Large corporations and many other companies have their own R&D departments with significant budgets in millions of euros. In parts, they outsource services of up to 20 percent of their budgets. Companies frequently face the question of whether this service is a core competence, and they will view their activities in a differentiated way. Utilizing external capacities will lead to new knowledge and know-how and compensate for own bottlenecks in R&D. Cost pressures force companies to steadily increase the rate and globally place partial services on the market. This strategy also helps to gain an advantage in time if "follow-the-sun" concepts are realized. With specific and strategic purchasing of development services, medium-sized companies are able to bridge over capacity bottlenecks and shorten their "time-to-market" phase. Significant competitive advantages result if innovations can be quickly positioned on the market. Good companies utilize crises situations; they will invest in innovations, position new products and thus will emerge strengthened from a recession.
Subject matter with many challenges
This will result in consequences for the purchasing department. A first consequence is the specific consideration of external research services and setting up a portfolio for R&D services. Many companies have already established a product groups management and a supplier management system; but they don't have one for external research services. The purchasing department must adjust and strategically manage this product group structure. This may comprise, for example, market research, laboratory services, materials analysis, innovation consulting, or external engineering.
Pharmaceutical companies closely collaborate with external laboratories or acquire biotech companies to obtain innovations with patents or licenses. Moreover, they will outsource, for instance, their complete preclinical research to subcontractors who can handle tests faster and more efficiently (laboratory services, screening of market studies, analytical services, as well as laboratory tests) – in parts even from low-wage countries. Pfizer shifted a major part of its "operative" R&D services to WuXi AppTec, a specialized company in Shanghai which also works for Merck & Co. For the development of the Airbus A380, EADS had no other alternative than to shift development services to suppliers. Leading goal specifications in performance, quality or target prices enabled the coordination and relocation to system suppliers. For example, United Technologies supplied the emergency power supply and the air conditioning system; Easton the hydraulic systems, and Honeywell aircraft electronics.
These examples illustrate how companies can efficiently "purchase" external R&D. The primary question is which operational steps and functions a company can outsource without completely risking its innovation or product protection. For a pharmaceutical company, it is non-critical if it uses another company to do its analytical processing of market knowledge, carry out laboratory tests, or design tamper-proof packaging. However, the development of an active substance would be a core competence.
The subject is not free of challenges. Purchasing departments can play a central part in it and can further establish the external relationship to suppliers. However, the R&D approach must be compatible with the corporate strategy as well as with the strategies of functional divisions. Many companies fail due to a lack of specifications provided by general management or due to competing interests. The purchasing department wants to integrate a new supplier and meets with internal resistance – a classical goal conflict where general management must step in. Starting point for a purchasing process is a common basis and setting up a "purchasing portfolio" for development services. The next question in the process is the type of collaboration. The majority of companies cooperates with existing suppliers. Much more interesting: Completely new product development through external partners. The company only keeps the project management and the development of ideas and concepts. In this case, the service to be developed is "cut up" and parceled out to different, independent suppliers. Companies can even go one step further and obtain ideas via "innovation labs", institutes or universities.
Cooperations and "parceling" services
A company in automation technology had almost completely outsourced the development of a complex robotic application. Two project managers of the company acted as the interface, coordinating the various engineering services (electronics, control, components), manufacture of components, and assembly with five suppliers. Problems are the technical delimitations, the interface management, as well as dependencies. The advantage: One supplier never has the complete information, and the prototype is produced faster. One necessity in contract design is the definition of quantitative and qualitative criteria. The objective in the specification is a separation between materials, objective targets and expected results, but also the collaboration, as well as a variable, target-based compensation. Qualitative criteria are stipulated all too rarely. The problem is here: A common basis must be found. What's a good documentation or satisfactory collaboration? A transparent and suitable basis in this respect would be a printed assessment form based on a system of school grades/keywords.
Security and knowledge transfer are very complex and sophisticate during the stage of joint development and rendering of performance.
Rather frequently, service providers will try to establish a dependency so that information will not be completely passed on. For example, when a control system was ordered, an outdated design documentation had been delivered. A fatal error which became evident upon a necessary adaptation after two years. That's why companies must conduct regular, formalized and standardized knowledge transfer and status talks. Supporting documents and versions of documentations and modifications or amendments must be regularly handed over. It's sometimes shocking that project managers keep intensive business relations over several years with a few suppliers. The company will thus be extremely dependent on both parties. To minimize risks in this respect, at least two employees should participate in the knowledge transfer meetings. One bank had even established clear specifications: Freelancers must rotate and may be commissioned a maximum of three times consecutively or for one year maximum.
In conclusion, it must be said that flexibility, control, competitive advantage, core competences, as well as own capabilities are essential factors in the decision-making process. In addition, there are long-term effects for the company. Especially critical factors are carrying out a change management, refuting the prejudices of other specialized departments, as well as the cultural change. However, the company must ask itself as to how innovations and R&D can be designed more efficiently and how new ideas are to develop. A justified question in times of a scarcity of skilled personnel.
The author
Martin Kotula (MBA), Project leader at Kerkhoff Consulting, PhD in "Strategic Sourcing". |
