Outsourcing Innovation

Article excerpt

Comparison of external technology providers to Siemens uncovers five drivers of innovation success.

OVERVIEW: Although innovation outsourcing has become a widespread practice in R&D management, managers on the ground wonder which project management practices are required for technology development with external providers. An examination of 24 outsourced development projects at Siemens identified five common drivers of success. Among these, project-specific partner competence as well as maintaining in-house competence distinguish successes from failures. In addition, each innovation source has specific success drivers. These include managing expectations (customers tend to get carried away thinking they can sell the technology next month) and protecting one's intellectual property in collaborations with competitors and start-ups. When a mature rather than novel technology is outsourced, the success drivers shift from project issues to producibility and system compatibility.

KEY CONCEPTS: innovation outsourcing, partnerships, project management, Siemens.

There is a continuing trend toward shifting product and service innovation activities outside the firm, a trend that is driven by a combination of more complex technologies (and greater technology risk), global markets, more dispersed expertise, and faster emergence of disruptive technologies (1,2). One survey of the world's largest R&D spenders reveals an increasing reliance upon external sources of technology over the last ten years (3); another recent survey estimates that 45 percent of innovations stem from external sources, with this figure as high as 90 percent in service industries (4).

Despite this, managers still struggle with identifying the best innovation providers and with managing collaborations. Indeed, many collaboration projects eventually unravel (4). This article presents a study of 24 detailed innovation outsourcing case studies at Siemens, a global electronics company with one of the world's largest and most international R&D operations. This study makes two contributions:

1. We compare five different types of external providers of novel technologies with respect not only to their general strengths and weaknesses but also to their operational management challenges: research institutes (including universities), suppliers, competitors, customers, and technology start-up companies. This offers lessons for R&D managers on how to choose among the various provider types and where to focus attention in managing collaboration projects.

2. We compare the outsourcing of novel versus mature technologies for one type of provider (suppliers) and demonstrate how, in the latter case, management challenges are less concerned with competence and more with the compatibility of a sourced new component within the broader system of which the component will become a part.

How the Study Was Conducted

Siemens AG is Germany's largest manufacturer and R&D organization. In fiscal 2007, its gross revenue was about [euro]72.4 billion and total R&D expenditures were [euro]3.4 billion. The company had 32,500 R&D employees globally, filed 5,060 patent applications and registered 8,267 internal inventions. Its R&D themes are highly diversified, ranging from environmental technology, new energy sources, artificial intelligence, new light sources, and new materials for such applications as transportation systems, factory design and logistics.

Siemens complements its vast in-house R&D efforts by collaborating with hundreds of external innovation partners. For this study, 24 innovation outsourcing cases were systematically selected along two dimensions (see Table 1): 1) comparing innovation sources for the embryonic technology phase, and 2) comparing the management challenges across technology maturity stages for one source (5,6 ).

The unit of analysis is a single collaborative project of outsourced innovation activity. …