Outsourcing Innovation: The New Engine of Growth

Innovate or die. That’s a theme many senior executives support. How to keep ahead is the issue. With 2 billion new minds becoming innovation sources for our marketplaces between 1995 and 2010, no one company acting alone can hope to out-innovate every competitor, potential competitor, supplier or external knowledge source around the world.1

But there is hope. Strategically outsourcing innovation — using the most current technologies and management techniques — can put a company in a sustainable leadership position. Leading companies have lowered innovation costs and risks 60% to 90% while similarly decreasing cycle times and leveraging the impact of their internal investments by tens to hundreds of times.2 Strategic management of outsourcing is perhaps the most powerful tool in management, and outsourcing of innovation is its frontier.3

Thinking About Outsourcing

First, consider the pharmaceutical industry, where independent biotechnology research adds 100 gigabytes per day to the databases of the GenBank alone (the National Institutes of Health genetic sequence database, an annotated collection of all publicly available DNA sequences). No company can hope to keep ahead of such an outpouring by itself. Furthermore, at the applied research level, combinatory chemistry (designing, constructing and testing new compounds in vitro at the molecular level) has reduced experimental cycle times by more than 800 times and lowered costs and risks by more than 600 times. As a result, hundreds of small, sophisticated firms have entered the field as potential suppliers of innovation —radically changing the opportunities for outsourcing and restructuring the entire industry.

Next, consider both the large services industries, where most innovations are dependent on software, and the manufacturing world, which increasingly relies on embedded electronics. In both cases, a mere 15 sequences of software can be combined in more than 10 trillion ways, each creating a potential new product or process. No internal R&D group can possibly predict, evaluate or cover all possible designs or competitive positions. To prosper in this environment — even survive — companies need to systematically tap the capabilities of external knowledge leaders, not just for state-of-the-art products and services but also for the continuous innovation and evolution of ideas that will keep companies at the frontier of their industries.<

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1. Forester Research and Access Media International estimate 140 million Internet users doubling at least annually through 2005.

2. Figures derived from interviews conducted between 1997 and 2000 with leading practitioners cited in this article.

3. The definition of “outsourcing” includes the relatively permanent purchase of goods or services in a particular category from a single source or mul tiple sources. “Innovation” is widely defined as the first reduction of a concept to useful practice in a culture.

4. J.B. Quinn, “Strategic Outsourcing: Leveraging Knowledge Capabilities,” Sloan Management Review 40 (Summer 1999): 9–21. The article provides a complete framework and key practices for outsourcing state-of-the-art products and services.

5. United Nations, “Statistical Yearbook,” New York, 1998.

6. The basic framework for strategic outsourcing was delineated in the following publications: J.B. Quinn, “Intelligent Enterprise” (New York: Free Press, 1992); and

J.B. Quinn and F. Hilmer, “Strategic Outsourcing,” Sloan Management Review 35 (Summer 1994): 43–55.

The classic economist’s statement of the rationale for outsourcing is:

R. Coase, “The Nature of the Firm,” Economica [number?] (November 1937): 386–405.

7. “A New Kind of Boeing,” The Economist, January 22, 2000: 62–63.

8. H. Mintzberg and J.B. Quinn, “Ford Team Taurus,” in “The Strategy Process,” (New York: Prentice Hall, 1996).

9. R. DaVeni and P. Ravenscraft, “Economies of Integration vs. Bureaucracy: Does Vertical Integration Improve Performance,” Academy of Management Journal 37 (October 1994): 1167–1206.

10. R.L. Simison, F. Warner and G.L. White, “Big Three Car Makers Plan Net Exchange,” The Wall Street Journal (February 28, 2000): A3.

11. Quinn’s “Strategic Outsourcing: Leveraging Knowledge Capabilities,” cited above, develops this concept, numerous examples and management practices in depth.

12. T. Blackman, “Trading in Options,” People Management, May 6, 1999: 42–46.

13. Company documents.

14. E. Von Hipple, “Sources of Invention” (New York: Oxford Press, 1988).

15. “Business: Wheels and Wires,” The Economist, January 8, 2000: 58–62.

16. W. Grimson, R. Kikinis and F. Jolesz, “Image Guided Surgery,” Scientific American 280 (June 1999): 62–69.

17. For an excellent review of this and other techniques, see:

E. Wilson, “Product Definition: Assorted Techniques and Their Marketplace Impact,” Institute of Electrical Engineers: Engineering Management Conference Report, 1990: 64–69.

18. This analogy was first suggested by S. Halsted, managing partner, The Centennial Group, 1998.

19. For a full analytical approach for operating in this mode, see:

R. DaVeni, “Hypercompetition” (New York: Free Press, 1997).

20. “The Future of Work,” The Economist, January 29, 2000: 89–92 (Special Section); and

J.B. Quinn, P. Anderson and S. Finkelstein, “Managing Professional Intellect: Making the Most of the Best,” Harvard Business Review 76 (May–June 1998): 71–80.

21. K. Zien and S. Buckler, “From Experience: Dreams To Market: Creating a Culture of Innovation,” Journal of Product Innovation Management 14 (July 1997): 274–287.

22. Interviews in support of “Information Technology in the Service Society,” Report of Committee on the Impact of IT on Performance of Service Activities, Computer Science & Telecommunications Board, U.S. National Research Council, U.S. National Academy Press, Washington D.C., 1994.

23. These concepts were first published in J.B. Quinn, T. Doorley and P. Paquette, “Technology in Services: Rethinking Strategic Focus,” Sloan Management Review (Winter 1990): 79–87; and

J.B. Quinn, T.L. Doorley and P.C. Paquette, “Beyond Products: Services Based Strategy,” Harvard Business Review 68 (March–April 1990): 58–68; and

J.B. Quinn, J. Baruch and K. Zien, “Innovation Explosion” (New York: Free Press, 1997) extends this concept to innovation outsourcing in detail.

24. H. Mintzberg and J.B. Quinn, “Nintendo of America,” in “The Strategy Process” (New York: Prentice Hall, 1996).

25. R. Katz and T. Allen, “Project Performance and the Locus of Influence in the R&D Matrix,” Academy of Management Journal 28 (March 1985): 67–87 ; and

M. Tushman and P. Anderson, eds., “Managing Strategic Innovation and Change” (New York: Oxford University Press, 1996).

26. J.B. Quinn, J. Baruch and K. Zein, “Software Based Innovation,” Sloan Management Review 37 (Summer 1996): 11–24; and

Quinn et al., “Innovation Explosion,” 1997.

27. G. Arnaut, “Partners in Virtual Workspace,” Information Week, Dec. 16, 1996: 70–77.

28. For a detailed development of the design and use of figures of merit, see:

Quinn et al., “Innovation Explosion,” 1997.

29. J.B. Quinn, “Logical Incrementalism” (Homewood, Illinois: Irwin, 1980);

Quinn, “Intelligent Enterprise,” 1992;

U.S. National Research Council, “Information Technology in the Service Society,” 1994; and

Quinn et al., “Innovation Explosion,” 1997.

30. W. Mossberg, “A Pilot Rival Organizes Your Life, Then Morphs Into Something Else,” The Wall Street Journal, September 16, 1999: p. B1.

31. The following major studies of innovation support this thesis: J. Jewkes, D. Sawers and S. Stillerman, “Sources of Invention” (London: St. Martin’s Press, l958);

T. Kuhn, “The Structure of Scientific Revolutions” (Chicago: University of Chicago Press, 1962);

D. deSolla Price, “Of Sealing Wax and String,” Natural History (January 1984): 48–57;

J. Diebold, “The Innovators: The Discoveries, Inventions, and Breakthroughs of Our Times” (New York: Dutton, 1990);

R. Root-Bernstein, “Discovering” (Cambridge, Massachusetts: Harvard University Press, 1991); and see the monthly series “Scientific Pathways,” Science.

32. The full logic for this is developed in: Quinn, “Logical Incrementalism,” 1980.

33. Government R&D procurement offers an example of the need for both human and software interactions. Contract officers’ personal knowledge was often necessary to overcome the slow bureaucratic review committees that are remote from the actual work. Yet they often unintentionally became “captured” by certain groups with exciting ideas. Software testing with independent observers helped ensure balance.

34. J.B. Quinn, “Managing Innovation: Controlled Chaos,” Harvard Business Review 63 (May–June 1985): 73–84.

35. Quinn et al., “Innovation Explosion,” 1997.

Chapter 8 illustrates many of the most common and useful forms and their associated incentive and performance measurement systems.

36. “The Future of Work,” The Economist, Jan. 29, 2000.