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The Ins and Outs of Innovation

Is strengthening a firm’s internal capacity for innovation a key differentiator when it comes to business competition? Or is it okay—even preferable, perhaps—to seek innovation from external sources? Such is the conundrum facing today’s organizations.

More and more, the advice seems to be, “Do both.” And data shows that organizations in the U.S. and globally are doing just that. According to the Industrial Research Institute’s 23rd annual trends forecast, the outsourcing of U.S. R&D to other companies is projected to increase in 2007, with half of R&D leaders expecting to increase such outsourcing between 2.5% and 10% (Scinta 2007). R&D Magazine and analysts Battelle estimate that 31% of outsourced R&D goes to other companies, 27% to commercial labs and 22% to academia, with smaller proportions going to federal, foreign, and nonprofit labs (Duga, Grueber, and Studt 2007).

Organizations are outsourcing more of their engineering and design work as well, according to Booz Allen Hamilton. While it was once considered taboo to outsource an organization’s core operations, the offshoring of engineering is only expected to grow, especially to China, India and Russia, with such spending projected to increase globally from $15 billion currently to $225 billion by 2020. Most of today’s outsourced innovation is done to take advantage of less-expensive labor, but future reasons are likely to be more strategic, including “market access, resource quality, increased productivity and expanded capacity,” the Booz Allen Hamilton study surmises (Dehoff and Sehgal 2006).

Another technique being used to involve outsiders in innovation is the “broadcasting” of corporate R&D problems for solutions by others, according to a 2007 Harvard Business Review article. Organizations that post corporate R&D problems for outsiders to ponder often find that opening up such challenges to a diverse audience can draw innovative solutions. “The more diverse the problem-solving population, the more likely a problem is to be solved,” write authors Karim R. Lakhani of Harvard Business School and Lars Bo Jeppesen of Copenhagen Business School (2007).

Often, it is the process of applying concepts learned in one discipline to another discipline’s problem that generates the solution. Lakhani and Jeppesen studied the corporate R&D problems posted between 2001 and 2004 by InnoCentive, a firm that broadcasts clients’ research problems and offers monetary rewards for solutions. The professors found that about 30% of problems broadcast were solved by external contributors, who spent an average of two weeks on their solutions. Lakhani and Jeppesen stress that internal staff will still play an important role in deciding which problems to post and in evaluating and implementing proposed solutions.

This concept of inviting the creative minds of others to join together in solving problems and developing ideas represents a “collaborative innovation network,” or COIN, according to Peter A. Gloor and Scott M. Cooper (2007), both of the MIT Sloan School of Management. In MIT Sloan Management Review, the authors say that such networks can exist within or outside of an organization and are facilitated by the Web.

One example of a firm using networks to combine the creative talents of its employees and its customers is German automaker BMW. In addition to posting specific engineering challenges and inviting solutions, BMW provides customers with a tool set “to help consumers design features of future cars.” Gloor and Cooper say this self-organizing of group efforts toward a collective solution—a principle they call “swarming”—may well describe the type of activity that characterizes innovation in the future.

Still, organizations want and need to develop a culture of innovation within their own enterprises. Robert M. Price, former CEO of Control Data Corporation, posits that the best way to do this is to encourage “awareness” and “caring curiosity” among employees (Price 2007). Awareness is the ability to correlate “how various tools and concepts can be best brought to bear on the problem at hand,” and caring curiosity is simply believing that “there’s got to be a better way” and then actively pursuing the solution. Price, the author of The Eye for Innovation: Recognizing Possibilities and Managing the Creative Enterprise, says that one way leaders can establish this culture is to encourage learning through others. For example, worker-leave policies that promote community involvement can provide employees with an opportunity to see how others use technology and resources to solve problems in a more entrepreneurial way.

Regardless of whether innovative ideas originate within the enterprise or via some collaborative effort with an external entity, organizations agree that innovation will gain in importance in the coming years, according to a global study by  American Management Association and the Human Resource Institute (2006). The study also found, however, that only 15% of the surveyed executives said they were more than moderately successful at innovation, and another 15% said they were “not at all successful.”

Being successful at innovation is bound to hold even more challenges in the future. Industrial research and development has undergone tremendous change in the past 50 years, and “future changes … will be even more dramatic and rapid,” says Charles Larson, president emeritus of the Industrial Research Institute (2007). While R&D has already experienced growth in the number and diversity of the people involved in research, Larson expects that new information technologies will fuel future changes and lists “quantum technology,” 3-D simulations and “mind-driven control of computers” as features that will enable quicker development of new products. Such new horizons will likely require the collaboration of innovative and creative minds from both inside and outside the organization.

Documents referenced in this TrendWatcher include the following:

American Management Association and Human Resource Institute. The Quest for Innovation. St. Petersburg, FL: HRI, 2006.

Dehoff, Kevin, and Vikas Sehgal. “Innovators Without Borders.” strategy+business,Autumn 2006, pp. 54–61.

Duga, Jules, Martin Grueber, and Tim Studt. “Industry Retakes Leadership Role.” R&D Magazine, January 2007, pp. F3–F15.

Gloor, Peter A., and Scott M. Cooper. “The New Principles of a Swarm Business.” MIT Sloan Management Review, Spring 2007, pp. 81–84.

Lakhani, Karim R. and Lars Bo Jeppesen. “Getting Unusual Suspects to Solve R&D Puzzles.” Harvard Business Review, May 2007, pp. 30–32.

Larson, Charles F. “50 Years of Change in Industrial Research and Technology Management.” Research Technology Management. ProQuest. January-February 2007.

Price, Robert M. “Sowing the Seeds of Innovation.” Leader to Leader, Winter 2007, pp. 7–12.

Scinta, Jim. “Industrial Research Institute’s R&D Trends Forecast for 2007.” Research Technology Management, January/February 2007, pp. 17–20.

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