As a recent cover story in BusinessWeek pointed out (The World’s Most Innovative Companies, April 24, 2006), innovation has become the topic di giorno in corporations (di giorno as opposed to du jour since the story was reported from a global confab taking place in Rome). And when it comes to outsourcing, innovation has almost reached the status of the Holy Grail — something everyone is looking for, even if they’re not sure they’d recognize it, if they found it.

Of course, the notion of “outsourcing innovation” is not new. My good friend James Brian Quinn in his summer 2000 Sloan Management Review article by that very same name put it quite succinctly when he wrote, “No one company acting alone can out-innovate all its competitors, potential competitors, suppliers and external knowledge sources.” In fact, Quinn argued that outsourcing was one of the most powerful management tools available for fostering innovation. Why? Because, it’s at the very point of intersection between the client and provider’s domain expertise that the most fertile ground for new ideas exists. Think of it as two great, but differently trained, minds collaborating to see problems and their solutions in new, otherwise unimaginable ways.

However, most organizations on either side of the outsourcing business relationship tend to approach outsourcing in a more limited and commoditized way. So, how do you go from a commodity mindset to an innovation mindset? Here are three ideas:

Define innovation in realistic terms. At the 2006 Outsourcing World Summit in February, Frank Cocuzza, Chief Financial Officer at Penske Truck Leasing, talked about how his relationship with Genpact was helping to remove defects, eliminate non value added process steps and improve productivity. “To me,” he said, “innovation can be found in the elimination of one defect or one step in a process.” As the business maxim goes, what you measure you achieve and you can’t measure what you haven’t defined. So, putting a clear definition on innovation as Cocuzza has is a key first step.

Recognize that innovation comes in different shapes and sizes. There is more than one type of innovation but we tend to think of innovation in only product terms. The growing use of outsourcing in the Research and Development (R&D) areas of companies in industries like consumer electronics and pharmaceuticals is an obvious example of this. Nokia has dramatically increased its outsourced R&D budget in the past few years to not only rein in costs, but to better tap outside sources of innovation and to re-direct its internal resources toward areas most likely to differentiate its products in its markets. But, we tend to overlook the opportunities for outsourcing innovation that can come from process and business model innovation. Procter & Gamble’s use of outsourcing within its global shared-services organization is a great example of using outsourcing to achieve process innovation. And Dell’s redefinition through outsourcing of the personal computer industry’s business model is legendary. So keep in mind that innovation can come in many shapes and sizes.

Create incentives and reward singles, not just home runs. Making service providers part of your organization’s innovation pool and rewarding them for their contributions, may pay handsome dividends. One company that I know of has an “innovation bank” that its suppliers are encouraged to continuously contribute to with ideas both big and small.

Companies reward these types of contributions from their own employees; why not reward them from your outsourcing partners, as well? Gainsharing — where financial benefits are split in some predetermined methodology — is one way to reward this. So is including an objective measure of “innovation contribution” in your company’s provider scoring system for future work. Companies have also created joint ventures with their providers to commercialize innovations. Other approaches exist.

As Penske’s Cocuzza said, “All of this is usually the result of some really great thinking.” In the end, outsourcing innovation means encouraging and recognizing really great thinking and making it an important part of the outsourcing business relationship.