Continuous improvement and innovation in services agreements – making it really work


It sounds like a great idea: continuous improvement and innovation are commonly included in outsourcing contracts, generally in two ways. First, ISG’s method for continuous annual improvement of service level performance has become the industry standard. We highly recommend this approach which has enjoyed nearly two decades of successful deployment.

The other way that continuous improvement and innovation are included is typically a clause in the Master Service Agreement that requires the service provider bring forward three to five ideas each year to improve services and technology or save money. Because these ideas may cause a reduction of the fee to the Service Provider, these clauses are normally supported by Gainshare clauses.  This means if there is significant reduction of the fees, then a structured program will allow the Service Provider to also reap some of the financial benefit for a period of time after the idea is implemented.

The challenge with continuous improvement and innovation in contracts is that the achievement of the objectives involves both the service provider and the client – it’s not a one-way street. Unfortunately, in the rush of daily service delivery, often neither party returns to the contract to recall that these promises were made, or to create a process through which they could be delivered. Most of the midlife engagements we see have such clauses in the agreements, which have never been executed – or even thought about by either party!

Continuous improvement and innovation are creative conditions; ideas do not simply materialize out of thin air in the course of service delivery. Every client situation is unique, and potential innovations must be proposed in the context of the situation. We recommend that clients create a specific focus on innovation in their governance process.  This requires that an innovation structure is created and time is set aside for both teams to think about potential ideas, review industry conditions, take input from the service provider’s experience in other engagements and best-practice think tanks, and come up with proposals that the leadership teams can evaluate.

Merely having an idea is not enough for the innovation process; there are technical feasibility studies to be done, contract review to ensure that the idea is really a new one and not contemplated already in the agreement, and the financial business case to support investment or validate gainsharing. The Innovation team will reach out to the Client’s Service Management & Governance team members for support – the Contract Manager, Finance Manager, and Service Delivery Managers, and often business stakeholders. Retained functions such as Architecture and Security teams may also be involved on both sides of the relationship. This innovation process creates buy-in across the two organizations which will have to represent the value of the idea to their respective leadership teams, making the likelihood of the idea’s implementation much greater.

Continuous improvement and innovation are a way of thinking that can only thrive in a well-governed relationship. Governance excellence is essential – and we find that clients who focus on structure and process in their relationships not only are able to realize the benefits of continuous improvement and innovation, but that other benefits also come along: friction between the two teams is dramatically reduced, problems get solved in an orderly way, and the management chain knows exactly what is going on in the services relationship. ISG has created a tool to help clients look at the continuous improvement of their own governance and management capability – our SM&G Maturity Assessment. This tool can be used to baseline a client organization’s shared and sourced services management capability, and repeated periodically over time to measure continuous improvement in this essential capability. A well-managed relationship is a happy, productive, and innovative relationship.

About the author

Cynthia brings 25 years of experience helping clients develop their sourcing governance and service management design. Having worked with more than 50 organizations to improve business management and service management processes in both single-provider and multi-provider environments, Cynthia has become a recognized expert in sourcing governance, vendor and contract management. She currently serves as the architect for ISG’s service methodology and global integrator of its products and services. Cynthia works to leverage ISG’s accumulated intellectual property resources to help enterprises create effective transformation and governance capability, and maintains a continuing role in the Strategy and Organizational Change Enablement practice.