Outsourcing innovation A manufacturer’s perspective A report from the Economist Intelligence Unit Sponsored by Siemens PLM Software Outsourcing innovation A manufacturer’s perspective Preface Outsourcing innovation: A manufacturer’s perspective is an Economist Intelligence Unit report, sponsored by Siemens PLM Software The Economist Intelligence Unit bears sole responsibility for this report The Economist Intelligence Unit’s editorial team executed the survey, conducted the interviews and wrote the report The findings and views expressed here not necessarily reflect the views of the sponsor The research drew on two main initiatives: We conducted a wide-ranging online survey in February-March 2008 In all, 305 executives took part To supplement the survey results, we also conducted in-depth interviews with senior executives and independent experts knowledgeable about outsourcing innovation The author of the report was Sarah Murray and the editor was Clint Witchalls Mike Kenny was responsible for design and layout Our sincere thanks go to the executives who participated in the survey and interviews for sharing their time and insights May 2008 © The Economist Intelligence Unit 2008 Outsourcing innovation A manufacturer’s perspective Executive summary T oday, few brand owners make their own goods Instead, they hand this over to others and concentrate on devising, designing, advertising and selling their products However, while outsourced manufacturing was once pursued largely to cut costs and allow organisations to focus on activities that added value to their output, companies are recognising that external partners may also have the ability to innovate With skills in short supply across the world, companies are not only looking to suppliers in their own countries for product and process innovations They have also recognised that, with engineering graduates declining in their home markets, they are more likely to find their research and development (R&D) capabilities in countries such as China and India, where thousands of young engineers are emerging from universities every year Yet, while the offshoring of R&D is becoming an increasingly popular model for large companies, when it comes to outsourcing, the potential loss of intellectual property remains a worry Moreover, lack of proper communication channels between companies and their external partners can hamper the flow of knowledge and ideas from service providers to their clients This report is based on a global survey of 305 senior executives The survey, which was conducted by the Economist Intelligence Unit on behalf of Siemens PLM Software, looks at the opportunities and challenges associated with outsourcing innovation We examine the drivers behind the more open approach to sourcing ideas that is emerging and the models companies are embracing as they struggle to innovate ever more quickly in order to remain competitive Some of the key findings are highlighted below © The Economist Intelligence Unit 2008 The term “innovation” is generally applied to new products and services Most companies measure innovation by counting the new products and businesses they launch The second most popular measurement method is to add up the revenue growth from these launches Counting the number of patents filed comes in a distant third, while some manufacturers still not measure innovation Skills shortages will increase the need to look externally for innovation The largest group of respondents reported that in the past three years it had become somewhat or much harder to hire talented employees who can deliver innovative ideas Cost cutting remains the biggest driver for outsourcing Most companies still use outsourcing providers to cut costs and to allow them to focus on their core competencies However, a modest group of respondents say they turn to outsource providers as a source of innovation Most companies recognise the need to start looking outside their organisations for innovation The largest group of respondents report that their organisations will increase the proportion of innovation and ideas that come from external partners in the next three years Outsourcing innovation A manufacturer’s perspective Use of external partners as a source innovation is not yet widespread While some respondents say that their organisations derive one-half or more of their innovation from external partners, the largest group of respondents agree that in the past three years “little or none” of their innovation has come from external partners Lack of trust remains the biggest obstacle to outsourcing innovation Fear of loss of intellectual property is the reason many companies are reluctant to turn to outsiders for innovation However, many respondents see technology as a way of protecting intellectual assets Management strategies help companies use external partners as a source of innovation Most respondents believe that establishing better communication channels with partners—both faceto-face and virtual—would make capitalising on their ability to innovate easier The majority of companies believe that having an open culture in which knowledge is shared is essential to capitalising on innovation from external partners © The Economist Intelligence Unit 2008 Outsourcing innovation A manufacturer’s perspective Introduction A few decades ago, when companies thought of innovation, it was with a view to improving a product over a period of years In-house R&D teams would apply what they had learned and gradually adapt products to meet new requirements Today, that process takes mere months As product lifecycles become more compressed and the complexity of the product development process escalates, companies are looking to broaden their supply of new ideas As a result, they are turning to R&D capabilities that lie outside their organisations and embrace a variety of “open innovation” models In the survey, 37% of respondents report that about one-quarter of the innovation emerging from their organisation in the past three years came from external partners As well as the need to speed up the time in which they bring new products to market, the shortage of skills in mature markets—particularly in fields such as engineering and chemistry—is driving the need to look for new pools of talent in countries such as China In the past three years, what proportion of innovation at your organisation has been derived from external partners, in your estimation? (% respondents) Source: Economist Intelligence Unit survey, March 2008 © The Economist Intelligence Unit 2008 Little or none 41 About one-quarter 37 About half 13 About three-quarters All or nearly all Don’t know and India Our findings confirm this trend, with 39% of respondents saying that, in the past three years, it has become “somewhat harder” to hire talented employees who can deliver innovative ideas, with a further 19% seeing this as “much harder” However, the survey suggests that while most companies have a positive view of outsourced or open approaches to innovation and expect to obtain more ideas from external sources in the next three years, many have yet to so The largest group of respondents (41%) say that in the past three years their organisation derived little or no innovation from external partners Only 13% report that about onehalf of their innovation came from these sources Lack of trust appears to be a major obstacle to the willingness of companies to embrace the idea of turning innovation over to third parties This was cited by 31% of respondents as the biggest barrier to the outsourcing of innovation, with 20% citing poor communications with external partners Almost one-half (49%) of respondents see loss of intellectual property to competitors and business partners as the main risk in outsourcing innovation to partners However, companies clearly recognise the importance of external sources of innovation, with 29% of respondents seeing overall competitive advantage as the main benefit and 26% citing greater speed in getting products to market The question for companies then is how they can capitalise on the benefits of sourcing innovation externally without losing their most valuable asset: their intellectual property Outsourcing innovation A manufacturer’s perspective The open innovation imperative T he concept of open innovation has attracted the attention of many companies and academics in recent years Henry Chesbrough, a business professor at the University of California, Berkeley, and author of Open Innovation and Open Business Models, argues that managers can tap into a vast pool of knowledge and ideas, many of which lie outside their organisations Companies, he says, not have to originate research in order to profit from it This is something that Proctor & Gamble has demonstrated Over the past decade, the company has radically altered the way it sourced new ideas and products, using the Internet and other methods to turn to independent investors, universities and suppliers Companies have long recognised that they cannot everything themselves The whole outsourcing movement, now decades old, is based on the idea of handing over tasks such as manufacturing to third parties to allow a company to focus on what it does best, whether marketing, branding and selling or managing customer relationships But while outsourcing and offshoring were used purely as cost-cutting strategies, some organisations are looking to gain more from their relationships with external partners by tapping into their ability to innovate This kind of strategy is seen as a good thing In this survey, the biggest group of respondents (57%) believe that the proportion of innovation derived from external partners will increase in the next three years Respondents highlighted a range of benefits from deriving more innovation from external partners The largest group see this as enhancing their organisation’s R&D capabilities (53%), while 38% cite product and service development and 35% point to What parts of your organisation’s business you think would benefit most from outsourcing innovation and ideas? Select up to three (% respondents) Research and development 53 Product/service development 38 Process efficiency 35 Supply chain management 32 Operations 29 Cost controls 24 Sales and marketing 21 Product/service quality 17 Don’t know Other None of the above; We would not benefit from outsourcing innovation Source: Economist Intelligence Unit survey, March 2008 process efficiency Part of the driver behind the desire to increase use of external sources of innovation is the pressure to speed up product development cycles In our research, 26% of respondents believe that deriving innovation from partners would help them get their products to market faster “By and large everything goes much faster these days,” says Steven Veldhoen, a vice-president in Booz Allen Hamilton’s Tokyo office and author of Innovation: Is Global the way Forward?, a joint study by Booz Allen Hamilton and Insead “I a lot of work with automotive companies and the development cycles are shortening all the time.” © The Economist Intelligence Unit 2008 Outsourcing innovation A manufacturer’s perspective At the same time, the pipeline of talent needed to research and develop the innovations behind new products is shrinking in mature markets Some 39% of respondents report that in the past three years it has become “somewhat harder” to recruit the kind of skilled workers needed to deliver innovative ideas, with 19% saying that this has become “much harder” Growth in emerging markets is not helping, notes Ian Brinkley, Knowledge Economy programme director at the UK’s Work Foundation Mr Brinkley argues that, while companies once filled gaps with highly talented Asian engineers and scientists—many of whom stayed on after studying in the US or Europe—this may become harder “If the quality of educational institutions in Asia goes up and their own high-tech industries develop, © The Economist Intelligence Unit 2008 creating more jobs, the future supply of high-quality labour coming into Western economies is going to slow dramatically,” he says “And this could potentially cause real problems.” Open innovation strategies may fill this talent gap Proctor & Gamble, for one, believes its open approach to sourcing innovation allows it to tap into vast pools of skilled individuals “We have about 9,000 researchers internally, but if you look at the domain space those people play in and the number of researchers who are out there in the world as a whole, there are 1.5m researchers in that space,” says Bill Metz, the company’s global business services external business development manager “So anything we can to to tap into them expands our capacity to innovate.” Outsourcing innovation A manufacturer’s perspective A variety of models W hile there is much discussion about the need to take a more open approach to innovation, the models being deployed by companies vary dramatically, from the totally open approach, whereby companies solicit ideas from everyone from suppliers to customers, to the “captive site” model in which companies establish and operate their own R&D centres overseas Proctor & Gamble’s version of open innovation involves accessing externally developed intellectual property, assets and know-how and, once it has identified a property, a trademark, a service or a capability, doing a business transaction with its owner “One of the challenges we face as we get bigger is that it’s more and more difficult to grow organically through only your own internal R&D,” says Mr Metz “So we’re turning to the outside to augment the capability that we have internally.” One of the ways P&G does this is through its CASE STUDY General Electric and the offshore research model Rather than turn to outsiders, General Electric has embraced the offshoring model, expanding its research facilities globally Headquartered on a 525-acre site in Niskayuna, New York, GE Global Research now also has centres in China, India and Germany This gives the company about 3,000 researchers across the four facilities, with expertise ranging from electronics and computing to chemistry and biosciences Two reasons lie behind the company’s decision to locate these facilities in connect+develop website, where individuals or companies can respond to the needs the company has posted or submit unsolicited input The task then is for P&G to identify viable submissions to which the individuals offering them have the rights Other examples of open innovation include InnoCentive, an open innovation company that uses a website to offer financial rewards to people who solve specific criteria posted on the site, and Lego Factory, which allows the children that are Lego’s customers to design products Our findings suggest that tapping into open sources of innovation in this way is something companies aspire to, with a large segment of respondents (59%) seeing an increase in the use of open sources of innovation at their organisation in the next three years Although the concept of “open innovation” has attracted much attention, Tim Jones, principal of Shanghai, Bangalore and Munich For a start, it allows GE to tap into new pools of technical skills, such as the analytics and modelling expertise in which India has great strength “It gives us access to the best technical talent around the world,” says Mark Little, senior vice-president and director of research at GE Global Research “Scientists in Munich, Bangalore and Shanghai wanted to work for GE, yet it was a major inconvenience to their lives to uproot their families.” At the same time, the centres allow the company to enhance its knowledge of countries in which it would like to expand its operations “It puts us closer to growth markets where it is essential for us to understand emerging trends, customer needs and unique challenges as we design new products and technologies,” says Mr Little One example is a magnetic resonance imaging (MRI) system produced by the company Instead of retrofitting a system that was designed for US customers, GE designed and developed an MRI system tailored to the China market “We can innovate, invent and design global products faster, and get it right based on our knowledge of these markets and customers,” says Mr Little “It is about finding more of the best, brightest researchers who have first-hand knowledge of the emerging markets where we want to succeed.” © The Economist Intelligence Unit 2008 Outsourcing innovation A manufacturer’s perspective Innovaro, a UK-based consultancy, argues that confusion often surrounds the term “open”, and that the models are quite distinct from one another “Open source is free of intellectual property and that’s the whole point of it,” he says “Open innovation is all about trading intellectual property If there’s no IP [intellectual property], then you can’t the deal.” For many companies, however, externalising innovation means turning to existing suppliers and other business partners “I see it happening pretty much everywhere,” says Mr Veldhoen “It’s working with suppliers, getting best ideas from suppliers and working in a way that it’s not just about delivering, but is also about sharing the best ideas.” Mr Brinkley identifies an additional version of external innovation “Some of the models are simply joint funding or joint ventures, particularly in areas © The Economist Intelligence Unit 2008 such as aerospace and pharmaceuticals So the recent Rolls-Royce investment in Germany is effectively with the state government—it’s not entirely a Rolls-Royce facility.” Often, it is users, rather than manufacturers, who are from necessity the innovators Eric von Hippel, a professor at MIT Sloan School of Management and author of Democratizing Innovation, cites the example of Massachusetts General Hospital, which developed a slow-acting syringe that releases a small amount of fluid containing antibiotics into the bloodstream This innovation would replace more expensive intravenous fluid bags and be better for patients “They designed and tested the syringe before calling in manufacturers,” he explains “So the users are designing and testing the product—they are the true innovators in such cases.” Outsourcing innovation A manufacturer’s perspective All talk and less action W ith companies such as P&G, Boeing, GE and Dell continuing to capture headlines for their open approaches to sourcing innovation, many companies aspire to similar models As the survey indicates, most companies expect the proportion of innovation derived from either external partners or open sources to increase However, when polled on how much innovation has been derived from these sources over the past three years, the results are quite different Some 41% of respondents say that little or none of their innovation has been derived from external sources in the past three years, while only a tiny minority (2%) say that nearly all their innovation was externally sourced More than one-half of respondents (54%) say that their organisation solicited innovation and ideas on an open-source basis only to a small extent, whereas a large proportion (51%) agree that their organisation was most successful at sourcing innovation in-house Part of the reason behind this mismatch between stated intent and actual activity may lie in the way companies define innovation—by the volume of new products and businesses they launch The majority of companies in our survey (64%) measure innovation this way The second most popular method, cited by 54% or respondents, is to tally the revenue growth from these launches, whereas 32% cite counting the number of patents filed as the method they used Yet such methods of accounting for innovation may leave out other types of innovation and process improvements that occur at the hands of external partners “When you look at automotive companies such as BMW, GM or Toyota, they open innovation all the time—it’s just that they haven’t called it that,” says Mr Veldhoen “So there could be a mis-definition How does your organisation measure innovation? Select all that apply (% respondents) Number of new products or businesses launched 64 Percentage of revenue growth from new products or businesses 54 Number of patents and trademarks filed 32 Time to market (cycle time) 30 Improvements in total-factor productivity (that is, the efficiency of a firm’s operations defined as the ratio of outputs to inputs) 25 Quality of manufactured goods (number of defects and the rate of delay) 25 Number of employees for whom innovation is a performance measure 15 Total shareholder return 11 Other We don’t measure innovation Source: Economist Intelligence Unit survey, March 2008 of terms.” However, a very real barrier to open approaches to innovation lies in many companies’ lack of trust in their suppliers As a result, companies worry that they could lose control of their intellectual property Respondents to our survey cite this as the greatest danger posed by a strategy of deriving more innovation and ideas from external partners, with 25% citing the potential loss of IP to competitors and 24% citing loss of IP to partners These fears have been realised in some instances where contract manufacturers have made the leap from supplier to brand owner, as Acer, a computer manufacturer, have done “Particularly in the computer world, you’re getting these weird-sounding brands you’ve never heard of suddenly being available © The Economist Intelligence Unit 2008 Outsourcing innovation A manufacturer’s perspective CASE STUDY Dell’s customer crowdsourcing model One of the strategies on which Dell built its business was the ability to customise its products using feedback from consumers So it comes as no surprise that the computer company’s model of innovation is based heavily on tapping into ideas from its customers To so, the company started to investigate how it might connect with customers online and find out more about their complaints, requests and problems The result was IdeaStorm, initially a blog and now a website facilitating what is known as “crowdsourcing” Launched in February 2007, IdeaStorm allows the company to solicit ideas for product improvements and innovations from online communities of Dell customers and potential customers Once a user posts an idea or suggestion on the site, the community can vote for or against it with a simple click of the mouse A forum section of the site allows individuals to debate ideas in more depth When, soon after the launch, visitors to the site suggested that the company should offer the Linux operating system, hundreds of thousands voted for the idea “So before we launched the new product, we did a survey on IdeaStorm and we had 100,000 people respond within a week telling us exactly what type of Linux they wanted and what type of support they wanted,” explains Bob Pearson, Dell’s vice-president of communities and conversations directly,” says Mr Jones “Those companies have grown by learning from the likes of Compaq and Dell, for whom they’ve been making products for years.” Worries over loss of intellectual property are heightened when it comes to operating in certain countries “The big problem is China, where respect for intellectual property is less rigorous than elsewhere,” confirms Mr Brinkley “And you can never count on national jurisdictions enforcing the laws the way they ought to.” However, technology can be a powerful tool when it comes to protecting intellectual property As companies increasingly hook suppliers into their 10 © The Economist Intelligence Unit 2008 Consumer feedback allowed Dell to tailor the product to customers’ requirements and launch the product extremely quickly “By the end of May, we’d launched our first systems with Linux,” says Mr Pearson “Normally the product development window in technology for hardware is 12 to 18 months This was a software improvement, but that’s still a very quick turnaround.” Mr Pearson sees the model as an effective way of speeding up product improvements and innovations “It still makes sense to talk directly with our business partners one-to-one in conference rooms, but only if it is balanced with the real-time feedback we receive from our customers,” says Mr Pearson “Last year, we had more than twohundred million customer interactions, and that’s a significant amount of feedback that we can learn from.” networks to facilitate collaboration, it is crucial for them to monitor and control the information that is accessible via these networks Options range from use of smart passwords to enterprise rights management software, which allows organisations to limit the data individuals can access and to control what those individuals can with the data Almost half (49%) of respondents said their organisations deployed passwords and encryption when working with partners, while 33% said they used systems and project areas protected by firewalls Enterprise rights management software was also used in the organisations of 26% of respondents Outsourcing innovation A manufacturer’s perspective Setting out the ground rules C oncerns over loss of intellectual property, argue experts, by no means rule out the possibility of deriving more innovation from external partners However, careful management techniques and contractual structures need to be in place at the beginning of an outsourcing relationship In our survey, 26% of respondents agree that having contractual agreements for the sharing of intellectual property would most facilitate a rise in the amount of innovation and ideas derived from external partners “Part of it is defining the basic terminology at the start between the outsourcer and the service provider and establishing what they mean by innovation,” says Michael Burtha, president of Applied Collaborative Strategies, a performance, innovation and leadership consultancy “Because there are changes that occur—small and large innovations and the process improvements that were implemented—when the service provider goes down the learning curve.” What is important, stresses Mr Burtha, is to establish who will have ownership of the improvements that naturally occur during the manufacturing process so that companies can feel comfortable in giving partners enough information about their products and strategies to allow those partners to make real improvements to them “The challenge for the service provider is that if they’re not getting the full snapshot of the landscape, it’s hard for them to be innovative,” he says “If you don’t talk about it ahead of time and work out how to optimise the continual flows of information and knowledge, you’re just doing a transactional deal versus creating competitive advantage.” A careful balance is therefore required between moving to protect sensitive data and intellectual assets—often using technological solutions—and giving suppliers access to enough information to enable them to make substantive improvements to a product or process Laying down the ground rules on who owns these improvements at an early stage in a relationship can give companies the confidence to open up more of their operations to outsiders In addition, companies need to establish communication channels, so that knowledge and innovation can flow back to them from the outsource service provider In this respect, technology can help Some 68% of respondents to our survey say that collaborative project systems would make capitalising on external sources of innovation easier, compared with 41% who cite an intranet accessible by partners A further 32% highlight use of a website soliciting ideas and proposals from external sources And more than one-half (57%) rate technology investment as What technologies and systems would make capitalising on external sources of innovation easier for your organisation? Select all that apply (% respondents) Collaborative project system 68 An intranet accessible by external partners 41 A company website soliciting proposals from any organisation or individual 32 A corporate wiki (a collection of web pages that can be edited by a group) 26 Videoconferencing sessions 25 Use of open-source websites such as InnoCentive and NineSigma 20 Use of 3D virtual worlds such as Second Life Other Don’t know/Not applicable Source: Economist Intelligence Unit survey, March 2008 © The Economist Intelligence Unit 2008 11 Outsourcing innovation A manufacturer’s perspective the most important input facilitating the sourcing of innovation from external partners Herman Miller, a US-based furniture systems producer, has found that technology greatly enhances the communication flow with its partners during the outsourcing process “There’s this seamless connection with almost anyone you work with at a close level,” says Don Goeman, who heads the design and development function at Herman Miller “It used to be like throwing things over a wall and now there’s information and data moving all over the place all the time.” However, Mr Goeman stresses that technology tools need to be supported by good management and clear lines of communication “It’s really important,” 12 © The Economist Intelligence Unit 2008 says Mr Goeman “There have been a number of times where the technical people we have on our staff know the people they’re partnering with so well that they look at them as almost from the same team.” Our findings support his view with 27% of executives saying that more face-to-face meetings would help to increase the flow of innovation from outside suppliers, while 26% point to communication channels such as e-mails, instant messaging, videoconferencing and collaborative project systems Almost one-half (47%) agree that capitalising on external innovation would be made easier by having a dedicated manager responsible for fostering the exchange of ideas with partners Outsourcing innovation A manufacturer’s perspective Conclusion F aced with talent shortages and the need to speed up the time it takes to get new products on the market, companies clearly recognise the need to look outside their organisations for new sources of innovation These sources can range from web-based communities of consumers and customers to universities, business partners and manufacturing suppliers However, our study shows that although companies acknowledge a need and intention to look externally for new ideas, evidence of activity in this area is weaker, with many respondents reporting that in the past three years little of their innovation has been derived from external partners or from organisations or individuals outside their network of suppliers In part, this may be because companies’ definition of innovation—based on the number of products launched—means that they are not taking account of other innovations in the manufacturing process already taking place However, the biggest barrier to outsourcing innovation is the fear of loss of intellectual property While this is a very real concern, companies that put in place contractual arrangements, robust collaborative project systems and efficient communication channels can minimise the risk of others capitalising on their ideas In addition, growing availability everything from data encryption systems to enterprise rights management software means companies can shore up protection of their most valuable intellectual assets And savvy companies have recognised that if they can strike the right balance between protecting these intellectual property assets and giving outsource partners sufficient access to information about their products and processes, those outsource partners can provide not just cost savings and flexibility, but also the ideas and innovations that, in a business environment moving ever faster, will help them continue to secure competitive advantage © The Economist Intelligence Unit 2008 13 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective Appendix In March 2008, The Economist Intelligence Unit surveyed 305 executives from manufacturing industries around the globe Our sincere thanks go to all those who took part in the survey Please note that not all answers add up to 100% because of rounding or because respondents were able to provide multiple answers to some questions How does your organisation measure innovation? Select all that apply What are the main drivers for your organisation to use outsourcing partners? Select up to three (% respondents) (% respondents) Number of new products or businesses launched Cost cutting 64 60 Percentage of revenue growth from new products or businesses Ability to focus on core competencies 54 59 Number of patents and trademarks filed Speed in getting products to market 32 39 Time to market (cycle time) Flexibility to adjust production 30 31 Improvements in total-factor productivity (that is, the efficiency of a firm’s operations defined as the ratio of outputs to inputs) New sources of innovation 22 25 Diversification of sources of production Quality of manufactured goods (number of defects and the rate of delay) 19 25 Proximity of production to customers Number of employees for whom innovation is a performance measure 15 None of the above; We don’t use outsourcing partners Total shareholder return 11 Other Other 2 Don’t know We don’t measure innovation In the past three years, to what extent has your organisation solicited innovation and ideas on an open-source basis (ie, from organisations or individuals outside your network of external partners)? In the past three years, what proportion of innovation at your organisation has been derived from external partners, in your estimation? (% respondents) 14 (% respondents) Little or none 41 Not at all 14 About one-quarter 37 Small extent 54 About half 13 Moderate extent 22 About three-quarters Large extent All or nearly all Don’t know Don’t know © The Economist Intelligence Unit 2008 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective In the next three years, you expect the proportion of innovation and ideas in your organisation that come from external partners to increase or decrease? Do you think your organisation is successful at capitalising on external sources of innovation? (% respondents) (% respondents) Successful 40 Neither successful nor unsuccessful 42 Unsuccessful 10 Don’t know/ Not applicable Increase 57 Stay the same 35 Decrease Don’t know/ Not applicable What is the biggest barrier for your organisation to source innovation and ideas from external partners? In the next three years, you expect the proportion of innovation and ideas in your organisation that come from open sources to increase or decrease? (% respondents) Lack of trust of external partners (% respondents) 31 Communications barriers with external partners Increase 59 Stay the same 33 20 Closed culture among employees who see their ideas as career-building tools 18 Decrease Don’t know/ Not applicable Internal communications barriers 13 Don’t know/Not applicable 10 Other What would most facilitate an increase in the amount of innovation and ideas derived from external partners, in your view? How many external partners does your organisation collaborate with in sourcing innovation and ideas? (% respondents) (% respondents) More face-to-face meetings with external partners 27 None to 57 to 20 20 21 to 50 More than 50 Don’t know More channels for communication with external partners, such as e-mails, instant messaging, videoconferencing, and collaborative project system 26 Contractual agreements for the sharing of intellectual property 26 Sharing office space with external partners 11 Don’t know/Not applicable Other © The Economist Intelligence Unit 2008 15 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective What changes in organisational structure would make capitalising on external sources of innovation easier, in your view? Select all that apply What technologies and systems would make capitalising on external sources of innovation easier for your organisation? Select all that apply (% respondents) (% respondents) Use of cross-functional teams and/or communities of practice Collaborative project system 57 68 Dedicated manager responsible for fostering exchange of knowledge and ideas with external partners An intranet accessible by external partners 41 47 A company website soliciting proposals from any organisation or individual Secondment of partner representatives to your organisation 32 39 A corporate wiki (a collection of web pages that can be edited by a group) Secondment of employees to partner organisations 26 33 Videoconferencing sessions Other 25 Use of open-source websites such as InnoCentive and NineSigma Don’t know/Not applicable 20 Use of 3D virtual worlds such as Second Life Other Is an open culture, in which knowledge is shared, essential to capitalising on innovation from external partners, in your view? Don’t know/Not applicable (% respondents) Yes 85 No 10 Don’t know In the past three years, has it become easier or harder to hire talented employees that can deliver innovative ideas? (% respondents) Much easier Somewhat easier 20 No change 18 Somewhat harder 39 Much harder 19 What investments would your organisations need to make to facilitate the sourcing of innovation from external partners? Select all that apply Don’t know (% respondents) Investments in technology 57 Investment in training courses 47 Investment in change management consultancy 44 Investment in additional staff 35 Other Don’t know/Not applicable 16 © The Economist Intelligence Unit 2008 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective Do you think your organisation would be more successful at sourcing ideas and innovations in-house or externally? What would be the main danger to your organisation of deriving more innovation and ideas from external partners? (% respondents) (% respondents) More successful 51 in-house More successful 38 externally Don’t know/ Not applicable Loss of intellectual property to competitors 25 Loss of control of intellectual property to partners 24 Erosion of in-house skills and talent 16 10 Loss of motivation for R&D teams 11 Dilution of in-house creativity Employees may leave to start ventures that compete with your organisation Don’t know/Not applicable What parts of your organisation’s business you think would benefit most from outsourcing innovation and ideas? Select up to three Other (% respondents) Research and development 53 Product/service development 38 What would be the main benefit to your organisation of deriving more innovations and ideas from external partners? (% respondents) Overall competitive advantage Process efficiency 29 35 Greater speed in getting products to market Supply chain management 26 32 Cost savings Operations 15 29 Access to new pools of talent in countries such as India and China Cost controls 13 24 Diversification of products Sales and marketing 13 21 Product/service quality Don’t know/Not applicable 17 Don’t know Other None of the above; We would not benefit from outsourcing innovation © The Economist Intelligence Unit 2008 17 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective About the respondents What technologies/techniques does your organisation use to protect its intellectual property when collaborating with partners? Select all that apply (% respondents) Passwords and encryption 49 Limiting the amount of data that leaves the organisation (eg, only submitting the digital equivalent of blue-line drawings to partners, not full CAD drawings) In which region are you personally based? (% respondents) 49 Asia-Pacific Discrete systems/project areas for collaboration protected by firewalls 33 33 Western Europe Read-only hardware devices and documents 28 30 North America Digital/enterprise rights management software 26 24 Middle East and Africa Water-marks on design documents 20 Eastern Europe Hosting partners in-house to negate need to information to leave site 17 Time-lapse document protection Latin America 12 Forensic copying of data storage devices What is your primary industry? Other (% respondents) Industrial manufacturing 21 Healthcare, pharmaceuticals and biotechnology 18 IT and technology 15 Consumer goods 14 Automotive Other manufacturing, please specify Chemicals Aerospace and defence Telecoms equipment 18 © The Economist Intelligence Unit 2008 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective What are your main functional roles? Please choose no more than three functions What are your company’s annual global revenues in US dollars? (% respondents) (% respondents) $500m or less 44 General management 37 $500m to $1bn 12 $1bn to $5bn 16 $5bn to $10bn $10bn or more 19 Strategy and business development 35 Operations and production 28 R&D 23 Finance 17 Marketing and sales 16 Supply-chain management 14 What is your title? Customer service 11 (% respondents) Procurement Board member IT CEO/President/Managing director 20 CFO/Treasurer/Comptroller Information and research Human resources CIO/Technology director Risk Other C-level executive Legal SVP/VP/Director 14 Other Head of Business Unit Head of Department 13 Manager 20 Other © The Economist Intelligence Unit 2008 19 Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this white paper or any of the information, opinions or conclusions set out in the white paper LONDON 26 Red Lion Square London WC1R 4HQ United Kingdom Tel: (44.20) 7576 8000 Fax: (44.20) 7576 8476 E-mail: london@eiu.com NEW YORK 111 West 57th Street New York NY 10019 United States Tel: (1.212) 554 0600 Fax: (1.212) 586 1181/2 E-mail: newyork@eiu.com HONG KONG 6001, Central Plaza 18 Harbour Road Wanchai Hong Kong Tel: (852) 2585 3888 Fax: (852) 2802 7638 E-mail: hongkong@eiu.com [...]... one-half (57%) rate technology investment as What technologies and systems would make capitalising on external sources of innovation easier for your organisation? Select all that apply (% respondents) Collaborative project system 68 An intranet accessible by external partners 41 A company website soliciting proposals from any organisation or individual 32 A corporate wiki (a collection of web pages that... terminology at the start between the outsourcer and the service provider and establishing what they mean by innovation, ” says Michael Burtha, president of Applied Collaborative Strategies, a performance, innovation and leadership consultancy “Because there are changes that occur—small and large innovations and the process improvements that were implemented—when the service provider goes down the learning... a very real concern, companies that put in place contractual arrangements, robust collaborative project systems and efficient communication channels can minimise the risk of others capitalising on their ideas In addition, growing availability everything from data encryption systems to enterprise rights management software means companies can shore up protection of their most valuable intellectual assets... sharing of intellectual property 26 Sharing office space with external partners 11 Don’t know/Not applicable 7 Other 3 © The Economist Intelligence Unit 2008 15 Appendix: Survey results Outsourcing innovation A manufacturer’s perspective What changes in organisational structure would make capitalising on external sources of innovation easier, in your view? Select all that apply What technologies and... snapshot of the landscape, it’s hard for them to be innovative,” he says “If you don’t talk about it ahead of time and work out how to optimise the continual flows of information and knowledge, you’re just doing a transactional deal versus creating competitive advantage.” A careful balance is therefore required between moving to protect sensitive data and intellectual assets—often using technological... collaboration, it is crucial for them to monitor and control the information that is accessible via these networks Options range from use of smart passwords to enterprise rights management software, which allows organisations to limit the data individuals can access and to control what those individuals can do with the data Almost half (49%) of respondents said their organisations deployed passwords and encryption... would make capitalising on external sources of innovation easier for your organisation? Select all that apply (% respondents) (% respondents) Use of cross-functional teams and/or communities of practice Collaborative project system 57 68 Dedicated manager responsible for fostering exchange of knowledge and ideas with external partners An intranet accessible by external partners 41 47 A company website... external partners However, careful management techniques and contractual structures need to be in place at the beginning of an outsourcing relationship In our survey, 26% of respondents agree that having contractual agreements for the sharing of intellectual property would most facilitate a rise in the amount of innovation and ideas derived from external partners “Part of it is defining the basic terminology... Communications barriers with external partners Increase 59 Stay the same 33 20 Closed culture among employees who see their ideas as career-building tools 18 Decrease 2 Don’t know/ Not applicable 5 Internal communications barriers 13 Don’t know/Not applicable 10 Other 8 What would most facilitate an increase in the amount of innovation and ideas derived from external partners, in your view? How many external... external innovation would be made easier by having a dedicated manager responsible for fostering the exchange of ideas with partners Outsourcing innovation A manufacturer’s perspective Conclusion F aced with talent shortages and the need to speed up the time it takes to get new products on the market, companies clearly recognise the need to look outside their organisations for new sources of innovation ... Outsourcing innovation A manufacturer’s perspective What changes in organisational structure would make capitalising on external sources of innovation easier, in your view? Select all that apply What... escalates, companies are looking to broaden their supply of new ideas As a result, they are turning to R&D capabilities that lie outside their organisations and embrace a variety of “open innovation ... innovation at their organisation in the next three years Although the concept of “open innovation has attracted much attention, Tim Jones, principal of Shanghai, Bangalore and Munich For a start, it allows