In the outsourcing territory, research and development (R&D) is considered the final frontier. That’s because R&D is seen as a source of...innovation – the mother of competitiveness, which is to be protected at any cost. As we all well know, from our business studies text books, core activities should never be outsourced.

1. Insights
The Case for R&D Outsourcing
- Dr. Martin Lockstrom
Introduction
In outsourcing territory, Research & Development (R&D) activity is considered the final frontier. That’s because R&D is seen
as the source of innovativeness – the mother of competitiveness, to be protected at any cost. As we all know from our MBA
textbooks, core activities should never be outsourced, as this could potentially create a new competitor.
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2. However, this is in fact a truth with a rider or two. Firstly, the R&D function contains an array of business activities that need to be analyzed
separately. Many of these are operational, of low strategic relevance, and could be performed more efficiently by an external service provider in
a low-cost offshore destination. Examples of such activities include (but are not limited to) market study, product testing and legal support. In
other words, when making outsourcing decisions, one should not only look at business processes at a functional level, but also dig deeper into
sub processes and tasks in order to identify opportunities, which can subsequently be clustered and allocated to external providers in order to
achieve efficiency and synergies (see Figure 1).
CASE 1 CASE 2
Business Function Business Function 1 Business Function 2 Business Function 3
Figure 1. Clustered sub process outsourcing
Secondly, it doesn’t matter where an invention originates (geographically … internally/externally); what matters is who will finally appropriate
it. Take for example Skype, founded by a couple of people from Sweden and Denmark, but developed by Estonian programmers. Or the BMW
X3 model, which was to a great extent developed by Magna Steyer and produced at its plant in Austria. And at P&G, more than half of their
product innovations originate outside the company today.
In sum, the capability to turn inventions into innovations and successfully bring them to the market is far more important than the inventions
per se. This is true in most industries where patents provide limited Intellectual Property (IP) protection and can often be circumvented through
alternative designs; research says that only the chemicals and pharmaceuticals industries have adequate patent protection. In other industries,
patenting is merely a tactic to fend off competitors in the short to medium term.
R&D Outsourcing Drivers Adapt. Besides increasing simplicity in R&D (i.e. reducing complexity),
R&D outsourcing also increases adaptability since creative thought
So why do companies outsource in the first place? Well, for starters, processes can be handled in a more autonomous, decentralized
the basic idea is to get a job done by whoever is best suited to do it. fashion without being overburdened by overheads and administration.
However, as mentioned earlier, first companies need to come to grips This characteristic is becoming increasingly important with product
with what they really do best and what differentiates them from their lifecycles shrinking and short time-to-market becoming critical to
competitors, in order to determine which business activities to retain competitive advantage. This is especially important in industries
in-house. When executives and senior managers are asked about their such as consumer electronics, where patents offer limited protection
companies’ core competencies, surprisingly, few have a clear answer. and delay means lost revenue that cannot be recouped easily. To cite
This phenomenon, combined with the fact that many executives are one example, this is why Apple uses an ecosystem approach, which
incentivized to trim their balance sheets can explain the frequent loss enables external firms to develop its smartphone apps.
of competitiveness through poorly executed outsourcing decisions.
As part of the Infosys Building Tomorrow’s Enterprise (BTE) framework, Collaborate and Learn. In today’s fast-paced economy, no single
the following themes help uncover those opportunities that need a company can alone possess all the knowledge and capabilities
greater share of R&D outsourcing. required to bring new innovations to the market. In fact, when
external competencies complementing the company’s core abilities
are combined and integrated in unique ways, they can add significant
Smarter Organization
value. Outsourcing of R&D and joint activities can greatly increase
Simplicity. Research shows that company size is strongly linked to productivity be expanding the flow of knowledge outside the firm’s
R&D productivity; the larger the organization, the lower the marginal boundaries. Take for example the frying pan coating Teflon, which
return on every dollar invested in R&D. In the past, many companies was discovered by accident by the company Kinetic Chemicals, a joint
erroneously believed that R&D productivity could be increased by venture between DuPont and General Motors.
creating economies of scale, but alas it is not so. The specific causes
for this are beyond the scope of this article, but nevertheless this is Emerging Markets
the reason why most disruptive innovations originate from Small and
Medium Enterprises (SMEs). And since complexity tends to grow with Over time, emerging markets have become extremely important to
company size, R&D outsourcing is often an effective means to passing companies of any size across all industries: Here’s the view on R&D
on some of that to an external party. outsourcing to emerging markets from a BTE perspective.
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3. Growth Momentum. Emerging markets have become more important Hence, the supply of engineering talent is vastly bigger in emerging
than ever due to a couple of reasons. Firstly, companies in mature economies. For instance, in 2010, China and India produced more than
markets are facing the headwinds of slumping consumer demand 2.6 million and 1.19 million science, technology, engineering and math
caused by the recent global financial crisis. This means that Multi graduates respectively. Even though the majority of fresh graduates
National Enterprises (MNEs) have to increasingly seek new revenue may not be globally competitive, the numbers are still attractive.
opportunities in emerging markets where growth numbers are still
Smart Sourcing. Due to the many institutional voids – weak legal
relatively healthy. Secondly, this means that companies also have
system, poor infrastructure and so on – frequently encountered in
to localize R&D activities in order to better serve local consumers
emerging markets, it is necessary to have an adequate network of
in emerging markets where competition is rapidly gaining pace.
external knowledge partners. The most common way of building
For instance, companies like GE and Novartis have located global
strategic ties is by setting up a joint venture (JV) with a local player,
R&D centers in Shanghai, China, each of which employ more than a
who can provide the necessary guidance on navigating the local
thousand people.
market, accessing local governments etc. The foreign MNE partner,
Innovation Hubs. Although new market access and cost reduction are on the other hand, usually brings in the required management and
two important drivers of R&D outsourcing, another key driver is access technological expertise. Even though JVs are declining in popularity
to talent. Whereas the interest in pursuing engineering and natural in countries like China, they are still a viable approach for overcoming
sciences as a career is on the decline in the West, these subjects are local obstacles in the early stages of market entry.
a big draw for the youth in emerging markets like India and China.
Making the Outsourcing Decision
The R&D outsourcing decision cannot be finalized overnight. It must consider all the above mentioned important aspects. Above all, it is critical
that the outsourcing decision not be driven by personal incentive. What’s more, as mentioned earlier, it is necessary to analyze not only functions
and processes, but also sub processes and tasks. The following checklist can add clarity to the R&D outsourcing decision making process. If the
answer to any of the questions is “yes”, the corresponding activity must not be outsourced.
Does the activity help to Core activities are those that make a company unique among its competitors.
create a differentiated market Keeping these proprietary and protected from competitors enables the company
position (i.e. core activity)? to command premium product/service pricing and in turn, superior profit.
Most companies, if at all, usually only pay attention to core activities. However,
Is the activity directly the outsourcing of complementary activities that support core activities can
supporting a core activity? put the company in an adversarial dependency position with an external
service provider and should hence be retained in-house.
CHECKLIST
COMMENT
Does the activity utilize or generate Intellectual property is the output of core activities. According to the logic in
strategically important intellectual points (1) and (2) above, activities using or generating strategically important
property? IP should be performed in-house.
In order to avoid adversarial dependency situations, there must be a sufficient
Are there less than two
number of service providers available in order to obtain competitive pricing
capable external service
and quality of service. For instance, all too cozy supplier relationships at NASA
providers available? led to spiraling costs and closure of the shuttle program.
Is the internal option better than the A competitive offer from the external provider must also be more competitive
service provider’s offer in terms of than the in-house alternative. If not, the outsourcing decision cannot be
cost and quality of service? economically justified.
Another important decision is whether or not to retain the organizational capability underlying an activity that has been outsourced; in other
words, the make-or-buy decision has to be made in conjunction with the outsourcing decision. Retaining in-house capability makes it much
easier to reverse an outsourcing decision. In other words, the outsourcing decision is not painted black and white, but rather in grey tones.
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4. Conclusion
Outsourcing has become commonplace in most companies and
virtually every industry. However, many companies are reluctant to
outsource R&D activities for the fear of IP loss. This fear is not baseless,
as history is replete with cases of IP theft. Nevertheless, in order to
identify potential candidates for R&D outsourcing, companies must
analyze the R&D function at sub process or task level. Also, they must
base their decision on a solid business case, which factors the impact
of outsourcing on not just R&D, but also the rest of the organization.
About the Author
Dr. Martin Lockstrom
Principal Consultant, Building Tomorrow’s Enterprise, Infosys Labs
Martin is a specialist in Supply Chain and Operations Strategy, Outsourcing/Offshoring and International Management.
During a six-year stint in China, he established the research and education activities at the SCM, Sustainability and Automotive
academic centers at China Europe International Business School, Shanghai.
He established the first endowed chair for Purchasing and SCM in China at Tongji University, Shanghai, and was also responsible
for setting up Supply Chain Management Institute China, an international network of SCM research and education hubs.
Martin co-founded Procuris Solutions, an IT company specializing in SCM-related solutions, offering consulting services to
companies like Accenture, Ariba, BMW, Clariant, Dell, Dow, Ernst & Young and Intel, among others.
He has a Ph.D. in Supply Chain Management from European Business School, Germany, a bachelor’s and master’s degree
in Industrial Engineering and Management, from Chalmers University of Technology, Sweden. He speaks Swedish, English,
German and Chinese, has published over 50 articles and papers and presented at more than 60 conferences.
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