'Proudly Found Elsewhere': the move to distributed R&D

Opening corporate innovation to outsiders is the new way to run a lab. In multinational R&D, the concept of "not invented here" is quickly giving way to "proudly found elsewhere".

Mary Kay Haben, a 27-year veteran of Kraft Foods took a bold step when she approached management and proposed a new way for the corporation to be creative – to implement a concept known as open innovation, and to put her in charge of it.

The notion of swapping ideas with outside partners, even competitors, in order to bring in new technology and products would have been implausible only five years before in the cutthroat and secretive consumer products business. But Haben knew that to innovate successfully, Kraft would have to look outside for new ideas, even in areas that weren't its core competencies, and institutionalise a way to handle the partnerships.

Company management agreed, and in November she was named senior vice president of open innovation, reporting to John Baxter, the company's executive vice president of global category development.

"The idea of 'proudly found elsewhere' is a big cultural change. This takes us beyond our suppliers to other food technologists and other industries," Haben said. "But it's better to have a percentage of something big rather than 100 per cent of nothing."

Haben is now traveling the globe to explain the concept to managers and employees from Kraft's headquarters in Illinois to its operations in England, Germany and Singapore. So far, the response has been positive. "When I talk to employees it's less about convincing them than about how to institutionalise this," she said. It's also important to figure out ways to give recognition and rewards to bringing in new technology in addition to what is invented in-house.

Now it’s a strategy

This certainly isn't the first time Kraft, and other multinationals for that matter, has gone outside for technologies or collaborations. But the approach is broader in scope and strategy than earlier collaborations, which many times have been more for targeted research.

Until the late 1980s, the central R&D lab, whether it was at NTT in Japan, Bell Labs in the United States or Siemens in Germany, was held up as an ivory tower, a bastion of innovation where well-funded, cutting-edge ideas percolated in secrecy under the careful guidance of the world's top scientists. The globalisation of business and science, increased competitiveness, a mobile workforce and other factors have contributed to cracking open those fortresses throughout the world.

R&D managers at multinational corporations quickly saw that they couldn't do everything themselves, and that other companies and universities throughout the world also had people as smart as their own. Enter a new era of external scientific and technological collaboration.

In a 2001 presentation to the Organisation for Economic Co-operation and Development, Harvard professor Henry Chesbrough asked, "Can internal R&D continue to be justified in a world of dispersed ideas, abundant capital and a mobile workforce?" The answer – not really – came in his landmark 2003 book, Open Innovation.

Since then, corporations throughout the world have embraced the outside alliances that many had been doing in a rifle-shot approach, and created systems for R&D that included both the central R&D labs focused on core competencies and the new ideas being brought in. New management functions have emerged that report to various parts of organisations, such as marketing or R&D. Chesbrough coined the term "open innovation," but the movement also is called distributed R&D or federated R&D.

A shift in spending

Chesbrough, now an adjunct professor at the University of California at Berkeley and executive director of the school's Center for Open Innovation, said there aren't any numbers yet to tell what percentage of economies are open versus closed in innovation practices. But there is a shift in who is spending money on R&D.

Chesbrough cited a US National Science Foundation study that showed that U.S. companies with 25,000 or more employees spent 39 per cent of the total $194 billion on R&D in 2001. Those with fewer than 1,000 employees spent about 23 per cent of the total. "Smaller companies are playing an increasingly important role in R&D spending," Chesbrough said.

Some 319 companies spent $5.3 billion on outsourced R&D, including requests for proposals and research contracts. Of the R&D that is outsourced, 92 per cent is outsourced to other companies, 6 per cent to universities and 2 per cent to other non-profits. Some 180 companies spent $4 billion on collaborative R&D, again the bulk of it – 98 per cent – with other companies.

The shift in innovation has also caught the eye of Kraft's competitor Procter & Gamble Co. Five years ago P&G CEO A.G. Lafley set a goal of having 50 per cent of P&G's innovations from outside. The company reportedly is closing in on 40 percent of its goal already by using a number of ways to link up with new partners, including its Web site, Connect & Develop, as well as several outside companies that match outside research to corporate needs, such as NineSigma Inc., Yet2.com Inc. and InnoCentive Inc..

In an article in the upcoming March issue of the Harvard Business Review, P&G's vice president for innovation and knowledge Larry Huston and senior vice president for corporate R&D Nabil Sakkab credit open innovation with being a key factor in the company's growth. One example: coming up with a way to print edible pop culture images on Pringles potato chips.

Traditionally, write Huston and Sakkab, P&G would have spent most of its investment developing a workable printing process. Instead, it circulated a technology brief throughout its global networks of individuals and institutions to link up with a small bakery in Bologna, Italy, run by a university professor who already had invented just such a printing method. The result was double-digit growth of the North America Pringles business over the past two years.

"By 2000, it was clear to us that our invent-it-ourselves model was not capable of sustaining high levels of top-line growth," they write. "The explosion of new technologies was putting ever more pressure on our innovation budgets. Our R&D productivity had leveled off, and our innovation success rate … had stagnated at about 35 percent."

The genesis of the idea of open innovation came from Mehran Mehregany, chairman of the electrical engineering and computer science department at Case Western Reserve University in Cleveland, Ohio. He saw a trend that corporate business models were relying heavily on external resources because technology was moving so quickly. But they didn't have the infrastructure to pull in technology.

"I saw that corporations didn't have the infrastructure in place that the government had," Mehregany said. "Increasingly companies are aiming to have a larger and larger percentage of innovation outside." Mehregany founded NineSigma, a company that vets requests for proposals for corporations seeking university or other partners. Clients include Kraft, Air Products, DuPont, P&G and Abbott Labs.

Searching for partners

"External innovation isn't a way to replace internal R&D. It's a way to amplify it above and beyond what internal staff can do," said Paul Stupay, vice president of business development at NineSigma.

Take client 3M Corp. When it needed a pressure-sensitive adhesive that could be applied on polyester film via a spray or hot-melt process, it went to NineSigma for help. NineSigma has nine scientists who work as programme managers with clients like 3M to create requests for proposals (RFPs). The RFP for 3M also specified that the adhesive combine hydrophobic and oleophobic properties, survive constant emersion in oil for up to 18 months, and contain no hazardous chemicals with sensitivities, flammability or strong odors.

The response from a network of researchers NineSigma has put together was five proposals to solve the problem. They came from companies pursuing applications in areas adjacent to 3M's target market, including concrete and stone, marine and drilling, and medical devices. "Our value is to uncover the unobvious," said Stupay, whose company takes a fee based on the value of any deal made.

"Most...were off-the-shelf solutions we didn't know about," said Robert Finocchiaro, technical director of corporate R&D services at 3M. Finocchiaro said 3M has long gone outside for technologies – one of the earliest times was a patent acquisition for wet or dry sandpaper around 1920. What is new now is that a company like NineSigma has management techniques for what used to be a rifle-shot process. RFPs are out a short time, only four to six weeks, because of NineSigma's network of scientists.

"The white paper goes to a large audience outside," he said. "When you cross into a different scientific area, that is when the innovation occurs." Finocchiaro said he will focus on open innovation, including his work with NineSigma, universities, government, R&D and consultants, at an upcoming global lab meeting of the company. "We're looking at opportunities that span multiple businesses."

Kraft is having a similar experience. "We use NineSigma when we are looking for alternative approaches to solve problems or where a solution from a different industry may help," said Todd Abraham, vice president of global research and technology strategy. Such tools help a company get to market faster than competitors. "It's about speed to market, not speed of development," he said. "And we will always have areas of core capabilities, in our case dairy, inside the company."

Joseph Helble, dean and professor at Dartmouth College's Thayer School of Engineering, worked on the other side of a NineSigma deal several years ago, when he still was at the University of Connecticut. He answered an RFP from a multi-million-dollar industrial manufacturer who wanted proposals of how to understand the chemistry of mercury in coal-fired power and steam operations. The knowledge was to be used to help develop technology to remove mercury from power-plant emissions.

Helble said he would not have been aware of the opportunity had NineSigma not contacted him. "They sent a broadcast email to chemical engineers and faculty, and I had the expertise" he said. "They have an interesting model to disseminate an opportunity better."

Not for the faint of heart

Finding the right partner and structuring the relationship beneficially is no small task. Large companies fear a loss of confidentiality or that they will look bad because they weren't able to develop the technology or science in-house. Corporations and their university or small company partners also need to find a way to trust each other. And they need to be specific about who does what, and who gets what IP. Settling these issues can add some time on the front end initially, but subsequent deals usually go easier, and they set the stage for repeated collaborations with the same partner.

AstraZeneca has been active in courting outside collaborators for decades. Its partners include Abgenix Inc. of the US, Procardis of the UK, Schering AG of Germany, Shanghai Jiaotung University and the University of Dundee in the UK. In January of this year it signed a collaboration with the M.D. Anderson Center at the University of Texas that covers a broad range of activities from clinical to discovery research, explained Hans Hultberg, AstraZeneca's director of global discovery alliances.

"We are trying to create relationships, to get to know institutions and companies," Hultberg said. "We may not do the deal this year, but we may in a couple years. Then we know their organisations."

One example was a four-year collaboration with the Lund Institute of Technology in Sweden to create the Microtech Protein Analysis Robot. The result was four patents and what Hultberg termed a successful global initiative. AstraZeneca had a number of proteins it was researching that were present in such low levels that the company did not have the technology to analyze them. There wasn't any technology in the market to fill the gap, so AstraZeneca's principal scientist, György Marko-Varga discussed the problem with a professor at Lund Institute who he knew from his time as an academic there. The professor was working on a technology that if developed further, might solve the problem. The collaboration yielded the robot.

Hultberg recommends that researchers who want to collaborate with AstraZeneca find a person within his company with a similar area of interest. The company has 11 research sites in seven countries. They focus on four areas: cancer and infection, cardiovascular and gastrointestinal, central nervous system and pain, and respiratory and inflammation. "Each of the four areas has an alliances function headed by an alliances director with a team to support functions," he said.

His advice to small companies: know the value of their science and protect it, and try to get to know scientists at companies. "Secure your IP, and don't send us confidential information," he said. They also can go to the partnering Web site. P&G and other companies have similar Web sites, and Kraft plans to put one up soon.

John Irven, director of technology at Air Products’ Packaged Gases division in the UK, said the door can swing both ways. "Open innovation doesn't only involve taking in ideas from universities or other companies," he said. "With open innovation we may be able to take an idea and spin it out to someone else. In the traditional model, you hold onto the IP and try to keep competitors from exploiting it. But when this is done with a company in a parallel business area, it could be a recurring revenue stream."

Irven said his company embraces both open innovation and standard in-house innovation in its market for industrial gases and packaging, which is a mature market in which one wouldn't necessarily expect innovation and work with outside partners. But Air Products, with help from its collaborators, won an award for what turned out to be its lucrative Integra-Maxx packaged industrial gases for welding. The company developed a smaller but higher-pressure gas cylinder, the Integra, and a new range of welding gases known as Maxx. It realized conventional R&D approaches wouldn't work to make lighter and smaller cylinders, so it worked with suppliers and partners on the cylinders, valves and coatings. It enlisted The Welding Institute in Cambridge, UK, a world centre for welding and joining, to test the product. "This is a good example of using external partners to leverage our own market," he said.

But Irven emphasises that managing IP and juggling a corporation's development pipeline with the time it takes to work with an outside partner are keys to success. "It can be a lot of work to put new technology within your own system," he said. "By going outside, you don't get a fully baked loaf you can cut and eat."