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The client innovation challenge: Managing the vendor eco-system

To achieve a competitive edge, client firms have intensified their search for sources of innovation. Recent years have seen client firms trying to tap into their strategic vendors’ innovations with the hope to benefit from their vendors’ extensive knowledge and experience.

However, a recent report[1] indicated that only one in ten client firms has been satisfied with the quality and impact of the innovation delivered by their strategic vendors. Indeed, innovation has become an ever so complex inter-organizational activity requiring a client firm to develop domain and architectural knowledge of the business solution while perfecting their ability to govern and interact with their strategic partners. In addition to these challenges, relying on expertise and technologies delivered by a small number of strategic, multi-service and large vendors does not seem to be delivering desired results for client firms.

As a result, client firms have been redesigning their innovation strategy and system to address both intra- and inter-firm challenges. One innovation strategy that client firms have been considering recently is the formation of a vendors’ eco-system.

We define an eco-system of vendors as a sourcing environment made of multi-service and specialist vendors that together engage in innovation projects for the client firm. An eco-system of vendors is composed of large and small vendors, some with generic offering while others highly specialized around very specific technologies or solutions, that together offer a range of capabilities and expertise to be called on to solve an imperative business challenge, such as the development of a new service, for the client firm.

Such an innovation model is challenging for both client firms and vendors as it creates new engagement rules for the parties for collaboration. For the client firm, there are new challenges in the form of understanding what capabilities are critical for the governance of an eco-system as well as which capabilities reside in the market and how to tap into these capabilities. Client firms also need to devise incentive and commercial models that make the collaboration of external parties and internal units effective, while protecting client IP and critical capabilities that deliver competitive advantage.

For vendors, challenges can be in the form of incentivization, as numerous vendors are in play and hence the share of each vendor is smaller, thus potentially depressing their enthusiasm to collaborate.

In early 2021 we conducted interviews with numerous IT executives in Europe, USA, and Australia to investigate the state of their innovation eco-system and the challenges they faced in achieving innovation via such arrangements. We report below our findings:

 

  • Firms are only now making the first step towards setting up innovation eco-systems with their vendors. From these interviews, it has become evident that firms see the value in working with a vendor eco-system for the reasons stated above. In particular, it was evident that access to specialized expertise has become key in driving future innovations. Firms are more than ever realizing the benefits of working with small and specialized vendors, while in some cases pairing large and multi-service vendors with specialist vendors to benefit from both scale and unique expertise.
  • As solutions get more complex and cutting edge, firms are choosing to go direct to specialized vendors, rather than via multi-service vendors. This allows them to better leverage the capabilities of the market and develop solutions that suite their specific needs. It has resulted in clients developing new capabilities as an orchestrator of vendors across their eco-system.
  • Firms lack scouting capabilities for the specialist vendor market. As a result, learning about specialist vendors and committing to innovation projects with them is a slow process. Alternatively, some firms engaged an external party to scout the specialist vendor market in search for expertise and solutions. Indeed, as compared with firms’ ability to search for vendors for outsourcing engagement, a similar capability for innovation is currently underdeveloped.
  • The governance structure and system of innovation eco-systems is still emerging. Firms still debate key concepts in governance such as incentives and penalties as well as applying different approaches to monitoring vendors and establishing deeper partnerships, some on an individual and others as a collective of vendors. As governance is at the heart of managing and monitoring the process of innovation by multiple vendors, it is imperative that mechanisms applied are relevant for the nature of innovation and consequently effective in delivering desired results.
  • Last but not least, as eco-systems of vendors often bring together numerous vendors to deliver a single solution, firms seem to lack the ability to apply joint performance indicators that reflect on the joint effort and incentivize vendors to collaborate. Rewarding individual vendors for their individual contributions might fall short in incentivizing them to collaborate in eco-system platforms. This is another area of capabilities within the client firm that seems to be underdeveloped.

 

Our study so far sheds light on the efforts firms have put into setting up innovation eco-systems of vendors. While some advancement in understanding the concept and to a lesser degree implementing it as a model for innovation has been achieved, we highlight in this article the lack of governance and performance mechanisms that inhibit firms from benefiting from the full potential of such innovation model. In a follow up article later this year, we will report the results of a global survey on the governance and performance of innovation eco-systems of vendors and consequently offer firms an applied governance framework to maximize the benefits from this innovation model.

[1] [1] https://www.hellersearch.com/blog/unraveling-the-dna-of-strategic-it-vendor-partnerships

This article was produced by Ilan Oshri, Heiner Himmelreich, Hrishi Hrishikesh, Anton Vlasic and Evelien Scherp

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