader talent base than any one firm could have provided
Process uplift. By being open to new ideas and tapping the expertise of their vendor partners, Worldspan has been able to learn from them and improve their own internal staff productivity.
Governance. Through the creation of the Global Resource Office, Worldspan has a central, but adaptive, sourcing office. This office, coupled with the senior-level project leaders who are onsite, the frequent visits to vendor sites around the world, and the constant monitoring and fine-tuning of the relationships, has allowed Worldspan to exercise careful control over its outsourcing activities.
Measurement. It goes without saying that none of the above would be possible to manage and maintain without comprehensive measurements. Fourteen major reports for management are produced on an on-line basis, backed up by more detailed reports for technical managers.
Culture, mutual respect, and trust. “Partnership” is probably an over-used and mis-used word, but it aptly describes the relationships that Worldspan has built with its vendor partners. This cultural understanding and trust goes a long way in easing the many differences that naturally arise.
Legal guidance. When Worldspan began negotiating their first outsourcing contract, they were quite inexperienced and thereby at a distinct disadvantage in dealing with the outsourcing vendor, that had considerable experience in such negotiations. Worldspan therefore retained the services of a law firm that had extensive experience in outsourcing contracts, and this proved invaluable. However, they made sure that the resultant contract was business-driven, not driven by the lawyers.
Top-level support. Although last, this factor is by far the most important of all these listed Executive support at the “C” level was crucial, especially in the beginning, where it was clear that costs would climb before the savings would kick in. Also, the formation of an executive steering committee helped clear the way for the road blocks that inevitably occur.
The Results
Worldspan began its offshore outsourcing in 2002, with the first major contract let in 2004; thus they have less than two years of experience. Yet, according to Ron Richards, Worldspan’s Corporate Director of Internal Auditing, measurable gains have already begun to be realized. Using Worldspan’s internal productivity metric of “billable hours produced,” the combined output of the in-house staff and their outsourcing partners has improved by 7.9% in the last year.
Using 2003 as a baseline, Worldspan's application development staff budget has decreased by more than 20% as a result of its outsourcing program. In 2003, total staff costs, both in-house and outsourced, were $93.4 million. In 2004, these costs were $84.2 million; in 2005 they were $82.6 million; and this year they are projected to be $71.3 million, for a cumulative savings of $22.1 million. These figures include the non-staff expenses related to outsourcing of $45K for hardware and software, $147K for networks and telecommunications, and $182K for travel expenses.
As reported by Kim Nancarrow, the Director of Financial Planning and Analysis, these savings represent employee-related cost improvements that are continuing into 2006 and beyond. But equally important to the cost savings are the improvements in Worldspan’s internal development processes, further enhancing its dominant position in the travel industry.
Tuesday, May 28, 2013
A Discussion on Innovative Thinking
Why innovation?
Innovation has been getting a lot of attention at my company and others over the past few years. Why?
The huge successes achieved by innovative companies.
Note: Apple’s market capitalization has exceeded 600 Billion dollars.
It’s cheaper than acquisition.
Note: Consider the “total” cost HP has incurred in the acquisition of EDS, Compaq,Mercury, and the other companies.
It stimulates “organic” grow in existing and new markets.
Note: Organic growth is the best kind of growth. It’s unbridled and won’t tarnish brands like direct competition can.
Note: Anyone own an iPod? Anyone own a Zune? I rest my case.
Note: Companies that enter markets with a disruptive technology can leap-frog the competition because they are not saddled with an installed customer base on legacy systems that they have to support while attempting to compete with new entrants. How has Kodak faired in the digital market? Do you think they were challenged by having to maintain all those chemical plants and paper mills for the film processing business, while say Nikon didn’t have the same challenges. What about trying to compete with ITA in next generation technology while maintaining three legacy core systems?
[Probably would be good to introduce the “five forces” of market completion and the affect it has on innovation.]
Invention vs. Innovation
Is an invention by itself innovative? If not, then when does an invention become innovative?
In the book “Innovate the Future” by David Groslin, the author indicates innovation happens when a product or service is used and accepted by the consumer base and has been deemed to add some form or real, positive, and transformative value.
The key here is transformative value and to the extent that an invention changes your life style or the way you do business determines if it becomes innovative; otherwise, it falls into the category of a solution in search of a problem.
Innovations should not only cause your customers or employees to think smarter, but work smarter. Because in the end, no one gets paid to think!
I like to use the example of a cork screw. You know the metal screw with the fixed wooden handle. They are functional, but not always practical. It works, but it can be awkward when used by a novice. Do you want to use one of those next to a table in a restaurant with white linens and customers? Ever try to carry one of those around in your pocket or apron? This is a product that was ripe for innovation and below are some examples.
Hypodermic needle with CO2 gas
Pros: It works. It is impressive. It doesn’t leave cork residue.
Cons: What do you do when you run out of CO2?
The Rabbit
Pros: It definitely works. It’s a cool piece of engineering.
Cons: Where do you store it? Can you toss it into the kitchen drawer? I have one…somewhere.
Leatherman Juice
Pros: It’s a multi-functional tool with pliers, screwdriver, blade, and cork screw. What a great idea.
Cons: You’ve got to be stuck on a deserted island before you will use it, and then you end up using the knife blade to cut the cork out.
Folding pocket cork screw
Pros: It works…always. You can toss it in a drawer or carry it in your pocket. It doesn’t run out of gas.
Cons: None
Which of the above is an example of an innovation? Why?
Can you think of other inventions that were not innovative?
There’s probably a good chance you cannot name one, unless you were the inventor, because after all these products were never generally accepted.
Essentially, most innovation falls within one of three categories: Product, Processes, and Business Models.
Product This is the category to which most consumers are familiar. Product innovation involves introducing new products or enhancements to existing products, but also innovation around the Three P’s, which are Pricing, Placement, and Promotion.
Canon imaging technology comes to my mind. They knew their future was in processing digital images, so they developed a core technology that could be adapted to printers, scanners, cameras, etc. Now their business model is built on delivering derivative products based on the core technology.
Process This category is about innovation around internal processes by which companies develop and or deliver goods and services. It could be as broad as modifications to supply chain management or specific as invoice filing. These are changes introduced to the way companies do business that make the company more efficient, cuts costs, and ultimately improve their competitive position. These types of innovation are important to commodity base businesses that compete on a very slim margin. If you are in the food distribution business, do you think your customers would find value in getting perishable goods to them a day earlier? How about 2 days? Organization and reporting improvements can also become innovative.
Wal-mart is the category killer in their market for one simple reason; they are the kings of supply chain management. They are a commodity based business that competes on price alone. What do they say in their advertisements? “Prices are falling” They leverage IT systems for real-time management of distribution and operations.
Business
Model According to Wikipedia, a business model describes the rationale of how an organization creates, delivers, and captures value (Osterwalder, Pigneur, & Smith, 2010) . Thomas Friedman has written several books describing how in his terms the world is flat. What he’s really saying is that prior boundaries are being torn down that allow business and markets to expand in previously unimagined locations and speed. New opportunities require new innovative business models. The 50 year old Standard Industry Classification (SIC) was replaced in 1997 by the new North American Industry Classification System (NAICS) and doubled the recognized industry classifications from 10 to 20 (Kim & Mauborgne, 2004) . In the mid-90’s we saw monumental shifts in the classification in not just businesses but entire industries. We’re not talking evolution here. This happened because of the industries that sprung up around new business models that didn’t exist 5 and 10 years previously. It is said that the majority of business innovation is happening around business models.
These three categories also track very nicely to the three disciplines introduced in the book, “The Disciplines of Market Leaders” (Treacy & Wiersema, 1997) . In this book the authors make the case that to be a market leader, businesses must focus their core competencies in one of three categories:
- Product Leadership
- Operational Excellence
- Customer Intimacy
Wal-Mart clearly understands its discipline is operational excellence. People who go into a Wal-Mart are not expecting leading edge products or intimate customer service, just well stocked shelves at discounted prices.
Innovation Examples
Can you list examples in each of these categories?
Product
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Process
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Bus. Model
|
FedEx TechConnect
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Home Depot
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*straddles two categories
Where would you put the following companies? Ask yourself…did their product or service exist before?
General Electric, SalesForce.com, Starbucks, Southwest, Pandora
Facebook: Does anyone know what Facebook’s product is? How about their business model?
What role does technology play in these innovations? What are some of the enabling technologies?
Internet, SaaS, SAP, microprocessor
Innovation Timing
To better understand the “necessity” for innovation and the timing, you must first understand consumer behavior and the adoption model they follow. Can anyone describe the Product Adoption model?
It’s depicted as a bell curve because it is intended to represent all consumption relative to a product or service in the form of incremental users over time.
A. Innovators
B. Early adopters
C. Early majority
D. Late majority
E. Laggards
What happens to a product at the onset of D?
· Incremental new customers starts to decline
· High margins disappear
· Competition intensifies
· It starts to commoditize
How do businesses compete on commodities? Price!
From a timing perspective, what do businesses or even markets do to protect their products from commoditization?
But when?
Not when ‘D’ starts because it’s too late. It’s at the onset of the prior phase ‘C’ just when things are getting good. To do this they have to knowingly give up profits and channel their resources to the new initiatives, which require discipline and forward thinking. Companies that base their products on ‘platforms’ will always have an advantage in this scenario. Remember Canon?
Incremental
Some product innovation is only intended to tweak a product relative to the competition. Companies may choose an “incremental” innovation whereby they introduce slight adjustments to a product to better position it against a competing product. An example of incremental innovation is the iPhone 4s. Some products may be released early to gain 1st adopter advantages and then follow with incremental innovation. This is very common with software applications. Many products follow a “good enough” product launch to get a footprint in the market, which is then followed by incremental innovation to keep the product current.
Disruptive
According to Groslin, disruptive technologies provide significant transformative value. Disruptive technologies tend to be game changers and leave the competition in their wake. Most often they are delivered by new market entrants and the introducing company quickly becomes the dominate player in the market. It is not uncommon for a new company to be founded on a single disruptive innovation, e.g., Google.
Think of the recorded music industry:
Vinyl -> Tape -> Digital
How many companies made the transition? How many new industries were born?
In the HBR case study, “Blue Ocean Strategy” (Kim and Mauborgne, 2004) the authors introduce the concept of Red Ocean vs. Blue Ocean. To what do you think the Red Ocean is a metaphor?
It means shallow water filled with sharks. It’s bloody, or in other words, there is fierce competition.
To what do you think the Blue Ocean is a metaphor?
Uncharted depths
According to the author which ocean is better suited for innovation?
Blue Ocean because it’s intended to imply uncontested markets where competition is irrelevant. Demand is created rather than fought over.
A blue ocean is created from within a red ocean when a company alters the boundary of an existing industry. By altering the boundary it implies the market is moved away from the shallow water and out into the deep blue sea.
Think about Cirque du Soleil. What did they create? Did they create anything new? Not really. They took components of shallow water industries, e.g., circus, acrobats, theater, and concerts, which all existed before and then bolted them together to create a new product. At the same time they altered the boundaries of each of these industries and pushed their solution out into the blue ocean where there was little to no competition.
Did they create new demand? Have you been to Las Vegas lately?
What type growth happens in a Blue Ocean? Organic, meaning those people who go to a Cirque performance may not have been to a circus performance since their children were young and now they are being enticed to return. The unique thing about Cirque is customers tend to be repeat customers and it’s not unlikely for them to bring new customers along. Would this happen in a Red Ocean?
HBR Case Study: TripAdvisor
Of the three strategic initiative underway at TripAdvisor in the case study (China expansion, develop vacation rental, and enter the flight search market), which one is ripe for innovation?
Think Blue Ocean – vacation rental
Why?
1. Alter existing boundaries
2. Create organic growth and new demand
Your Company
What are your company’s Red Oceans?
What are your company’s adjoining oceans?
Where are airlines innovating? (international Wi-Fi, lay flat seats, merchandising)
Where is your company vulnerable to disruptive technologies?
In what innovation category (product, process, business model) should your company focus?
Of the five forces of competition, which ones make the GDS industry attractive? Unattractive?
Works Cited
Groslin, D. (2010). Innovate for the Future: A Radical New Approach to IT Innovation. Prentice Hall.
Kim, W. C., & Mauborgne, R. (2004). Blue Ocean Strategy. Harvard Business Review, 4.
Osterwalder, A., Pigneur, Y., & Smith, A. (2010). Business Model. Retrieved May 2013, from Wikipedia: http://en.wikipedia.org/wiki/Business_model
Treacy, M., & Wiersema, F. (1997). The Discipline of Market Leaders: Choose Your Customers, Narrow Your Focus, Dominate Your Market.
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