26 Nov 2007  Research & Ideas

Best Practices of Global Innovators

Corporate R&D labs used to be the key for companies to create competitive advantage. But in the 21st century, innovation is moving out of the lab and across the globe. That's why Harvard Business School professor Alan MacCormack and his research collaborators believe that a real source of competitive advantage is skill in managing innovation partnerships. Key concepts include:

  • Innovation is increasingly driven through collaborative teams due to product complexity, availability of a low-cost but highly skilled labor pool, and advances in development tools.
  • Collaboration adds to the top and bottom lines by shortening development lead times, increasing capacity, and facilitating access to skills, capabilities, and intellectual property that a firm does not possess internally.
  • Many efforts at innovation collaboration fail because they begin with the goal of lowering costs.
  • Successful collaboration programs develop a collaboration strategy that is aligned to their business needs. They also organize for effective collaboration and invest in building collaborative capabilities.

 

In the not-too-distant past, many companies secured competitive advantage by investing heavily in internal R&D. Company engineers and scientists built value from the ground up, and protected their intellectual property like lions defending their pride. If it was not invented here, it was not worth using.

But today, says Harvard Business School professor Alan MacCormack and his research collaborators, "not invented here" is becoming a badge of honor—and more than that, a source of competitive advantage.

To design the 787 "Dreamliner," now scheduled for its initial flight in late 2008 after a recent setback, Boeing lashed together the efforts of 50 partners in 130 locations working together over 4 years. These firms aren't just manufacturing partners—they actually design the components they make.

"In our view, Boeing's source of competitive advantage is shifting; it is less and less related to the possession of deep individual technical skills in hundreds of diverse disciplines," the researchers conclude in their paper, Innovation through Global Collaboration: A New Source of Competitive Advantage. "Boeing's unique assets and skills are increasingly tied to the way the firm orchestrates, manages, and coordinates its network of hundreds of global partners."

It just isn't possible for one firm to master all these skills.

MacCormack and his team (Theodore Forbath, Peter Brooks, and Patrick Kalaher, all of global services provider Wipro Technologies) interviewed some 100 managers from 20 firms to gather best practices of the companies that do collaborative innovation correctly. They also charted how global teamwork can misfire. The research built upon expertise developed in Wipro's own collaboration experiences used to shape the interview program.

We asked MacCormack to discuss the findings.

Sean Silverthorne: Traditionally we've thought of innovation as something done internally by a business, often through a centralized R&D team. But your study discusses a trend where companies innovate in collaboration with partners. At a macro level, what's driving this trend?

Alan MacCormack: There are 3 main drivers. First, the complexity of products is increasing, in terms of the breadth and number of technologies they include. Cars send maintenance data wirelessly to dealerships; sneakers contain silicon chips to fine-tune their fit. It just isn't possible for one firm to master all these skills, let alone house them under one roof.

Second, a pool of low-cost yet highly skilled labor has emerged in developing countries, creating incentives to substitute these for higher-cost equivalents. Indeed, some regions of the world are developing unique skills which can provide a valuable source of product differentiation.

And finally, advances in development tools (e.g., computer-aided design) coupled with a move to more open architectures and technical standards have driven down the cost of distributing work. When you add these up, it is clear that collaboration is no longer a "nice to have." It is a competitive necessity.

Q: What are the advantages to companies that do it well?

A: A big one is lower cost. In fact, that's often the primary reason that firms look to collaborate in the first place. But the payoffs go way beyond cost. Collaboration can help to shorten development lead times and increase capacity; it can facilitate access to skills, capabilities, and intellectual property (IP) that a firm does not possess internally; and it can allow a firm to acquire relationships and knowledge in a part of the world where it has no experience. In essence, collaboration can help firms improve their bottom and their top lines. For a few, it provides a real source of competitive advantage.

Q: You mention in the paper that many efforts at innovation collaboration fail because they begin with a "mindset" of lowering costs. Why does this approach not work?

A: Many firms adopt what we call a "production outsourcing" mindset to collaboration. This is typified by a focus on lowering cost at the expense of other potentially more valuable benefits. These firms view collaboration as a form of arbitrage—a way of substituting U.S. resources with equivalents of lower cost. But they fail to consider how collaboration can be used to support their broader business goals. Collaboration can lower costs; but it can also be used to increase the distinctiveness of a firm's products—for example, by tapping into the unique skills and capabilities of a partner. Leading firms develop an explicit strategy for collaboration that is aligned with their business objectives. While a focus on lower cost is sometimes the outcome, it is not always.

A second reason that managing collaboration like production outsourcing doesn't work is that it leads to ineffective organizational practices. Production and innovation are different activities. While the former seeks to replicate an existing product at low cost, the latter seeks to discover something entirely new and valuable. Similarly, outsourcing and collaboration are very different skills. While one involves procuring an asset or resource at the lowest price, the other requires leveraging the unique skills and capabilities of partners to jointly solve problems. Applying the same organizational methods to both sets of activities ignores the fact that they have different objectives.

Q: You detail 3 critical principles followed by companies that formed successful collaboration programs. What are these principles?

A: First, firms must develop a collaboration strategy that is aligned to their business needs. At its heart, this requires assessing how collaboration can help firms improve along multiple performance dimensions, including both lower cost and increased differentiation. Successful organizations achieve the latter in 2 ways; first, by leveraging a partner's superior capabilities and skills, and second, by accessing a partner's unique contextual knowledge, the knowledge and relationships that it possesses by virtue of its local position. In combination, these 3 benefits—cost, capability and contextual knowledge—comprise the "3C's" of a global collaboration strategy.

The second principle is that firms must organize for effective collaboration. Firms that view collaboration through an outsourcing lens tend to adopt a "transactional" model of organization. They treat partners like component suppliers, and focus their efforts on how to specify what is required from them in great detail. By contrast, successful firms recognize the inherent uncertainty in innovation, where a range of problems that cannot be predicted in advance must be resolved. Dealing with uncertainty requires different organizational choices in terms of team design, contract structure, and IP management.

Consider, for example, a typical practice at many outsourcing firms. In quiet times people are taken off a project, and in busy times they are added to it. This makes sense in a transactional world, where it is assumed that people can pick up where they left off. But there is no guarantee that the same staff will return. If they don't, the new team members will have to begin afresh understanding the client and project context. Leading firms recognize this is not effective and so insist on greater staff continuity. While expensive in the near term, the long-term payoff is deemed worthwhile.

Leading firms also pay greater attention to contract structure. Writing contracts the size of a telephone book is obsolete in an era where the greatest value a partner provides is in the ideas they possess and not the wage rate they pay. Partners must be encouraged to share ideas, which can only be accomplished if they share in the spoils that come from their realization. Hence successful firms reward partners through revenue and profit sharing, while hedging risk by asking them to absorb a portion of development costs.

The final principle that emerged in our work is the need to invest in building collaborative capabilities. Many managers assume that their firms are already equipped to work with partners. They believe it is possible to get it "right the first time" and are surprised and upset when things don't go according to plan. Yet firms are rarely good at collaboration in their initial efforts. Leading firms recognize this reality, and make investments—in people, process, platforms, and programs—to enhance performance over time. The result is that they learn this skill at a much faster rate than competitors.

Q: You mention 4 areas in which firms must invest: people, process, platforms, and programs. How does each of these contribute to building collaborative capabilities?

A: People: Effective collaboration requires people with different skills, given that team members sit outside the boundaries of the firm in distant countries with different cultures. Rather than a focus on pure technical expertise, managers need a broader skill set, associated with the need to orchestrate and coordinate distributed work. To reflect this emphasis, firms must change their recruitment, development, evaluation, and reward systems.

Process: Effective collaboration requires that firms rethink their processes. Distributed work involves a variety of additional tasks as compared with single-site projects, related to dividing tasks, sharing artifacts, and coordinating and integrating work. Rarely does a firm's default process adequately address these activities. Effective approaches are discovered through informed trial and error, using pilot projects to test the value of specific practices and generate descriptive data to help assess performance.

Platforms: Leading firms invest in an infrastructure—a set of development tools, technical standards, and working methods—to facilitate distributed work. The more complex the project and the more partners involved, the more sophisticated this platform needs to be. We were surprised by how many firms pay inadequate attention to this area, causing major problems. Consider the Airbus 380, which had been delayed for 2 years, in part because 2 partners used different versions of the same design software!

Programs: Successful firms manage their collaboration efforts as a coherent "program," in contrast to organizations that run each project on a stand-alone basis. To achieve this objective, some firms have created the post of, in effect, "Chief Collaboration Officer," responsible for overseeing all their collaboration efforts. Such a move signals the importance of partnering to a firm's strategy, facilitates efforts to transfer learning across projects, and helps to standardize methods for selecting and managing partners.

Q: Can you give examples of companies that were successful and the benefits they gained?

A: Before we do, it's worth noting that evaluating the benefits from collaboration is hard. Many firms struggle with this issue, given they need to quantify the benefits before making the kinds of investment we are talking about. It's easy when it's all about cost; how much are you saving? But what if you are using collaboration to access new capabilities and deliver superior levels of product differentiation? That value is harder to measure, yet firms must solve this problem or miss out on huge opportunities.

Consider Microsoft, which used an Indian software partner to enhance its testing capabilities in its Windows division. Microsoft's partner helped to apply "lean" manufacturing techniques to the test process, streamlining and prioritizing tests and re-designing tasks to allow staff to work in parallel. As a result, one team improved test time by 90 percent, lowered costs by 70 percent, and reduced "failure" rates to near zero.

NewCo, a firm that designs enterprise servers, obtained a different type of benefit. In one recent project, the firm was having difficulty meeting the target cost due to the high price of one component. So the firm asked its Taiwanese development partner to leverage its knowledge of local manufacturers' costs and capabilities to solve the problem. The partner located a new supplier that could source an equivalent component at lower cost. For NewCo, the value of collaboration was in accessing superior local knowledge.

Boeing's development of the 787 exemplifies what is possible through collaboration. The project included over 50 partners from 130-plus locations working for over 4 years. From the start, the aim was to leverage advanced capabilities from this network, not to replicate the skills already built. For example, Boeing signed up smaller firms with expertise in the new composite materials being used in the airframe, integrating their work with other partners developing complementary technologies. Indeed, this type of project could never get off the ground without the ability to collaborate effectively.

Q: Are there industries or types of companies where innovation is best kept in-house, where a distributed model does not make sense?

A: We're still working on the best way to think about this question. What we can say is the number of industries where a go-it-alone approach makes sense is rapidly declining. Leading firms are pushing the boundaries in terms of where and how to use collaboration, while resolving critical organizational and intellectual property issues in creative ways. The old adage of keeping the "core" in-house and using partners for the surrounding pieces is not enough. Consider that Boeing recently spun out its supplier of nose cones and fuselages, a business that many would consider "core" for an aircraft manufacturer. Examples such as these are forcing us to rethink the advice we give about what parts of the innovation value chain a firm should keep and where it should look to partner.

Q: You point to Boeing as an example of a company whose unique assets are becoming less on the technical/engineering side and more on its ability to orchestrate its network of global partners. Is Boeing the exemplar of what companies of the future will look like?

A: It's certainly one firm that we believe demonstrates how collaboration can be used for competitive advantage. The firm "orchestrates and integrates" the work of its partners. And critically, these skills are difficult to replicate; harder, we would argue, than any specific piece of technical know-how the firm possesses. Boeing must create the vision for next generation products, select technologies that meet this vision, develop an architecture within which partners can work, and choose partners with the right mix of capability and cost. And this is all before a project starts! Once it begins, there is the challenge of directing and managing globally distributed innovation teams.

One could argue that the firm has been doing this for years, so what is so different now? Well, historically Boeing used a "build-to-print" approach. Innovation was driven by a central R&D team, and only the manufacturing tasks were distributed to partners. This is not collaboration, it is outsourcing. In recent projects, however, the firm has adopted a more collaborative approach, requiring partners to fund and design many critical parts. This isn't an easy transition. Apart from the need to invent new processes and practices, it implies a distinct shift in culture. Indeed, there have been hiccups along the way, given the huge challenges involved in projects of this complexity. But to date, Boeing has managed the transition admirably. In the process, it may well have reinvented itself.

Q: What are you working on next?

A: This first study was qualitative in nature, so the results we describe represent a set of hypotheses about how firms can successfully collaborate. One ongoing focus therefore is to bring quantitative data to bear on this topic, with the aim of quantifying the impact of the strategies and practices we observed. This would help firms to evaluate choices and measure the value of alternative collaboration approaches.

A second focus is to develop a better understanding of where firms should collaborate. We have seen examples that challenge the conventional wisdom on this topic, and lead us to believe a new perspective is needed. This perspective must capture the fact that collaboration is in itself a capability that is rare, valuable, and hard to imitate.

Finally, we have begun research on a topic that strongly influences the success of collaboration efforts: the design of a product's "architecture." We discovered in our work that the decisions a firm makes about how to partition tasks and allocate them to partners are among the most critical, yet poorly understood, aspects of these projects. These choices dictate how effectively a project is run, and can constrain (or elevate) the performance of the product itself. In a new study, we have developed ways to measure a product's architecture, and are using this to assess the impact of making different choices.

About the author

Sean Silverthorne is Editor of HBS Working Knowledge.