Gail Farnsley knows in her gut that better online collaboration tools will help Cummins build better truck engines. But gut feelings don't deliver ROI, so this CIO hasn't been lobbying for a big budget to implement them.

	A double-decker highway takes shape on the road to the tech campuses of Bangalore's Electronic City Photo by Mahesh Bhat

Instead, she's talking with IT outsourcing partners in India, including IBM, Tata Consultancy Services, and its own IT joint venture, KPIT Cummins, about what they have going in this area. Do they have collaboration tools that they hope to sell to other companies, where Cummins could be a test site for little or no cost?

This is the next frontier for offshore outsourcing--innovation and new technologies. You say you can cut some costs shipping IT work to India? That's old news. Top-flight IT teams are using cost-cutting relationships they've built over the past few years to take the next step and tap outsourcers to make their companies run better. Call it innovation from outsourcing.

Easy to say, but make no mistake: It's extremely difficult, even for experienced outsourcing buyers, to get breakthrough ideas out of their IT service providers. "We're to blame as customers," says Ajit Naidu, a Merrill Lynch managing director in charge of technology for global equity markets and services, speaking at last month's Nasscom conference in Mumbai, India. "We don't give enough big-picture exposure. We do piecemeal projects. We don't provide enough understanding of the whole business problem."

But don't let the outsourcers off the hook, because they aren't delivering on the innovation front. In our survey of 430 IT pros who work with Indian IT service providers, just 10% cite "innovative ideas" as one of the most significant benefits that would prompt them to use such services again; 72% cite lower costs.

Indian outsourcers aren't built--culturally or structurally --to ooze innovation. Culturally, India's IT services business boomed by delivering what customers ask for, not by telling clients that there's a better way to do something. And structurally, with high turnover and a constant need to promote people, Indian IT companies' front-line staffers often don't have the business knowledge to push an innovation agenda.

Indian IT companies are taking some promising steps to deliver more innovation (see "Can India's Outsourcers Step Up?"), and just as important, buyers are starting to demand that. More companies are tying outsourcer pay to business goals (see "More Deals Tie Pay To Results"), and more are working on projects jointly.

"I'm seeing a lot more willingness from all my partners to invest together," says Farnsley, who after five years as Cummins' CIO is leaving this month to create an IT research institute at Purdue University. For example, if Cummins wants to put a new technology to use in its environment, and KPIT Cummins sees that technology as a growth business, they split the cost of training KPIT staff on it.

Cummins' internal IT staff is good at spotting problems and areas for improvement and "escalating" those to decision makers, Farnsley says. Cummins is now demanding more of that from its service providers. Farnsley put it to them this way: "One of your responsibilities is to make sure I'm not being stupid."

Remember all the hard knocks companies took when they raced to offshore IT work earlier this decade and saw the supposed savings shrivel because their people didn't have the skills to manage offshore projects? That only gets more difficult when the goal is innovation. Robert Willett, CIO of Best Buy and CEO of its international group, knows he and his team need to get better at accepting ideas from partners. "We're still struggling with that," Willett says. "We need to be more on receive than transmit."

Often the outsourcers get to know a process or technology better than any staffer, and improvements need to spring from those everyday interactions. "I can't pay anyone as a job to be innovative," Suren Gupta, CIO of Wells Fargo consumer lending, said at Nasscom.

Innovation from outsourcing may be the new Holy Grail, but it's still out of reach for most. Just 12% of customers of Indian IT service providers say their "delivering innovative ideas" has improved significantly in the last two years. And 31% say it has gotten significantly worse.

The evidence suggests that innovation from outsourcing is hard to do. Which means CIOs who get this right could give their companies a competitive advantage that's hard to match.

			What's Next For India Can India's Outsourcers Step Up? More Deals Tie Pay To Results Talent Challenged, Training Obsessed India's IT Looks Inward Outsourcing's Real Return Software Startups, Social Stigmas Image Galleries In India's Villages, A Morsel Of Broadband India-based IT Services Study Need to dive deeper? Download our "10 Lessons Learned About Outsourcing" report