Building University Relationships in China

The IRI has been a thought leader in sourcing innovation (SI) for over 20 years. To understand how firms successfully access external innovation, the authors held three roundtable discussions with representatives from the 12 IRI companies listed below. The companies represented a diverse set of industries including oil and gas, specialty chemicals, foods, pharmaceuticals, national laboratories, diversified manufacturing, large chemical, aerospace, and telecommunications. Each roundtable member was selected because of his/her central role in sourcing external technology, and their organization’s extensive experience in licensing and using collaborative research agreements to meet technology commercialization goals.

In addition, a workshop was held at the Fall 2007 IRI annual meeting. Individual interviews were conducted with experts on external innovation from academia, industry and government. Participants represented a cross-section of industry sectors including life sciences, consumer products, oil & gas, chemicals, materials, federal laboratories, control systems, defense/aerospace, electronics, food, agricultural processors, diversified manufacturers, and academia.

The roundtable discussions explored the link between strategy and SI. The typical drivers were found to include lower cost, reduced risk, faster cycle time, managing workloads, and flexibility. Strategic thinking is crucial in the collaborative innovation world. A firm must navigate three dimensions of strategy: 1) its own long-term strategy; 2) the long-term strategy of the partner; and 3) the interconnectedness of the firms at the business unit and supply chain levels. We start with understanding the firm’s strategic intent.

Interviewees reported a lack of holistic vision of how sourcing innovation is linked to the development of corporate strategy. The real question is, “What is the firm’s (or business unit’s) strategy for growth?” A clearly defined strategy helps determine which assets are needed to meet customer demands.Anumber of strategic considerations help managers determine which assets should be internally developed and which must be externally sourced. They include an accurate understanding of the firm’s core capabilities and current resource needs, the firm’s need to protect and maintain critical capabilities or intellectual assets in-house, and the firm’s longterm strategic intent in its areas of business interest.

Finally, firms benefit from an assessment of how their internal processes and systems impact the external innovation efforts. The organizational processes/systems that support internal projects may or may not be sufficient to support external projects. Effectively integrating the external innovation efforts into processes such as the firm’s budget processes, new-product development systems and project management programs, are important adjustments as firms source external innovation.

Sourcing innovation is a two-company affair. It is equally important to understand how each of these issues impacts the collaboration from the partner’s perspective. The partner’s strategic intent is a case in point. What is the long-term strategic intent of the partner? Not every partner is your friend. At 8:00 a.m. they are your partner; at 8:15 a.m. they may be your competitor. This reality stems from the fact that collaborating with a market leader is an effective way of moving into an adjacent business area. These intimate relationships allow a new market entrant to learn about this market space from a leading firm and apply the knowledge rapidly, sometimes without the original partner.

Our interviewees dealt with this issue by exploring multiple strategic considerations from each firm’s point of view. Considerations of importance include the roles/ responsibilities of each partner, risk allocation between the firms, the split of costs/revenues, and how that split relates to resource contributions. Additionally, the allocation of intellectual property rights between the firms, the rights each firm has to the background intellectual property of the partner, and the jointly created foreground intellectual property upon termination of the relationship are key determinants of whether a particular collaboration is attractive or appropriate. If the parties cannot craft an agreement that meets the key strategic needs of both sides, the parties should part friends. It is a mistake to force-fit inconsistent strategies into a collaborative relationship.

We cannot leave the topic of strategy without discussing the interconnectedness of the firms at the business unit and supply chain levels. For example, in the case where two large firms come together to collaborate, each likely brings a long history of past and current relationships into the discussions. The partners can simultaneously be collaborators at the R&D level, competitors at the business-unit level, major suppliers to each other in the supply chain, and adversaries in court. These multiple intersections lead to complex strategies in which each firm uses its power in one segment of the relationship to influence a completely unrelated segment. The ability to take a holistic view and deal with the power dynamics in these multi-faceted relationships is an attribute of a skillful executive team and a successful business.

Our interviewees identified relationships with key suppliers as a high-value area of innovation sourcing. The first step is supplier selection. R&D managers, working with the procurement team, ensure that suppliers are selected on the basis of their technical competence and innovative capability. Two of our interviewees conduct supplier challenges. Their firms clearly define technical needs, disclose those needs to selected suppliers under the appropriate terms and jointly seek solutions. It is common for these IRI firms to contribute manpower, intellectual property and market insights to the relationship. Some firms share technology roadmaps with their suppliers and exchange scientists and engineers. Over time, each firm’s technical projects portfolio is influenced by the other’s capabilities, marketplace intent and the long-term nature of the relationship.

If the collaboration is successful, a portfolio of projects and options emerges. This leads to a situation in which the firms must decide whether to maximize the value of each project or to maximize the value of the collaboration. One interviewee uses the concept of “winbalancing” to accept the fact that while neither firm can maximize the value of one specific project, both firms can maximize the value of the relationship by balancing costs and risks over a portfolio of projects.

Win-balancing does not just happen. The responsible technical manager is expected to be an advocate for the supplier. He/she works with business-unit staff and the procurement organization to ensure that both firms win over time. Metrics reinforce this behavior. One IRI firm we interviewed measures how many supplier technologies fit with the firm’s product line. Managers count the number of stage-gate phases affected by the collaboration. They assess cultural fit, key capabilities, and the amount of new business awarded to the supplier based on innovation the supplier brought to the firm.

There is an added benefit. Many supplier projects focus on short-to-medium-term projects/products, not longterm technology platforms. A close collaboration influences this trend by providing the suppliers with a better understanding of consumers’ needs and a long-term view of the firm’s technical direction.

There are tensions in these relationships that go beyond the immediate collaboration. For example, suppliers may work simultaneously with multiple competitors. They want to broadly sell the jointly developed innovation into the market, even to the partner’s competitors. While there are no hard-and-fast rules for dealing with this issue, some firms in our study ask for a limited-time, head start in the marketplace before the supplier sells to competitors. In other situations, selling to competitors is acceptable if it allows the supplier to meet cost and quality targets. In the final analysis, win-balancing means what it says. If one firm always wins and the other always loses, there is no balance.

While solid strategic thinking is a cornerstone of effective collaboration, strategy has limits and is based upon assumptions about the future that may change rapidly. For example, major market shifts, changing government regulations and commodity price changes can render large parts of strategy obsolete. As one interviewee put it:

“External events nuke us out of left field. They are outside of our business. We have no control. They turn the supply chain into total chaos. We have to work with outsiders to resolve the issue.”

He could have been talking about the no trans-fats law in New York City, the no incandescent light bulbs law in California, or oil prices that didn’t swing $15 a barrel in three decades and now swing $15 in three weeks. When the business is shaken in ways management did not expect, external partners are one source of skills and resources to deal with the disruption.

The “Want, Find, Get, Manage” Model guided our interview process (2). This model suggests that after the firm knows what technology it “Wants” to access externally, it develops a strategy to “Find” it. After finding the technology, the firm has an efficient process to contractually “Get” the technology and “Manage” the relationship to success. Our roundtable discussions focused on the Want.

The effectiveness of an innovation search is strongly dependent on how well the firm has defined its wants. Some wants are always there: better, cheaper, faster; others relate to a whole new functionality or business intent. The technical staffs of a number of IRI firms work closely with the business units to identify the firm’s “10 most wanted” list. To ensure business unit commitment, the business units prioritize their wants and place a “bounty” on the technical team’s ability to find it (1). However, there is skepticism that internal employees can identify breakthrough ideas. Long tenure, a narrow focus on the business and a history of facing the same challenges leads internal team members to develop a predictable idea list. As one interviewee put it: “Practical ‘out of the box’ thinking is not a routine activity. The more experienced the workforce, the more myopic they become. They are prisoners of their history, silos, brands, and categories. True breakthrough thinking is rare.”

The marketplace does not care about the source of innovation. Customers reward increased functionality at reduced cost.
Sourcing external innovation complicates the strategic planning process because the partner’s strategic intent must be taken into account.
Effectively integrating external innovation into the firm’s internal processes (budget processes, new product development systems, project management programs, etc.) requires important adjustments.
The allocation of intellectual property rights between firms and the rights each firm has to the partner’s background intellectual property and the jointly created foreground intellectual property upon termination is a key determinant of whether a collaboration is appropriate or not.
Supplier relationships are a high priority. Customers balance their desire to access supplier innovations with the supplier’s need for financial models that reward innovation and intellectual property positions that permit the supplier to fully exploit the innovation.
Effectiveness of the firm’s external innovation activities is strongly dependent on how well the firm has defined what it wants. Wants must be stated at a level of granularity that allows the Find process to begin.
Once firms know what they want, they begin the Find process. While external service providers such as Innocentive, YourEncore, Yet2come.com and NineSigma can be good Find resources, firms underestimate the power of their internal Find capabilities.
IRI firms use two models to budget for external innovation: a central funding pool, and an overall budget for R&D without segregating funds into internal and external pools.
External innovation requires a culture change. Senior management commitment is key.
The source of internal resistance to external innovation is predictable.—The Authors

This statement suggests that new employees, experienced with new challenges, and a diverse group of people from outside the business, may help the team to produce breakthrough ideas. People who bring an external perspective may include retired executives from related industries, futurists, leading academics with relevant experience, and creative thinkers. Diversity of thought improves the odds of generating a breakthrough idea. Defining the characteristics of what your firm wants is central to success. Broad overarching statements about what the business unit desires do not meet the need. Wants must be stated at a level of granularity that allows the Find process to begin. A common practice is to determine wants by analyzing roadmaps for specific industries such as the International Technology Roadmap for Semiconductors. Such roadmaps broadly represent the industry consensus and help companies plan their technology development efforts.

Part of the definition process is the development of acceptance criteria for each gap (Want) and the creation of easy-to-use proof of principles. These criteria and principles act as filtering mechanisms that guide the thinking of employees as they find solutions that fill the gaps. Including technical and marketing employees in this process allows the firm to identify wants on each link of the value-added chain and to develop acceptance criteria that fit business as well as technical needs. P&G, for example, develops simple but practical acceptance criteria. When searching for paper towel technology, the first test is to put soap in a paper towel and rub it hard on a carpet for 15 strokes. If it falls apart, it is not ready (3).

Some firms set up websites to solicit ideas from customers. Our interviewees report mixed results. Firms that find actionable innovation repeatable and reliable have a strong technical customer base that is limited in size. They also have a sales force that calls on these customers and encourages them to submit ideas. Two examples are a medical devices firm that encourages physicians and academic experts to submit ideas, and a chemical firm that solicits ideas from its technical customer base. Less successful firms have a large, diverse, non-technical customer base (e.g., food and consumer products companies). These firms find the value of the website low relative to its administrative burden.

Once the business unit defines its “most wanted” list, the Find process begins. While many firms underestimate the power of their internal Find capabilities, external service providers such as Innocentive, YourEncore, Yet2come.com, and NineSigma can be good Find resources.

The first step in finding an external resource is to ask the internal technical staff where to look. Their knowledge of the literature, patent landscape, conference proceedings, and their personal external networks are excellent sources of information that point to promising Find targets. The challenge is organizational. How can management effectively draw technical staff into the external asset identification effort?

Air Products and Chemicals uses a “needs tracker” database in which each external Want is posted to the technical community. GSK Consumer Health identifies its wants at a category level and provides them to its network of global technology scouts. Each scout is (a) a full time employee of a business unit, (b) located in a specific region of the world, and (c) has scouting as a designated part of his/her responsibilities. To maximize the possibility of finding interesting technology, GSK Consumer Health posts its wants online (see innovation.gsk.com). P&G Bioscience group is another group that places its want list in the public domain (pgbiosciences.com).

While these are the common themes that guide the Find activity, sourcing innovation is “a contact sport.” Each firm must be looking, sensing, talking to, and engaging a variety of external sources. Sources include universities, technology brokers, federal laboratories, venture capital firms, SBIR recipients, international firms with patents,and conference presentations in your firm’s areas of interest.

Each firm must be looking, sensing, talking to, and engaging a variety of external sources. Describing all the aspects of developing a collaborative agreement to get the external asset is outside the scope of this article (4). However, the budget process is one aspect of accessing external technology that was discussed at multiple roundtables.

We found that firms use two models in budgeting for external innovation. In the first model, firms have a central funding pool for spending externally. These funds are under the control of the senior management team. They are not assigned to a particular group or area, but are used for the best opportunities as they emerge. One of the firms we interviewed has a top-down strategy for encouraging external collaboration in which the CEO reports progress to the analysts quarterly.

In the second model, firms set an overall budget forR&D without segregating funds to be spent externally. In these firms, R&D management decides how much to spend externally depending on the project’s specific developmental needs. Other functions, such as marketing, can also be involved in this determination for projects close to commercialization. Several firms use a hybrid approach combining both the models above. From our roundtables, we learned that there was no consistent preference for either of these budgeting models.

Culture is a powerful force that guides employees’ attitudes and behaviors. Employees repeat behaviors that are rewarded and that have worked in the past, even if these behaviors have outlived their usefulness. As one of our interviewees put it: “Our biggest enemy is our mindset. We’re running out of steam trying to do more of what we do best.Wemust come together and reinvent the way we invent.”

Our roundtable discussion identified senior management commitment as a key cultural change agent. Senior managers bring more than resources—they bring the ability to change attitudes and behaviors by encouraging movement toward new goals. For example, A.G. Lafley, CEO of P&G, set the tone for its Connect + Develop program when he set a target to acquire 50 percent of P&G’s innovation externally. Senior managers such as Nabil Sakkab (senior vice president, corporate research and development, retired), Larry Huston (vice president of innovation, retired) and Jeff Weedman (vice president of external business development and global licensing) built external thinking into the day-to-day activities of P&G organizations (5).

At GSK Consumer Health, Ken James, SVP, consumer health R&D and Stan Lech, VP, global innovation R&D, lead the SI effort. Growth went from an anemic 2.4 percent in 2005 to 14 percent in 2007 (6). GSK has combined an aggressive external innovation effort with internal organization changes that create strong links between internal functional groups, external sources of innovation and consumers. In this new structure, decision making occurs quickly, at lower levels and in a multifunctional context.

Hawker Beechcraft’s CEO, James Schuster, the SVP of product development and engineering, Randy Nelson, and the entire senior leadership team are changing the way light jets are manufactured and sold (7). They are moving away from the traditional vertically integrated approach in which the firm assembles each piece of the plane, toward a systems integrator approach in which suppliers build complete subassemblies. The subassemblies are delivered to Hawker Beechcraft for final assembly and delivery to customers.

These examples make an important point. Senior management support is a cornerstone of SI. The old ways die hard. Employees are hesitant to follow middle managers with unclear mandates to “access external innovation.” In addition to senior management support, our interviewees discussed the importance of the reward system, the communications plan and an assessment of their firms’ collaborative capabilities to influence culture. Reward System and Corporate Communications Organizational culture is influenced by the firm’s reward system. In general, employees pursue behaviors that are rewarded and avoid those that are not. The most powerful reward system is the marketplace, and the marketplace does not care about the source of innovation. The firm’s reward systems must reflect that technical agnosticism. These words hold a simple truth: firms that reward internal innovation while holding external innovation at arms-length are out of phase with the global leaders.

The reward system is a sophisticated form of corporate communication. True communication with employees is a dialog of actions. Lectures about the importance of SI are impotent because words are imprecise and easily misunderstood. Words take on meaning when management takes visible actions to support the words. When a partner firm is given the “Partner of the Year” award, the culture begins to change. When every employee with SI responsibilities has his/her performance review infused with SI objectives, the change quickens. When a meaningful percentage of the senior management team’s bonus is based on meeting SI targets, a significant budget is dedicated to external initiatives, and formal announcements are made to the investor community, the cultural change process is well on its way.

We asked our interviewees, “Who resists innovation sourcing?” The answer identified two organizational levels of resistance: technical staff and middle management. At the level of technical staff, many professional scientists want to be scientists, not project managers. Their skill sets and interests lie in making technical discoveries, not integrating external technologies.

Technical professionals also see the administrative burden and the sheer amount of extra personal effort it takes to form a collaborative relationship as an impediment. The administrative burden associated with accessing external technology can be large. Assume your scientist identifies an external asset. How long does it take to put a Confidentiality Agreement in place? How about a Material Transfer Agreement? Joint Development Agreement? Absent an efficient process to identify, evaluate, value, and contractually acquire external technology, the administrative burden can be large and daunting.

The second burden is the amount of personal effort associated with convincing others that budget, resources and personnel should be redirected to an external effort. One scientist described the personal costs in terms of “effort and mindshare that drains the spirit.” When sourcing innovation is seen by others as new, unusual or competing with an internal activity, the level of personal effort needed to overcome internal political resistance can be large.

Middle managers are measured by budget responsibilities. If they devote budget externally and get no financial relief, they must cut internal spending. In R&D, that means losing people, disrupting teams and decreasing capabilities. Once gone, headcount does not come back easily. External projects also require sharing decisionmaking with partners. Joint decision making has costs in terms of time and effort.

Finally, middle managers are “bandwidth-limited.” External collaboration simply takes more time and effort to manage than internal projects. It is easy to underestimate the work required. Managers must work with the legal group to put a non-disclosure agreement in place, assess the partner’s strategic intent and technical capabilities, participate with the business development group and other affected functions to draft a joint development agreement, and ensure that the firms have compatible decision-making structures and systems. All of this must be done before the collaboration can start. None of this must be done when the development is totally in-house. Given this reality, adding an external project to their current responsibilities is resisted unless the advantages are overwhelming.

Market leaders must reinvent themselves for tomorrow’s world. We are not talking about some fuzzy tomorrow years in the future. We are talking about tomorrow. It is important to frame the problem well. If the future belongs to firms that maximize their market offerings by combining external assets with internal capabilities, then the future belongs to firms that develop collaborative skills into a core competence. A key leverage point is performance. Success begets success. Revenuegenerating relationships embolden management to take another step. Failure is chilling.

If collaborative innovation is the future of the enterprise, a clue to the future is found in the past.Afirm’s history of collaborative agreements points out strengths and weaknesses. When we won, what did we do? When we lost, what did we do? A rigorous approach to this analysis is vital. One or two anecdotal SI successes do not translate into a systematic capability. You don’t get good at something until you do it over and over and apply the learnings from each iteration. Most importantly, management must relentlessly lead the way. Organizations learn slowly, but forget at the speed of light. Any hesitation by management convinces the troops that SI is just another fad. The word at the laboratory bench is, “Wait six months and management will be spewing the next set of consulting buzz words.”

Although the outcome of SI is rarely certain, a consensus is emerging. Managers are unwilling to live in the middle world, mired between isolated projects utilizing external innovation and the majority of projects using internal innovation. The risks are simply too high. If you are tasked with developing the external innovation effort in your firm, we have a suggestion. Throw this article on the boardroom table. Put up a chart that plots your patents against all of the patents in your areas of business interest. Compare the current project portfolio for internal versus external innovation. Evaluate your competitor’s alliance portfolio for its impact on your strategy. Plot the number of conference presentations in your areas of business interest against the number of presentations by your firm’s scientists. Stimulate a fact-based discussion around the impact of external technology on your customers, suppliers and product lines. The discussions must result in action. Either SI is important to the firm or it is not. If action is warranted, it must focus on creating a set of sustainable, repeatable and reliable processes to implement the SI effort.

The authors thank the IRI, Department of Commerce, EDA University Center Program, Alcatel-Lucent and Praxair for their support of this study.