Wednesday, November 30, 2011

Outsourcing Innovation

Outsourcing innovation means giving the job of innovating and coming up with new ideas to other companies. While only few companies considered outsourcing innovation to be safe and benefitting ,a lot of them are doing it now. A strong reason for this trend is that while innovation is essential for an organization ,the current spending on R&D is not yielding expected results. As a result companies want to outsource innovation to both cut costs and yet get sharp minds to work on their R&D projects. The current recession is another reason companies have adopted this strategy as they want to get a head start on developing new products and services for the marketplace.

Let’s consider the mobile handset market. Most of the handsets developed are built from design to development in lesser known technological labs in Taiwan and other countries. The multimedia device prototypes produced by these companies are then bought by famous mobile powerhouses and end up on their shelves under their brand name. Companies like dell and Motorola today are buying complete design’s from technological companies in Asia , tweaking and customizing them and then selling them with their own brand name. Even in the pharmaceutical sector, companies are collaborating with Asian research companies to develop new drugs in an effort to cut costs. The logic being that since most drugs don’t succeed in the market and are taken of the shelf soon, a high R&D cost can really hurt their balance sheets. Proctor and gamble says that it plans to outsource more than half of its R&D operation by 2015 as compared to 20% now.

There are however risks associated with outsourcing ones R&D operations. Motorola had outsourced its mobile design and development operations to Taiwan’s BenQ. But then BenQ, by tweaking the phones to suit the Chinese market began selling them their under its own brand. That prompted Motorola to pull its contract. Thus while most companies have strict outsourcing confidentiality clauses in their agreements ,there is always the risk of intellectual property being misused or transferred which can hurt the parent company. The risk associated also has a bearing on which place the company outsources it R&D to. While US has an advantage in terms of its strong intellectual property rights it is not preferred due to high costs , which is a primary driving force for outsourcing. India is preferred to china in this regard as it has more stringent intellectual property laws. Thus as the definition of core operations for companies change , so does the nature of outsourcing. The question really is should companies continue to outsource innovation ? Is this taking outsourcing too far ? What do you think?

References

  1. http://www.businessweek.com/innovate/content/jul2009/id20090722_518153.htm
  2. http://sloanreview.mit.edu/executive-adviser/2009-5/5155/outsourcing-innovation/

By Kailash Pande

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