Outsourcing Innovation

1. Outsourcing Innovation The New Engine of Growth Management Analysis Summer 2001

2. Innovate or Die “No one company, acting alone, can hope to out-innovate every competitor, potential competitor, supplier, or external knowledge source around the world.” James Brian Quinn Sloan Management Review, June 2000

3. Outsource Innovation • Be Strategic • Use the most current technologies and management techniques • Lower innovation costs and risks 60-90% • Decrease cycle times • Leverage impact of internal innovations

4. Thinking About Outsourcing • Pharmaceutical Industry • Hundreds of small, technologically sophisticated firms have entered field as potential suppliers of innovation • Radically changes opportunities for outsourcing • Dramatic restructuring of the entire industry • Large Services Industries • Dependent on innovations in software • Manufacturing Industries • Dependent on innovations in embedded electronics

5. High Profile Example • Cisco Systems • Couldn’t keep up with manufacturing and human resource demands of 100% growth rate • Established long-term relationships with a few manufacturers and opened its systems, processes and networks to them for joint equipment development • 30 vendors and service providers are part of Cisco Hosting Applications Initiative (CHAI) to develop new technology and optimize performance in hosted applications

6. The Time Is Right • Demand is doubling every 14-16 years • Creating new specialist markets that are large enough to attract innovation • Supply of scientists, technologists and knowledge workers has skyrocketed • Software based analytical, modeling, communications, and market-feedback technologies have lowered costs and risks – allow smaller firms to participate in emerging markets

7. The Time Is Right • Ability of technologies to interact/work together has grown exponentially • Biotech, computer, chemistry, environmental and food fields • Emergence of new incentives for entrepreneurs to develop and exploit advances in knowledge • Lower tax rates, privatization, relaxation of trade barriers, decreasing capital investment requirements • New management techniques, software and communication systems make coordination much more effective

8. Benefits of Outsourcing Innovation • Greater knowledge and innovative depth • Access to the most up-to-date systems • Highest quality at lowest cost • Maximum flexibility • No front-end investment

9. Outsourcing the Technology Chain • Basic Research • Early-Stage Research • Advanced Development

10. Outsourcing Business Processes • Outsource entire business processes or process-design activities that are not core competencies • Functional services • Advertising • Maintenance • Auditing • Major systems • Logistics • Worldwide accounting • Energy supplies • Real estate operations • Software systems development and operation

11. Outsourcing Business Processes • Internal sources as dominant innovators • Depth of expertise • Software • Investment support • Variety of customer contacts • Companies that use only internal sources of innovation • Cut off from continuing streams of innovations • Cut off from opportunity to switch rapidly if new value added services appear

12. Outsourcing New-Product Introductions • Outsource key phases of new product introduction • Speeds process • Lowers costs • Amplifies impact • Provides instant feedback about customer preferences • Reduce reverse-risk of becoming obsolete • High percentage of all innovation occurs at the interface between innovative suppliers and customers

13. Outsourcing New-Product Introductions • Auto companies • Modularizing designs and accessories • Reducing response cycle times to 4-5 days • Creating partnerships with dealers and Internet operators like Autobytel and CarsDirect.com • Rapidly collect and analyze consumer preferences • Modify prices and product offerings in response to customer needs

14. Managing Outsourced Innovation • Attempting to build permanent marketing or production dominance is futile • Should build • High level technical skill sets • Well-designed platform for innovation • Market scanning, sensing and responsiveness capabilities • Should drop outmoded core competencies • Learn from each opportunity and be able to spot new opportunities for outsourcing

15. Managing Outsourced Innovation • Commitment to exciting goals • Making sure your partners benefit • Creating internal masters of the process • Developing open, interactive software models • Establishing audacious goals – figures of merit • Concentrating on what needs to be accomplished, not on how to get there

16. Managing Outsourced Innovation • Using software to coordinate the players • Sharing gains from surpassing targets • Three-point system of information exchange and project execution • Incentive systems and open, compatible information

17. Commitment to Exciting Goals • Inspire internal and external people to work together • Investigate partners’ record on innovation before signing contracts • Attitudes towards innovation • Treatment of innovative champions • Reward structures for innovation • Make sure goals or purposes are aligned • Shared platform of ethical principles and/or culture • Provide strong sense that each partner has the right to operate independently

18. Make Sure Your Partners Benefit • Be able to assess market opportunities in ways that supplier-innovators can not duplicate • Focus on genuine core competencies • Develop other strong competencies that protect the core or are demanded by customers • Define how value is created for customers • Provide bargaining leverage with suppliers • Serve as strategic barrier to suppliers or competitors who may try to enter same markets • Outsource the activities at which you cannot become “best-in-world” • Outsource to a best-in-world supplier

19. Create Internal Masters of the Process • Use Outsourcing Process Masters • Individuals (and small groups) who are inquisitive, gregarious, and possess excellent specialist skills • Become company knowledge centers • Identify and transfer best-in-class internal innovations to rest of company • Find, benchmark, and track best-in-world external capabilities • Provide objective checks against internal pressures to continue outmoded practices • Biggest obstacle to adopting innovative ideas internally – rewarding implementation through traditional or modified performance measures

20. Develop Open, Interactive Software Models • Well-developed, open, interactive software models are at the core of most rapid innovation today • Provide constantly updated, accessible, visual and dimensional view of systems and performance requirements • Provide software hooks and defined interfaces that allow external designers to innovate independently • Almost all new services are developed and tested collaboratively with customers through shared screens • Three-shift, around the clock R&D decreases cycle times, lowers development costs and risks, allows coordinating company to tap into the best minds • Software is responsible for most of the increased speed and precision of today’s innovation processes

21. Establish Audacious Goals • Adopt figures of merit • Define what winning performance really demands • Specify technical-economic performance levels that are feasible, but sufficiently high to shift customers from one provider to another • Exciting performance targets that induce innovators to rethink existing approaches and come up with something genuinely new • Provide focus, cohesion and energizing goals for small, flexible, decentralized, self-coordinating internal or external innovation groups

22. Concentrate On What Needs To Be Accomplished • Identify the most talented people and internalize figures of merit • Then the innovation process can be decentralized and outsourced to any level • Attempting to manage suppliers rigorously is futile • Norm for success is outsourcing innovation • Continuous interactive tests and feedback about subsystem and system performance • Software systems based on customer inputs or interactive design software • Help innovative suppliers understand customer issues • Lower the risk of creating a new product or process that will fail • Assist clients in understanding and preparing for innovation • Transfer knowledge smoothly to customers • Provide customers necessary comfort level to ensure product use

23. Use Software to Coordinate the Players • Software forces a common language, measurement system, and set of rules • Improves human communication • Captures and preserves knowledge with precision, detail and transferability • Offer opportunities for joint reviews between outsourcers and clients • Allows joint design collaboration among diverse and independent entities that are physically dispersed and serve no single authority • Coordinates progress and results with exceptional precision and speed • Allows specific, instantaneous, disciplined interactions, undiluted by personal, linguistic or interpretive biases

24. Share Gains From Surpassing Targets • Outsourcer and suppliers working together can yield exponential gains in knowledge • Partners should agree on specific performance targets that are • Fair • Few in number • Easy to understand • Readily usable by people doing the work • Sharing gains that accrue from exceeding performance targets can result in unexpected boosts in performance

25. Use Three-Point System of Information Exchange and Project Execution • A few top-level managers • Review developing opportunities • Create exciting goals • Create challenging figures of merit • Constantly realign existing strategic priorities as external environments change • Break bottlenecks that may occur at lower levels

26. Use Three-Point System of Information Exchange and Project Execution • Champions on both sides (people whose careers depend on the relationship’s success) meet • Numerous interactions among those who actually develop, produce and operate the invention • Spot new operating needs, technical opportunities, creatively solve problems • Ensure that valuable nuances of tacit knowledge about problems and processes get transferred when needed • Make sure that the best vendor talent and sufficient urgency are applied to the project

27. Use Three-Point System of Information Exchange and Project Execution • Communication and innovation are greatly enhanced if client and outsourcer share the same electronic model of products or processes (software) and can work together asynchronously • Especially important if multiple outsourcers must cooperate

28. Incentive Systems and Open, Compatible Information • Innovative companies operate with highly decentralized organizations • People at the top • People doing the project • Everyone else • Common, open-information capability that places all participants on the same footing in discussions • Develop strong incentives that are adapted to the specific type of innovation sought • Avoid endless approval cycles and communication delays • Amplify individual responsibility and flexibility

29. Somewhat Orderly Chaos • No one manager or team controls the innovation outsourcing process • Broadly predictable characteristics • Greater bandwidth • Speeds • Wireless capabilities • Interconnectivity • Reform into circular, independent nodes with knowledge centers • Little visible authority or ownership structure

30. Adapting and Exploiting the Innovation • Insist on constant interactive development, disciplined by frequent software tests before and after physical models are available • Why Outsource Innovation? • Resource limits • Specialist talents • Multiple risks • Attracting talent • Speed

31. Advice on Managing Outsourced Innovation • Don’t • Look at only relative internal capabilities • Think of products as core competencies • Skills are core competencies • Expect opportunities to come to you • Assume you can out-design the world • Rely on your years of experience • Dictate details of processes or practices

32. Advice on Managing Outsourced Innovation • Don’t • Set fixed current-best-practice targets • Try to capture all the gains • Overlook the importance of customers in the process • Make suppliers into subordinates • Tolerate vertical hierarchies • Let internal politics isolate participants

33. Advice on Managing Outsourced Innovation • Do • Develop selected skills to be best in world • Position your company to seize opportunities • Develop capabilities for scanning externally • Create a clear, exciting vision of the future • Manage relationships by using process masters • Evaluate suppliers’ past innovation practices • Develop shared goals and figures of merit

34. Advice on Managing Outsourced Innovation • Do • Share incentives to perform beyond targets • Create open, interactive software models • Say what you want, not how to get it; then test interactively • Establish a three-point management focus • Reward those who make alliances work

35. Organization Forms To Foster Innovation • Starburst Organization N New Competency or Alliance Second level of Outsourcing N Core Competence N N N N

36. Organization Forms To Foster Innovation • Network (Spider’s Web) Organization N Contact Person N Node (e.g. taxation specialist company) N N N N N