History of R&D Outsourcing
When was R&D First Outsourced?
Outsourcing of R&D began on a small scale prior to the 1970s and 1980s. There are examples of R&D outsourcing dating back as far as the 1500’s with Italian Renaissance artist Michelangelo, who set up a network of specific suppliers to provide the materials and skills he needed to create his work.
More recently, the 1930’s saw companies in the United States were contracted to conduct R&D on the government’s behalf. During that same decade, the largest American and European firms performed 7% of their R&D functions abroad. This number has been steadily rising since the 1960’s, when a sample of 32 multinational companies were conducting 6.2% of R&D abroad, and by 1995 the number had risen to 25.8%.
During the 1990s, as a consequence of globally distributed R&D networks, R&D outsourcing began to rapidly expand. The explosion of outsourcing innovation was additionally facilitated by a number of other factors such as improved intellectual property rights and changes in trade and investment governance.
Early Origins Of Outsourcing
While outsourcing and offshoring seem relatively new, the current movement mirrors events in the aftermath of the American Civil War when northern textile factory owners moved their operations to the southern United States.
Japan, recognizing a need to modernize its factory system, hired foreign engineers and technicians following their revolution in 1868 to put the country on the path to modernization.
The aftermath of World War II has created an even more global environment. The first use of outsourcing was timesharing in the 1950’s, which lasted for 25 years.
1970’s marked the time when R&D outsourcing really took off and took the form as it exists today. Pharmaceutical companies first began their R&D outsourcing efforts in the 1970’s. At the same time, contract research organizations were first created. Finally, the 1970’s saw transnational corporations shift their R&D strategy from the traditional model seen in the 1950’s and 1960’s of utilizing their own domestic environments to create a competitive advantage, to locating their R&D centers to other countries to take advantage of new talent, cheaper expenses, more resources, and emerging markets.
By the 1980’s, technology had advanced greatly, as did the ideas for outsourcing. Major consulting firms set up remote management services. By the 1990’s, with the invention of the Internet, companies began focusing on core competencies and outsourcing everything else. Countries like India, due to a strong English proficiency and an education system that focuses on science and mathematics, have become major outsourcing locations ().
As we have mentioned in previous posts, many large, multinational corporations currently outsource at least part of their R&D functions to other countries, with the major hotspots being India, China, and Brazil. In 1985, Texas Instruments was the first of these corporations to establish a major R&D center in India. The center was the first of its kind in India, and opened up India as a viable outsourcing location. Before Texas Instruments arrived, India did not allow private companies to import equipment into the country for the purpose of sending data transmissions overseas. Texas Instruments changed that, and went further by providing each of its initial 17 engineers with state of the art workstations, which, until then, was unheard of in India. Using the model set up by Texas Instruments, companies like Microsoft, GE, and Boeing set up successful R&D centers in India, and are now among 750 multinationals with a presence in India.
Coca-Cola built an R&D center in India the year after its chief competitor, Pepsico did. Coca-Cola knew that it had to keep pace with Pepsico and followed Pepsico’s lead into a new market where the company could better tailor its products to the tastes of the local population. Although Pepsico’s influence wasn’t nearly as profound as Texas Instruments’, the steps it took to become a more global brand forced the hand of Coca-Cola to follow suit or potentially be left behind.
Finally, there are reports that Apple is in the process of purchasing Israel-based flash memory firm Anobit. Although Apple has been a customer of Anobit’s for several years, as Apple uses Anobit’s components in the iPhone, iPad, and Macbook Air lines, it will be interesting to see if Israel sees more multinational corporations look there for talent, now that such a high profile industry leader has demonstrated a larger interest in an Israel-based company.
What is the Current Internal vs. External Outsourced R&D Landscape?
According to a survey conducted by R&D Mag, as of 2007 companies outsource 24.4% of all R&D work, up from 21.5% in 2002.
A 2003 Gartner survey showed that 75% of medium and large sized companies would consider off-shoring part of their business by 2004. The survey revealed that at the time, India accounted for 90% of total offshore revenue, although China, Israel, and the Philippines were quickly emerging as a viable challenger to India’s throne. Elsewhere, countries like Singapore, Bangladesh, and Vietnam were just beginning to emerge as destinations for outsourcing. The Eastern Hemisphere is such an attractive location for Western businesses because the natural time difference allows for a longer business day utilizing follow-the-sun styles of management, where work in one hemisphere is passed off at the end of the day there to work in the other hemisphere where the workday is just beginning.
An attractive outsourcing option like this allows companies to focus more directly on their own core competencies, while outsourcing the other areas in which they aren’t as competent. Understanding the history of outsourcing is crucial for companies looking to outsource their R&D so that they can see what worked and didn’t work in the past. Avoiding documented pitfalls, as well as building on successful outsourcing techniques will give companies looking to outsource R&D a greater chance to be successful with the significant undertaking.