The new version of the “not invented here” lament is “why do we have to outsource everything?” In this post I investigate the role of R&D outsourcing in innovation crescendo.
R&D groups have a capacity limit determined by their organizational infrastructure and talent and therefore can effectively execute only a fixed maximum number of projects at any one time1. If a company with an over-utilized R&D group wants to add more projects without adding more headcount, and there are additional funds in the R&D budget, should those funds be leveraged for outsourcing to help execute the additional projects? Can outsourcing traditional R&D activities accelerate innovation crescendo and is it an efficient use of resources?
Here are five scenarios where outsourcing might accelerate innovation crescendo.
1. Outsource work of R&D functional groups … Outsourcing can increase the capacity of your R&D group and can help manage fluctuating levels of work for functional groups when capacity has been exceeded so that timelines are not delayed. For example, outsourcing to specialized vendors may be a smart choice if your analytical group is overloaded with work and you need a new analytical method developed for your new consumer or pharmaceutical product. Clinical studies, stability studies, safety assessments, patent searches, graphics development and ingredient reviews can all be outsourced easily and safely since they are discrete elements of R&D which are well defined and can be conducted by outside parties who have specialized expertise, work independently, and don’t require intimate knowledge of the new product, or specialized oversight.
2. Outsource product development which utilizes a specialized technology … Your R&D and manufacturing groups have only a limited number of core technology competencies, so this outsourcing strategy can be used to increase capacity. For example, a pharmaceutical company may know how to develop and manufacture tablets, liquids and lotions but may not have sufficient expertise in R&D and manufacturing to make a liquid-gel, or an aerosol product or a patch delivery system.
Typically the R&D and/or manufacturing might be outsourced to a third party contract vendor who has specialized expertise in these technologies who will develop and/or manufacture products for the pharmaceutical company using the pharmaceutical company’s active ingredient and/or its brand. This arrangement allows the pharmaceutical company to deliver some novel line extensions for an existing drug, thus getting more “bang for the buck” for the time and expense of discovering a new pharmaceutical active ingredient.
Note that although this type of outsourcing is reasonably common, you will need to make sure the third party vendor has a solid reputation for being easy to work with and can deliver products on time.
3. Outsource personnel with specific skills … Have you ever had an R&D project where you needed a specific skill that is unavailable in your company? For example, it could be someone with specific regulatory knowledge, clinical knowledge or technical knowledge to help you on a hot project. Or have you come across the situation where all the in-house project managers are busy and you need a project manager immediately for a new project?
In these situations outsourcing (i.e. contracting) on a temporary basis makes sense. If your company limits the number of “temps” or “consultants” that can be hired, a comparative cost analysis for hiring a temp verses a permanent hire and an analysis of the benefits of bringing a new project to market more quickly (even by a few weeks), may help you to persuade your boss that outsourcing is the better route to success.
4. Outsource where your R&D group is small … The size of an R&D group has a bearing on the outsourcing issue. Typically small R&D groups tend to outsource more because they don’t have all the functional groups of larger R&D groups. This is perfectly natural as small companies do not have economies of scale and it makes no sense for a small company to have all the R&D functions that might only be used for a small number of projects. Many start-up biopharma companies essentially outsource their entire product development effort with a few key internal personnel managing the clinical and regulatory strategies and reporting back on the status of the development efforts. Tight management and oversight of the third party vendors is critical in these circumstances.
5. Outsource for Open innovation … Open innovation conceptually suggests the use of third party ideas to create added value in innovation, and incorporates the concept of outsourcing internally-generated ideas that may fall outside the corporate strategy. Open innovation is the foil of the “not invented here” lament. Good ideas always benefit from other people’s input and open innovation is a fantastic way to invite consumers and others look at an idea and improve upon it.
Postscript… The use of outsourced services, ideas, technologies and consultants can help increase the capacity of R&D, improve the quality of R&D projects, or improve the speed to market of an R&D project. But it’s important to prioritize these goals to ensure you make the “right” outsourcing choices. For example, if you need to increase the capacity of an R&D group, say from 10 projects to 15 projects, then outsourcing functional work or specialized technology will work well. On the other hand, if you have a high priority project where speed to market and execution are essential then outsourcing for functional capacity may be only appropriate if you have a functional bottleneck that cannot be resolved, because otherwise I believe these projects are better handled in-house if possible. The administrative overhead of managing an outsourced project (placing the proposal out to bid, contract negotiations, quality audits etc) means that outsourced projects typically are slower than a corresponding in-sourced project. Outsourcing work for functional R&D groups works well for back-burner type projects where speed to market is not critical.
Outsourcing personnel with specialized skills or services for specialized technology will improve your speed to market if those skills or services are lacking or undeveloped in-house. If your primary goal is to improve product quality, then open innovation outsourcing to elicit new ideas and content from outside your company or the use of outsourced personnel with specific skills will result in a better product but may increase the time to market.
- See my earlier posts on “Investing for Innovation Crescendo” for a discussion on improving organizational infrastructure and talent.
© Dennis Nelson 2013