“Open Innovation” is a fact on the ground for contemporary research organizations; so, too, is extensive IT proliferation and the linkage it permits; so, too, is a genuinely global competitive environment. Yet despite the benefits and advantages of open processes, there are important potential risks as well. These facts carry important strategic, structural and staffing implications for innovation leaders and the changing role of the R&D “Lab” of the Future (LOF).
This article is a snapshot of these implications, which are drawn from the LOF research project carried out between 2007 and 2010 under the joint sponsorship of CIMS, the Industrial Research Institute and its Research on Research subcommittee, and IBM, and funded by the National Science Foundation (see “What Will the Lab of the Future Look Like?, CIMS TMR Fall 2009, pp.7-8).
The century-old model of a strong, centralized, isolated lab as a primary competitive advantage for innovating companies is giving way to more open and collaborative models that are more globally distributed, and more complexly linked, to more different kinds of partners. R&D’s role has shifted from “doing in-house research” to “managing the innovation ecosystem:” identifying and exploiting new sources of science and technology, and new markets, anywhere in the world.
“Open innovation,” proliferating IT and “global competition” all have far more to do with burgeoning science and technology sources and broadening markets than “outsourcing R&D.”
As a result, R&D managers and policy makers, in research organizations and in governments, are facing—and often embracing—new challenges.
Brave New World of Research-Based Innovation
The business model of older industries like automobiles and newer ones like consumer electronics has been to outsource manufacturing and components—and, increasingly, such innovation-related activities as design and R&D as well. The promise seems compelling: returns will rise as investment declines, particularly investment in expensive assets like manufacturing plants or research labs. R&D and other inward innovation activities are increasingly global as innovation ideas are sourced from around the world.
Yet the story for managers on the ground seems vastly more nuanced: yes, modular product design facilitates increasingly complex products, and such design is, increasingly, fostered by enhanced information technologies and the collaborative development that IT permits. But broad external collaboration via IT links in turn poses risks that proprietary digital information that “wants to be free” will, in fact, “escape.”
IT security per se is one issue, as repeated instances of system hacking illustrate (recent hacking victims range from Lockheed-Martin and Sony to PBS). Insider leaks constitute another risk (think Wikileaks)—and that risk appears to rise as “employees” and “researchers” are more diverse and broadly distributed, implying greater geographic and cultural distances that managers must bridge.
Still a third issue is patent defensibility—whether issues arise because (as some assert) “the U.S. patent system is broken,” because offshore patent systems diverge from the U.S., or because transfer of proprietary IP to foreign partners is a condition of market entry. Moreover, the skill sets entailed in “managing the innovation ecosystem” appear to be substantially different from those involved in managing internal R&D. On the one hand, today’s R&D managers see themselves as “keepers of the future,” who must insure that the focus of division and SBU managers on quarterly returns and the benefits of incremental improvements doesn’t endanger the more distant, yet bigger, wins of substantial innovations rooted in new research. This changes the internal R&D job from sheer customer service to strategic leadership.
On the other hand, R&D is increasingly responsible for the external relationships of the organization. These relationships comprise both sources for inward innovation, such as Procter & Gamble’s “connect and develop” initiative, and potential recipients for commercializing internal discoveries not pursued by the firm. Such external commercializing is not new; 40 years ago Texas Instruments began seeking licensing revenues from “second sourcing,” while others depict IP and patents as means to shape the competitive environment as well as extract additional profit from ideas.
New Perspective on Innovation
Innovation has never been more urgent, or more important, and it has become increasingly collaborative. Two decades after “stage-gate,” it may be time for a new perspective on innovation, R&D’s evolving roles, and the tradeoff decisions these imply.
Such a new perspective would posit the familiar timeline from “idea” to “commercial product,” but would extend beyond the usual project base to the firm’s entire network of external partners. Thus, since contemporary R&D management is increasingly transmuted to managing the innovation ecosystem, an effective model should include the multiple and changing possible partners for sourcing innovation ideas, technology and capabilities; for developing them; and for commercializing and exploiting them. Thus ideas can be sourced externally, developed internally, and commercialized internally, as in P&G’s “connect and develop” initiative.
But the 50,000-foot view is insufficient: any complex product will embed multiple components and processes, each of which may be externally or internally sourced, developed or exploited. Further, each of the “make or buy” decisions implied carries implications for developing, maintaining or choosing to abandon internal capabilities over the longer term, and thus for future strategic options.
One reason why R&D’s tasks have become so complex is that the increasing complexity of contemporary products and services significantly exceeds the ability of even very large firms to internalize all the needed skills by hiring employees. Instead, open innovation seeks access to the needed skills without owning them. The tradeoff: requisite enhanced skills to manage across boundaries (disciplinary boundaries, functional boundaries, firm boundaries and cultural boundaries). Thus, R&D management for the R&D LOF entails structural, staffing and strategic dimensions.
If a firm elects to engage in some form of open innovation—and most are compelled to do so, driven by the promise of lower cost, more rapid innovation, and access to essential skills—then that firm must also consider how to structure the new set of networked relationships with collaborating partners. What fraction of the innovation activity will be carried out where? It’s possible to “buy” ideas, but shall that transaction be an arm’s length, one-off exercise? Or is there potential benefit to some closer, more enduring link, from time-bounded contract to joint venture to possible acquisition? Such structural choices will be difficult to re-do, once having been initiated.
Staffing issues range from questions of whom to hire, what qualifications or skills to seek and maintain, to how that staff shall relate to the organization’s core activities (both R&D per se, and other elements of the organization).
With any alliance, assessment of the partner’s performance becomes critical—and managing performance assessment even within a given company and for its own employees, across disciplinary boundaries as well as national boundaries, may be problematic. Multi-functional new- product development teams are widely advised—and carry well-documented difficulties for assuring engagement and effective assessment.
The difficulty of specifying performance assessment criteria at the edge of the state-of-the-art where genuine innovation takes place is even harder. Beyond “managing performance assessment,” staffing NPD teams with fulltime versus part-time members, co-locating teams or retaining them as geographically separate entities, and choosing a degree of autonomy and power for the team and its leader are all well-known nuances for internal NPD that can be extrapolated to the more complex “relational networks” of internal plus external partners.
Implications for Decision-Makers
Inside the firm, executives face the challenge of identifying the future footprint of capabilities and knowledge on which to compete over the long term. Every decision to outsource implies a choice to allow the erosion or disappearance of internal capability. As with other “scarce resources,” critical internal capabilities need to be identified, fostered and protected. With knowledge resources, including R&D, essential internal capabilities will shift over time as new sources and technologies become available. Structure, staffing and strategic decisions carry long-term implications— the futurity and irreversibility that Peter Drucker pointed to as far back as 1954.
For policy makers in government, the “facts on the ground” of the LOF are dimensionally different but closely related. Policy makers, like firm executives, now must also recast their roles in terms of the innovation ecosystem.
New sorts of infrastructure, rooted in IT, are essential drivers of innovation. While firms can and should manage their internal systems and security, the broader issues of infrastructure capacity and security reside with governments, and their importance and impact are hard to overstate: On the one hand, the Pentagon has just declared that hacking can be constituted as an act of war justifying military response (in the aftermath of hacking attacks on the Defense Department and Lockheed- Martin). On the other, a new breed of virtual start-up firm is bringing niche drugs to market.
Policy makers are responsible for IP and patent rules, enforcement domestically and via treaty in other countries, and possible patent harmonization. The requisite skills must be available in the workforce, an issue of concern articulated ten years ago.
But policy makers must also acknowledge the complexly collaborative nature of contemporary innovation, which can transcend the ability of any country, let alone any company, to unilaterally create and develop the needed knowledge base. Simplistically nationalistic approaches will be insufficient; the new boundaries and purviews must be global.
Mariann Jelinek, Ph.D
Richard C. Kraemer Professor of Strategy,
Mason School of Business at the College of William and Mary
Former NSF Director of the Innovation and Organizational Change Program
Alden S. Bean, Ph.D.
CIMS Executive Director Emeritus
Former NSF Program Director