Outsourcing Innovation: The New Engine of Growth

Innovation today calls for the complex knowledge that only a broad network of specialists can offer. That is why many companies are starting to outsource innovation. For example, pharmaceutical companies may outsource some basic research, whereas other companies may outsource business-process innovation or launches of innovative products.

Four forces are enabling this change: Demand is doubling every 15 years; the supply of knowledge workers is skyrocketing; interaction capabilities have grown; and new incentives have emerged. The most effective companies, however, keep core-competence activities in-house, outsourcing the rest to best-in-world suppliers.

Successful outsourcing of innovation involves first scanning for opportunities, not unlike a surfer scanning waves. With many waves of change occurring simultaneously, innovation surfers cannot be sure of riding the right one. They position themselves where experience and intuition tell them many waves will be forming. When an attractive one emerges, they speed into the curl and try to adapt quickly to shifts.

Outsourcing companies have other challenges as well. As one notes, "The key to success is both sides getting the relationship right at the outset. There must be mutuality of interest, common objectives and an agreed-on scorecard." To attract partners, a company must have some capabilities that supplier-inventors cannot duplicate to get to desired markets.

Companies also need: people who are "process masters" to keep the innovation processes moving along; open and interactive software; shared stretch goals, or "figures of merit"; and a way to share gains achieved by exceeding the targets and to reward those who make alliances work. Moreover, once a company evaluates suppliers' past practices, it needs to give them freedom, concentrating on what needs to be accomplished and not dictating the how. "Managed chaos" used to describe successful innovation processes within companies. But with today's speed and numerous outside suppliers, the chaos is not so much "managed" as "somewhat orderly." No one manager has total control. People who work cooperatively have the best chance of success.