R&D outsourcing is a business practice widely used by many companies across many industries across the world. A few days ago, we addressed seven reasons why a company might choose to outsource R&D. However, although outsourcing innovation can be hugely beneficial to all involved companies, the move to do so is not without its share of risks.
1. Communication
In a paper submitted to the 2011 International Conference on Computer Communication and Management, “Impact of R&D Outsourcing in Global Enterprises,” Rashad Yazdanifard, Abdulkareem Alli, Wan Fadzilah Wan Yusoff, and Hossein Reza Babaei argue that the single largest drawback of not keeping R&D in-house is the delayed communication between the company and the client R&D organization. Communication breakdowns are much more common when working between two different organizations than they are if everything were consolidated under one roof or overarching organization.
One such example of a breakdown of communication due to outsourcing involves the development of Boeing’s 787 Dreamliner. Boeing thought that it didn’t matter where the parts of the aircraft were assembled so long as everyone was building from the same blueprints. The companies Boeing contracted to build the various pieces of the aircraft didn’t actually build the parts Boeing needed, instead specializing in building different products made of the same materials Boeing would use in the parts for the Dreamliner. Boeing, instead of contracting a company who built aircraft components, attempted to train the contracted companies to build the parts they needed, thinking that in the long run expenses on the Dreamliner project would be lower. What happened instead was that the companies Boeing used to build the pieces to the aircraft didn’t share the same culture as Boeing and consequently the quality of the parts suffered, causing the completion of the aircraft to be delayed numerous times.
2. Control
Another detriment to outsourcing R&D is the lack of control that comes with moving research and development to another company. In 2007, Jim Miller wrote an article about the shortcomings in R&D outsourcing experienced by major pharmaceutical companies. Miller said that the pharmaceutical companies were in position to reap huge rewards through outsourcing R&D, but only if the companies would be willing to relinquish control of their own research and let the contract research organizations take over, something the pharmaceutical companies had to that point been unwilling to do. Miller says one of the major reasons for this reluctance is the robust regulatory environment of the industry, but more that the pharmaceutical companies haven’t yet figured out how to properly and effectively manage an outsourcing relationship. The pharmaceutical companies are currently in the middle of a restructuring of R&D operations, from a more traditional, in-house model, to a more modern outsourcing model, as they have fallen significantly behind other industries in this regard.
3. IP Ownership
In accordance with the risk of a lack of control, companies looking to outsource R&D need to be aware of the risks involving the development of new intellectual properties created through the outsourcing relationship and which company owns them. According to Anand K. Sharma, there are two models companies can use to approach the issue of IP ownership within an outsourcing relationship. The first is the captive-firm model, where the delegating company will usually maintain control of any future patent rights. The second is the developmental-partner model, where the parent and outsourced companies will remain largely separate entities and patent ownership is determined by the nature of the specific relationship of the companies.
4. Unpredictability
R&D outsourcing causes more issues than the outsourcing of site services or manufacturing because of the unpredictability of the outcome of the outsourced projects, as well as the variety of projects being outsourced. Depending on the industry, an incomplete R&D contract can be a relatively minor, or a very critical issue. The pharmaceutical industry, for example, uses a blended model of outsourcing and insourcing to allow for more agility in responding for immediate issues that arise in the drug discovery process.
5. R&D Outsourcing Responsibility
Responsibility concerns fall into nearly every other issue when considering outsourcing R&D. Ambiguity around who’s ultimately responsible for a task can cause problems. One way to make sure responsibility is explicitly delegated is to draw up contracts for all aspects of the outsourcing partnership that will specifically define the roles and responsibilities of each partner. R&D managers need to be involved in creating the contracts in conjunction with the lawyers because the managers have the greatest understanding of the technical aspects of the project that will need to be addressed in the contract.
R&D outsourcing can be a great way for a company to improve its production and break into a new marketplace with a great new product. However, in order for the outsourcing partnership to function smoothly, the risks associated with R&D outsourcing need to be understood and addressed early on so that potential pitfalls can be avoided once the partnership is up and running.
____________
Want to learn more how Newlogic will empower your R&D organization, review our R&D services or contact us.