In the 1990's, when manufacturing and other low-skill jobs began their migration to overseas locations in Southeast Asia, U.S. corporations pledged that they would maintain control over their core R&D operations and critical design work. In mid-March, though, Business Week published a cover story on "Outsourcing Innovation," describing how Taiwan, China and India are emerging as R&D hubs as the result of Western companies outsourcing product design and R&D work to Asian manufacturers and developers. In just a couple of years, according to Business Week, the outsourcing trend that swept through the manufacturing sector will sweep through America's R&D labs, leaving Asian competitors as the new driving force behind innovative new technologies. American companies -- too cheap, too lazy and too arrogant -- will find that they no longer have a stranglehold on global innovation. But is the situation really as dire as Business Week suggests?
Clearly, something fundamental is happening to U.S. innovation. The anecdotal evidence is starting to pile up that U.S. companies -- desperate to cut costs in order to remain competitive with their low-cost rivals around the globe -- are starting to re-think ways that they can increase the productivity of R&D expenditures. In an effort to get products to market faster than ever before, they are asking questions that they never asked before: What can be done in-house, and what can be done elsewhere? What is mission-critical, and what can be safely entrusted with suppliers and original equipment manufacturers?
Idea factories are being replaced by idea networks. In a recent piece for TCS ("Alpha Companies, Beta Products... And Solving the Innovator's Dilemma"), this author explored the ways that technology companies were attempting to solve the "Innovator's Dilemma" by re-thinking the product development cycle, tapping into active end-user communities, and experimenting with "beta" versions of products that could pave the way for groundbreaking new technologies. By opening themselves up to global innovation networks and keeping their ears close to the ground for new ideas, the best and brightest American companies were finding new ways to channel innovation outside of their corporate walls.
This idea is not a new one. In May 2003, Erick Schonfeld of Business 2.0 wrote an article in which he discussed how companies were finding ways to tap into "pools of expertise" in places where corporate R&D mavens never looked before. Interestingly, he called the article "Outsourcing Innovation"...
Outsourcing, as Schonfeld described it, did not mean farming out R&D work to overseas locales like India and China. Instead, it meant that companies were tapping into "global networks of intellectual capital." Instead of relying only on internal R&D staffers to develop new products and ideas, companies were now turning to scientists, entrepreneurs, inventors and former executives located anywhere in the world. Put another way, the notion of R&D labs as "idea factories" that "manufactured" innovation was already an outdated concept even two years ago.
One prominent example of the new thinking about R&D is Procter & Gamble, which launched its Connect + Develop program with the goal of having at least 50% of its new products derive from ideas generated by non-employees. In order to reduce R&D expenditures, the company looked for ways to transform the product development cycle. The answer was to actively seek opportunities to connect with innovators from around the world in order to find the next generation of products, technologies and processes. Instead of an R&D employee base of 7,000, the company now had access to millions of potential innovators.
P&G is not the only "alpha" company experimenting with new approaches to innovation. In industries like manufacturing, electronics, and automobiles, the "best of breed" companies are also tapping into innovation at the edges of their traditional networks. In March, The Economist published an article on "The Rise of the Creative Consumer," documenting specific examples of how companies like General Electric, BMW and Electronic Arts are tapping into the creativity of their customers and experimenting with "open-source" innovation. According to The Economist, "Not only is the customer king; now he is market-research head, R&D chief and product-development manager, too."
Clearly, the notion of innovation is changing rapidly. Not surprisingly, a whole new lexicon is emerging to describe this widespread change in the way that companies think about their relationships with people and organizations outside of their corporate walls. The new buzz words include "open-source innovation," "open-market innovation," "a free trade of ideas," and "democratic innovation." The last term, in fact, is the basis of a new book by MIT's Eric Von Hippel, "Democratizing Innovation."
Yes, companies are outsourcing innovation -- if that's what you want to call it. A more accurate representation, though, would be that companies are recognizing the immense creativity at the edges of their networks. These companies are finally learning the value of collaboration and information-sharing, whether it is with third party suppliers located in Bangalore, India or consumers located in Bangor, Maine.
It's too easy to point at statistics like "total R&D spending as a percentage of sales" and conclude that U.S.-style innovation is on the decline. Measuring the pace of innovation is harder than ever before because companies are no longer trying to do innovation all by themselves. It's important to look at the bigger picture and realize that everything is OK with American-style innovation -- at least, for now. Idea factories, just like their smokestack namesakes, are simply being replaced by something different and more modern.
The author writes about business, technology and venture capital for TCS.