Managing Global Outsourcing to Enhance Lean Innovation: Outsourcing Techniques Used by Smaller Firms Can Help Larger Firms Keep R&D Lean While Maintaining Innovation Efficiency
Marion, Tucker J., Friar, John H., Research-Technology Management
Firms are increasingly pressed to decrease project cycle times while reducing R&D costs. However, even as firms are required to do more with less, successful innovation in new products and services is still the lifeblood of any firm, whether new or established, large or small. Unfortunately, the risks associated with R&D are more prevalent than ever, with increased global competition combined with shorter lifecycles. Product and service failure rates remain high, at approximately 40 percent (Adams 2004). The charge falls to R&D managers, therefore, to be both leaner and more effective in their innovation efforts.
One option for resolving this dilemma is the outsourcing of important components of innovation development and commercialization. Outsourcing is a strategically important activity that enables an enterprise to achieve both short- and long-term benefits (Wu et al. 2005). The use of outside suppliers to provide services or products frequently offers a cost-competitive alternative to performing the required activities in-house (Rainey 2005).
The function of R&D itself has grown more internationally distributed and aligned to leverage the advantages of outside resources (Eppinger and Chitkara 2006). While lower transaction costs (for instance, lower wages) were initially a primary motivation for outsourcing, the enhanced networks and innovation leverage made possible by these activities are now challenging the locus of internal innovation (Nambisan and Sawhney 2011). One need look no further than Apple's relationships with contract manufacturer Foxconn and with networks of component suppliers, which allow a rapid rate of successive product generations (Duhigg and Bradsher 2012). The benefits of outsourcing--adding critical expertise without adding fixed costs--can be leveraged throughout the R&D process. Services that may be outsourced include industrial design, engineering, prototyping, component sourcing, manufacturing, sales, and administrative functions. For R&D managers, these outside resources can be a "breath of fresh air," bringing new energy to innovative ventures within the corporate walls (Thomke and Nimgade 2007).
In a study of outsourcing and R&D, we explored the opportunities and challenges for firms seeking to leverage outsourcing to enhance their R&D effectiveness while staying lean in their innovation efforts. To accomplish this task, we studied small, new ventures, many of which were started less than five years ago. These firms, which lack the complexities, capital structure, or internal R&D resources required to develop and commercialize their innovations, turned outside for help. Outsourcing allowed these firms to limit fixed R&D costs, increase speed to market for their first revenue-generating products, add innovative talent to the team, and develop relationships and networks vital to sustained growth. While small, new ventures may be compelled to outsource components of their innovation efforts, large, established firms seeking to improve their R&D performance may also find benefits in an outsourcing program.
This study sheds light on the approach that small, new ventures take to leverage global outsourcing; our analysis synthesizes the best practices of these firms in order to provide insight for more established firms seeking to increase the efficiency and effectiveness of their R&D organizations.
This paper reports on the results of a longitudinal three-phase study undertaken over several years. The complete study was intended to develop a better understanding of how product development could be made more efficient and effective by studying how new, resource-constrained ventures developed and commercialized their initial products. Over the course of the initial phases of the study, we noted the frequency with which these firms leveraged outsourcing to make the most of their limited resources and move products to market more quickly and with less risk. …