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Firms struggle to manage their innovation ecosystems

A lack of governance and performance mechanisms is hindering firms from getting the most out of suppliers in their innovation ecosystems

Enterprises often turn to their strategic suppliers to gain a competitive edge, hoping to tap into innovations and experience that the vendors have gained through their work with customers.

However, a 2016 study found that only one in 10 firms was satisfied with the quality and impact of the innovation delivered by its strategic suppliers.

Indeed, innovation has become a complex inter-organisational activity that requires a firm to develop domain and architectural knowledge of its business while perfecting its ability to govern and interact with strategic partners.

Apart from these challenges, relying on expertise and technologies delivered by a small number of strategic, multi-service and large suppliers does not seem to be delivering desired results. As such, firms have been redesigning their innovation strategy and systems to address both intra- and inter-firm challenges.

One innovation strategy that firms have been considering recently is the formation of a vendor ecosystem. We define an ecosystem of vendors as a sourcing environment made up of multi-service and specialist vendors that, together, engage in innovation projects for a firm.

An ecosystem of vendors comprises large and small suppliers, some with generic offerings while others can be highly specialised around specific technologies. Together, they offer a range of capabilities and expertise to solve a business challenge, such as developing a new service.

Such an innovation model is challenging for both firms and vendors because it creates new engagement rules for all parties involved in the collaboration. For the firm, there are challenges in understanding what capabilities are critical to govern an ecosystem, as well as which capabilities reside in the market and how to tap them.

Companies also need to devise incentive and commercial models that make collaboration between external parties and internal units effective, while protecting intellectual property and critical capabilities that deliver competitive advantage.

For suppliers, challenges can be in the form of incentivisation, as numerous vendors are in play and so each one’s share is smaller, potentially depressing their enthusiasm to collaborate.

In joint study by Boston Consulting Group and the University of Auckland in early 2021, we conducted interviews with numerous IT executives in the US, Europe and Australia to investigate the state of their innovation ecosystem and the challenges they faced in achieving innovation via such arrangements. Here are our findings:

Access to specialised expertise

Firms are only now making the first step towards building innovation ecosystems with their suppliers. From our interviews, it is evident that firms see the value of working with a vendor ecosystem for the reasons stated above.

In particular, it is clear that access to specialised expertise has become key in driving future innovations. Firms are more than ever realising the benefits of working with small and specialised suppliers, while in some cases pairing large and multi-service vendors with specialist vendors to benefit from scale and unique expertise. 

And as solutions become more complex and cutting-edge, firms will choose to go direct to specialised vendors, rather than multi-service suppliers. This lets them better leverage the capabilities of the market and develop solutions that suit specific needs. It has resulted in firms developing new capabilities as an orchestrator of suppliers across their ecosystem.

However, as firms lack scouting capabilities for the specialist vendor market, learning about specialist suppliers and committing to innovation projects with them is a slow process. Some firms have also engaged external parties to look for expertise and solutions in the market.

Governance structure

The governance structure and system of innovation ecosystems is still emerging. Firms still debate key concepts in governance such as incentives and penalties, as well as applying different approaches to monitoring suppliers and establishing deeper partnerships.

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 results.

Last but not least, as ecosystems of suppliers often bring together numerous vendors to deliver a single solution, firms seem to lack the ability to apply joint performance indicators that reflect the joint effort and incentivise vendors to collaborate. Rewarding individual suppliers for their individual contributions might fall short of incentivising them to collaborate. This is another area that seems to be underdeveloped within firms.

Our study so far sheds light on the efforts firms have put into setting up innovation ecosystems. 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 an 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 ecosystems of vendors and consequently offer firms an applied governance framework to maximise the benefits from this innovation model.

Ilan Oshri is a professor of technology and globalisation at the University of Auckland Business School. Heiner Himmelreich, Hrishi Hrishikesh, Evelien Scherp and Anton Vlasic are from Boston Consulting Group.

Read more about IT supplier relationship management

Read more on IT supplier relationship management

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