Separate Innovation from Service

That new kind of contract is easier to imagine than write. "I was in one meeting where the vendor sat for what seemed like centuries trying to put an SLA around innovation, saying we'll provide X number of ideas per month, creating this really detailed governance process in place for how ideas get vetted," Morgan, Lewis's Hansen recalls. "It didn't work."

"The process that produces [the vendors'] 6 percent margins is well understood and providers are quite happy with it," says Trowbridge. "They don't have to think too much. They don't have to meet with the customer. If they have to show up and engage and innovate, that's risky."

Customers will have to break the cycle, and that begins with figuring out what they actually want from the vendor. "It's ultimately up to the buyer to define what is meant by innovation," says Gartner's Anderson. "If you can't define it, you can't expect it." IT leaders at Fluor attempted that with their IBM deal in 2003. "We tried to bake innovation into the contract, from a responsibility point of view," says Taylor. But the pricing remained inflexible and transaction-based so "it was very difficult to reconcile their invoices with what we thought was their contractual obligation to innovate", Taylor says. If he wanted IBM to do some R&D work or explore a new technology, there was no efficient way to fund it.

Fluor signed a new contract with IBM last year. "The lesson we learned was that we needed to put a more generic umbrella agreement in place for future innovation," says Taylor. "There are specific towers of service in the scope of work that are commoditized. But there is also a separate agreement that will enable IBM to provide innovation in all kinds of areas, like virtualization." The contract includes prenegotiated terms for future innovation around issues of indemnity, risk and intellectual property protection. "If we want to have IBM explore virtual desktops, there's already a fabric in place. We don't have to call the lawyers and go through a full negotiation each time," explains Taylor. "And it's separate from the rest of the outsourcing, so IBM doesn't need to get reimbursed through the fees we pay for the commodity activity." Now Fluor can increase and decrease services from IBM without penalty. "It's important not to lock yourself in because you don't get the benefit of innovations that present them selves every day," Taylor says.

Taylor hopes the fourth time's the charm. "We understand more about how IBM manages its business," says Taylor. "And they know more about us." That's a good start. "It's in a customer's best interest to understand all of the vendor's warts and what it takes for a vendor to succeed," says Morgan, Lewis's Hansen, "instead of thinking: 'Can we put one over on them?'"