Outsourcing has become an important tool for most R&D leaders, although outsourcing is often viewed negatively, synonymous with a loss of jobs, R&D leadership and competitiveness in the industry. R&D outsourcing is an important resource utilized by leading R&D organizations to reduce costs, expand capabilities, leverage open innovation, and support broader industry reach. The move to outsource R&D can also be seen as a deliberate step by the company to increase its global market reach. The effects on research and development have been profound, affecting project implementation, organizational structure and strategic management.
There are a number of reasons for the shift from in-house R&D to outsourced research and development, not the least of which is an attempt by companies to cut costs of operation, which is what immediately springs to mind in regard to outsourcing. But there are other reasons a company may choose to outsource innovation.
1. Cost Cutting
For example, Pfizer, the world’s largest research-based pharmaceutical company, is closing a U.K. based R&D facility in an effort to save $5 billion a year by 2012. The company will try to make up for the lost productivity by making greater use of contract development and manufacturing organizations going forward.
2. Talent Search
Not all companies are looking to simply cut costs however. Google, for example, is looking in different markets not for cheap labor, but instead for new talent. One of the most important foreign locations Google uses to find talent is Bangalore, India, where the search giant is one of many companies that has opened a research and development facility.
“Bangalore is the so-called Silicon Valley of India, and there is a large pool of talented software engineers there,” said Krishna Bharat, one of Google’s principal scientists.
3. Increase Capabilities
Through outsourcing, a company can become competent in anything because they just hire a qualified company to do the R&D they need. Of this aspect, Newlogic CEO Marc Drucker said, “Outsourcing allows companies to shift away from core competencies which will help innovation. Companies can focus on new ways to innovate, and strive to break into a ‘blue ocean’ instead of a fast following.” It allows companies to extract greater, or hidden, value from their brands and distribution systems. A software company like Google can quickly become competent in cell phones, laptops, and tablet computers. Similarly, a retail company like Wal-Mart can compete with the brands it has on the shelves.
4. Flexibility
Outsourcing allows for more flexibility of the R&D staff to grow and shrink in response to business needs. Consequently, this added agility increases productivity for the company as it can more easily approach its projects. In 2008, Olympus opened a global research and development center for life science in Munich, which, by 2009, will employ 450 people from different fields of specialization. Olympus hopes that all its departments will benefit from having such a highly multidisciplinary team working together under one roof.
5. Globalization
Companies also need to be aware that industries are becoming increasingly more global, and need to take steps to keep pace with the competition. Companies can outsource to other regions to take advantage of each regions’ unique capabilities. For example, companies outsource to China for low-cost manufacturing, to Russia for technologies, to the United States for innovation, or to Italy for design. Additionally, India has a large talent pool of scientists and engineers. General Electric plans to invest $130 million in the Bangalore, India based multidisciplinary John F. Welch Technology Center, which will eventually employ 2,200 people from this talent pool.
6. Localization
There are still other reasons a company might choose to outsource R&D. Instead of tapping into an existing talent pool in other parts of the world, some companies use R&D outsourcing to seize new localized market opportunities. PepsiCo, for example, opened a research and development center in 2006 in Shanghai that will analyze and improve their food products, and cater those products to the taste of Chinese consumers. PepsiCo went on to invest another $850 million in China by 2009.
7. Building Partnerships
Finally, outsourcing provides a means through which companies can build mutually beneficial partnerships. Panasonic formed a collaborative R&D partnership with Renesas Technology in 2010, and was able to begin mass producing system-on-chip LSIs as a result of the creation of the most advanced process for SoC chips developed by the partnership.
Outsourcing significantly changes the role of R&D managers from a focus on technical capabilities to one of early stage innovation defining innovation and managing their completion with the appropriate mix of internal and external resources depending on the strategic importance of the innovation’s core technology platform.
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