Innovation sourcing-strategy-matters3412

Innovation in products, services and processes has

been the key to long-term growth and competitive

success. However, despite increasing investments

in research and development, many firms are not

achieving the benefits they seek from innovation.

To ramp up their levels of innovation, companies

have shifted more of their focus from internal

innovation to a range of outside sources. Our

research in five industries concludes that companies

are increasing their reliance on external sourcing

for innovation, but most lack an innovation

sourcing strategy. Avid innovators create and

manage a diverse set of innovation "channels" that

incorporate not only sets of sources, but also well-

established approaches for managing at the

interfaces. Finally, leading companies manage the

entire innovation-sourcing network holistically—

including both internal and external sources.

Research Report

InnovationSourcing StrategyMatters Jane C. Linder, Sirkka L. Jarvenpaa,

Thomas H. Davenport

external partnerships with drug research firms at various stages ofthe drug development process. Lilly also turns to individuals forinnovation, using community sourcing to solve hard chemistryproblems. It posts these on its website, InnoCentive.com, and offerspayments up to $100,000 for verified solutions. Establishing thechannel—the Internet site, the awareness among scientists, itsown acceptance procedures, and the payment mechanisms—gives Lilly ready access to a world of talent when it encounters achallenging problem. Lilly also has venture capital funds withwhich it invests in early-stage biotech research. Establishingthese and other clear innovation channels enables Lilly to excelat drug development. According to financial analysts, Lilly has thefullest and most productive late-stage pipeline in the industry.5

The purpose of this study was to understand how companies areeffectively establishing and using external sources for innovation.Based on our research, we conclude that:

• Companies are increasing their reliance on external sourcingfor innovation, but most lack an innovation sourcing strategy.They transact with a few familiar external innovation sources,but they are not getting the most out of this important activity.

• Avid innovators create and manage a diverse set of innovation"channels" that incorporate not only sets of sources, but alsowell-established approaches for managing at the interfaces.They cultivate multiple external sources and explicitly mastera range of boundary-spanning approaches in support of a clearinnovation sourcing strategy.

• Leading companies manage the entire innovation-sourcingnetwork holistically—including both internal and externalsources. In addition to accepted project- and risk-management techniques, they use big ideas to define agendasand drive new sources of value.

As a firm matures in its ability to manage innovation, it expandsthe types of innovation it undertakes and the sources it uses.Besides product innovations, firms create value from service andbusiness model innovations. They create value not only by

To ramp up their levels of innovation, companies have shiftedmore of their focus from internal innovation to a range of outsidesources such as customers, research companies, business partnersand universities. Fifty percent of the executives we interviewedfor this study assert that the percentage of external innovationwill grow even further over the next three years. One noted, "Weare seeing an enormous shift in our industry, with all the playersdoing far less product innovation internally. If we're going into anew long-term growth area, we're getting there with involvementin venture capital, alliances or acquisition of technology. The lastplace we would look for innovation is in-house R&D."2

This trend is not new.3 Researchers from Accenture's Institute forStrategic Change and the McCombs School of Business at theUniversity of Texas partnered to understand how companies aremanaging these increasingly important activities (see Sidebar A:Research approach). Despite the growth of external innovation, wefound that many companies lack a sourcing strategy that guidesthem in managing it. Companies may look to other organizationsfor innovation, but they often do so unconsciously, or stickrigidly to a single innovation source that no longer suits them.An innovation sourcing strategy not only helps companies decidewhat combination of internal and external sources they shouldconsider but also how to leverage these throughout the innovationchain. Sophisticated firms clearly have sourcing strategies forproduction processes, and managers of many functions havewell-defined approaches to "build vs. buy" questions. Yet only afew leading-edge firms can be said to have a sourcing strategyfor innovation. Even fewer have a holistic way to manage diverseinnovation sources to get the most out of the process.

Consider, for example, the pharmaceutical firm Eli Lilly andCompany. The company drives innovation with a notably holisticapproach. It extends from an innovation-hungry business strategyto a set of detailed tactics for managing partnerships with externalinnovation providers. A Lilly strategist asserted that externalsources are essential for success: "Innovation is occurring aroundthe world; you flat cannot do it all yourself. We'll look at 1000 to1500 opportunities this year to acquire someone else's intellectualproperty."4 At any given time, Lilly is managing more than 140

Accenture Institute for Strategic Change · March 2003

Innovation Sourcing Strategy Matters

Most executives would agree that innovation is critical to the long-term growth and prosperityof companies. However, innovation processes are not yielding the benefits they should.1

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discovering or designing new products, but by bringing thoseproducts to market. As firms increase the number of innovationsources they use, they integrate these sources into channels ofinnovation across the different phases of innovation. To cope withthe rising complexity of types, sources and channels, the leadingfirms manage innovation holistically by targeting new marketspaces and innovative business models, then assembling a sourcingstrategy that leverages the various channels in a complementaryway. Holistic management of innovation sourcing is rare, but it isan increasingly important strategic capability.

External Sourcing Brings GreaterComplexity in Innovation Processes

Innovators implement new ideas that create value.6 Firmscan innovate in many areas including new product and servicedevelopment; new or better work processes like logistics andhuman resource management, marketing and customermanagement; and new tools and processes like productionmachinery and information systems, financing and capitalmanagement, and innovative business models. In short, companiescan innovate in just about everything they do. In addition,innovation involves more than just ideation. It is an end-to-endprocess that stretches from discovery through commercialization.

Sidebar A: Research approachResearchers from the Accenture Institute for Strategic Changeand the McCombs School of Business at the University of Texasidentified five broad industrial categories in which innovation iscompetitively important: pharmaceuticals, high technology/electronics, automotive, retail, and oil and chemicals. These arecertainly not the only industries in which innovation matters,but we chose them to reflect a broad spectrum of approachesto external innovation sourcing. We conducted in-depth,personal interviews with 40 senior executives responsible forsome facet of innovation in firms across these industries. Ofthese firms, 52 percent were headquartered in the UnitedStates, 43 percent in Europe and 5 percent in the Asia/Pacificregion.


Continuous innovation is a competitive necessity in the industrieswe studied. One electronics executive put it this way, "Out therein some garage is an entrepreneur who is forging a bullet withyour company's name on it. You have got to shoot first."

Unfortunately, however, most firms tend to concentrate theirinnovative activities explicitly in a small number of areas. In ourstudy, by far the most common area was product innovation(Exhibit 1). Even executives who describe a broader innovationagenda for their firms frequently focus on product innovationwhen it comes to questions of sourcing.

The specific innovation focus we found might have more to dowith the responsibility of the individuals we interviewed ratherthan any overarching corporate plan. At the very least, we canconclude that few companies had clearly stated a corporate focusfor innovation. The firms in our study rarely targeted businessmodel innovation, and business process innovation tended tohappen primarily during occasional "reengineering" initiatives.One executive attributed his firm's bias against these types ofinnovations to funding issues and incentives. Organizationalownership for these kinds of innovations is often unclear, andcorporations provide little in the form of reward structures tomotivate innovation in this area.

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0 5 10 15 20 3025

Exhibit 1: Innovation often focuses on products

(n=40, multiple responses accepted)

Products

Services & customerexperiences

Business processes

Manufacturingprocesses

Technology development

Business models

Lines of business

Store design

Packaging

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While most companies tend to focus innovative activities onproducts, their approaches to sourcing range widely. On average,the executives in our study who could specify a percentage ofexternal innovation estimate that their firms source 45 percentof their innovation from outside. This average hides a great dealof diversity. Some of the retail firms in our study report that theyget 90 percent of their innovation from outside sources—primarilyin the form of the products they sell. In contrast, discovery-intensive pharmaceutical and chemical organizations like Lilly andDuPont Crop Protection rely on internal sources for more than 70percent of innovation.

As noted by other researchers,7 executives see improvements fromgreater external sourcing. They cite several appealing benefits:

• Opening up new doors. By accessing new types of expertise,companies can extend products and services in ways that werepreviously closed to them. For example, a small firm in theautomotive industry partnered with a marine engine firm todevelop a new cast aluminum engine block. Both firmsbenefited—vehicle firm got a light-weight, high-performanceengine, and its partner established a new line of products forwater craft.

• Delivering quality results faster. Executives report thatexternally sourced projects benefit from the focusing powerof explicit financial obligations. Says one vice president, “Ourpeople pay more attention when they have to write a checkfor the work. And the development firms we work with forceus to be more explicit about what we want so they can ensuretheir own success.” Clarity of objectives and focusedmanagement attention drive the project to a better, fasterconclusion.

• Cutting the cost of innovation. Whether by sharing thefinancial burden with other firms or by working with lower-cost external providers, executives are finding that externalsourcing can reduce their innovation costs and spread the risksamong other firms. The vice president of engineering in a smallautomotive firm explains, “The big automotive companies haveten to a hundred times more resources than we do. If we allneed a particular innovation, we let them plow that row aheadof us and position ourselves as adroit followers.”

• Facilitating tough priority calls. When internal staff membersbecome committed to a project, shelving it in favor of activitieswith higher potential can create dissent. In one company knownfor its innovation culture, the executive we interviewed noted,“People innovate for the innovation's sake, not for the bottom

line.” Yet, studies show that the most successful innovatorsare distinguished by their ability to kill poor projects.8

Executives often find they can pull the plug more easily whena project is externally sourced.

• Stimulating internal innovation. Executives find that invitingin outside innovation sparks more innovation on the insideas well. They believe their own work improves when it'ssubjected to competition from external ideas and when theyadd outsiders with new capabilities to their teams. Tappinginto the idea flow also helps a firm loft its strategic agendain the right direction.9

Greater external sourcing means greater variety in sources ofinnovation. Firms are tapping new types of external sources,from user communities and consultants to consortia of competingfirms. For example, at the behest of a consortium of largecustomers, Aker Kvaerner, a specialist in oil and gas recoverytechnology, is collaborating with a competitor to develop a sub-sea oil recovery process. According to Simon Davies, AkerKvaerner's vice president of group technology, “Our customerslooked at their sub-sea processing vision and concluded that nosingle company had all the solutions. They then persuaded us towork with ABB to push the technology forward.”

With new types of innovation sources available, executives areexpanding the purposes for which they consider external sourcesappropriate. In research-intensive companies, for example, theconventional wisdom holds that employees conduct research inthe firm's core area of expertise, and outsiders provide lessimportant support activities.10 Yet research powerhouses in thepharmaceutical industry are turning to small biotech firms fortheir next generation drug breakthroughs. Chemical companieswith strong internal research traditions are lining up contractscientists in Russia and India to strengthen their staffs and stretchtheir R&D budgets. Firms that are edging into new productdomains are looking to outside sources not for support capabilities,but for the critical skills these new arenas require.

Perhaps most importantly, firms are using external sources for allphases of innovation from discovery and development tocommercialization and even product maintenance. Also, they usedifferent sources at different times—for example, university researchduring a product's discovery phase, a strategic partner to bring anew service to market, and a consulting company for businessprocess innovation. Reports Jeff Weedman, vice president ofexternal business development and global licensing for Procter &Gamble, "We extract value from our own intellectual propertythrough just about every kind of relationship you can imagine.


We are also making many new external connections that expandour capability beyond our core competencies. Given our globalscale, we are able to sense new innovations early in theirdevelopment and increase alliances or acquisitions to bring themto market more quickly and more broadly. The goals? To incubatebusinesses that fit our initiatives, to accelerate the innovationcycle and to extract value from our own unique intellectual assets.”

Firms Need an Explicit Innovation SourcingStrategy

In addition to its benefits, sourcing innovation externally carriesmany risks and costs—some of them hidden.11 Constructing dealsthat achieve their objectives and protect a firm's intellectual assetsdemand specialized skills. This is particularly difficult whereinnovation relies on a complex network of internal and externalrelationships. Innovation sourcing sometimes results in theunintended loss of knowledge. Toyota, by outsourcing the designand manufacture of the electrical systems for its automobiles,surrendered its grasp of the detailed knowledge this painstakingpiece of work entailed. With that knowledge went the in-depthunderstanding of and appreciation for the complex interactionswithin the system. One electronics company found that changingits role from a manufacturer (i.e., manufacturing products fromcomponents) to an assembler (i.e., manufacturing products fromsubcontracted subassemblies) made it uncomfortably reliant onsubcontractors for innovation. In the business model change, itlost the capability to participate in and monitor criticalsubassembly-level innovations.

Nurturing strategic relationships also takes management time andattention. One leading high technology firm recognizes universitiesas a source for cutting-edge intelligence and research. However,to take advantage of these innovations, management has to spendtime with the professors as well as develop internal relationshipsto ready its own organization to make use of the ideas. Creatinga culture in which external contributions are accepted, let alonewelcomed, continues to be problematic in many companies.

Nevertheless, the executives in our study are convinced thatexternal innovation has value. “It has been proven beyond doubtthat, in many areas, you get more out of doing outside innovationthan inside,” says Rune Strømquist, senior vice president oftechnology at ABB Oil, Gas and Petrochemicals, a market leaderin oil and gas and power and automation technologies.However, much of the potential remains unrealized because

executives do not have comprehensive frameworks for managingexternal innovation effectively. Most do not have explicitguidelines for establishing when to use external sources ingeneral, and when to use each type of source in particular. Firmsdo not tap all the sources at their disposal. Very few firms, forexample, take advantage of community sourcing.12 Companiestend to choose specific partners in an ad hoc manner. Further,they do not spell out how to interface with or coordinate amongdifferent sources. In addition, they frequently manage externallysourced projects in the same way as they manage internal ones,whether or not the project has the same profile. As a result,projects stumble over differences in culture, pace and expectations.

Most companies do not track the proportion of externalinnovation, nor do they measure the performance of their externalinnovation suppliers. About half of the firms in our study assertthey measure their own firm's innovativeness in some way—mostoften by the percentage of sales due to products introduced inthe past several years. However, no firm measures thecomparative results of internally and externally sourcedinnovations. As a result, executives have no concreteinformation about whether or not innovation sourcing is payingoff.

These problems underscore the need to manage externalinnovation sourcing through an explicit strategy. The companiesin our study illustrated two stages of progress toward this. First,they developed sourcing channels rather than an ad hoc portfolioof independent sources. Secondly, they managed innovationholistically and used the company's overall innovation strategy(the role innovation plays in the company's value-creating agenda)to shape a supporting innovation sourcing strategy (see Sidebar B:Components of an innovation sourcing strategy).

From Innovation Sources to Innovation Channels

The executives in our study told us they use a wide variety ofexternal innovation sources, ranging from strategic partnershipsand standing customer panels to university research. However,many choose sources in case-by-case manner and rely on localmanagement skills to make sure projects deliver the promisedbenefits. In a word, they source "transactionally." For the mostpart, these decisions are taken without analyzing how thistransaction affects other internal or external innovations or howit relates to transactions in other phases of the innovation chain.

More sophisticated innovators shape the menu of externalsources explicitly into innovation channels. Just as experienced

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marketers reach their end customers through specificdistribution channels—not an ad hoc collection of resellers andoutlets—these firms set up innovation sourcing channels to meetparticular business needs. They set goals and objectives acrossthe innovation chain—the series of value-adding processes thatreach from discovery through development to commercialization.Then they develop external innovation channels, based onarticulated sourcing principles, to reach their goals. We illustratesome of the sourcing channels across the innovation chain inExhibit 2. Exhibit 3 describes the channel types in more detail.

For example, Los Alamos National Laboratories partners withprivate sector firms to develop technologies. Past partnershipsoften started when researchers met at conferences. More recently

the organization has established a strategic partnering program.This involves recruiting the "right" partners—five or six firmswith a compatible technology interest and need—andestablishing processes for managing the relationships effectively.Donna Smith, division leader for industrial business developmentexplains, "We assign one of our seasoned researchers to live inthe partner firm for two years. The individual's job is to learn thecompany, understand its research interests and future direction,and help groom the relationship." Because of the way it managesthese activities, Los Alamos National Laboratories does not justhave strategic partners; it has a strategic partnering channel.

We determined from our interviews that each channel has adifferent set of strengths and weaknesses relative to various

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Sidebar B: Components of an Innovation StrategyAn innovation sourcing strategy addresses five central questions. These must be answered in the context of competitive positioning,risk tolerance and strategic time horizons:

What is the organization's innovationstrategy, including desirable domainsand end products for innovation?In pharmaceuticals, the domains mightbe disease categories; in retailing theymight be consumer market spaces; in theautomobile industry they could be vehiclecategories. The end products mightinclude products and services, customerexperiences or creative financialinstruments.

What are the key sourcing principles?Some firms were able to articulate theirkey principles for sourcing quite clearly.Brent Bellm, director of corporatestrategy for eBay, encapsulated its view ofinnovation this way: "We arephilosophically committed to community-based innovation. And we do not think ofit as 'sourcing' innovation, but enabling it.We use our internal resources to createnew features that stimulate and enablenew waves of innovation from ourcommunity." According to Martin

Sigmundstad, senior vice president ofindustry and commercialization for theNorwegian oil firm Statoil, "Statoil worksclosely with suppliers to develop technicalsolutions to improve Statoil's performance.The main value for us is being able to usethe technology to establish our strategicposition as the leading operator. As aresult, our primary goal is to achieveavailability—through one or moresuppliers—rather than ownership of newtechnology. However, ownership can beuseful to accelerate the process ofmaking technology available, and issometimes necessary to ensure that thetechnology is made available at all."

What are the firm's innovationsourcing channels and what needs dothey address? While no firm in our study used the word"channel" to describe its innovationsources, some explicitly managed sets ofsources in the same way marketersmanage distribution channels. They had

matched specific sets of sources withinnovation needs and managed them as agroup, through established processes,rather than as separate and independentrelationships.

How are the interfaces across channelsidentified and managed?Companies that managed innovationsources as channels established andmanaged relationships through regular"standard operating procedures."

What internal organizationalmechanisms need to be established toleverage external sourcing effectively?A small number of firms in our studyestablished processes to evaluateimportant relationships regularly—notjust at the outset of a sourcing deal, butthroughout its course. Strategic sourcerswould also implement measures to assessthe competitive effectiveness of eachchannel.

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innovation objectives (see Exhibit 4). Community sourcing, forexample, has the benefit of low costs because a company typicallypays little or nothing for the work of community-based innovators.However, executives often find it more difficult to direct thischannel than others. Co-sourcing and community sourcing presentcomplex intellectual property challenges.13 Different sourcingchannels require different internal management capabilities,innovation processes, external relationships, information flowsand intellectual property arrangements.

The firms that leverage innovation channels go beyond a simpletransactional approach to sourcing. They still occasionally do one-off deals, but most of their externally sourced innovation comesthrough channels they establish deliberately. The company cultivatesexternal channels it wants to use so they are available consistently.Moreover, it chooses channels that match its strategic requirements.Once established, these channels can be used fluidly as needs arise.

Some examples will illustrate the point.

• Unlike most retailers, Marks & Spencer, a UK food, clothing,home ware and beauty chain, distinguishes itself throughproduct innovation. For example, it offers a line of men's woolsuits that are machine washable. It relies on suppliers to investin innovative new types of products that will appeal to theMarks & Spencer customer. Says James Stafford, technicalexecutive for intellectual property division, "I think we have

unique relationships with a stable, committed supply base.They will invest in new ideas, and we will reward them withorders. Historically, much of this business has been done ona handshake."

• A leading supplier of application software to the retail industrypartners with customers to drive innovation. It maintains apool of ideas for potential new software features and functionsand consistently trolls for customer interest in one of itsdevelopment candidates. It kicks off a development projectwhen one of its leading customers is willing to provide funding.The firm's chief strategy officer notes, "It is not enough to beright about whether your customers want a particular newcapability, you have to be right about the timing too.Otherwise you don't get the value. We make sure eachinnovation is supported by a market-leading retailer who iswilling to put dollars behind it."

Establish Innovation Channels throughOrganizational Processes

Just like other types of channels, companies establish innovation-sourcing channels through organizational structures and processes.They do the following:

• Establish an organizational locus for sourcing. In someorganizations, such as Procter & Gamble, a businessdevelopment group is charged with the responsibility to solicitand manage outside relationships. In others, like Boots, thegroup that concerns itself with future products and servicesshoulders this responsibility. Some firms create separateorganizations for each important channel. Explains DaveThompson, Lilly’s senior vice president of strategy and corporatedevelopment, "We have two venture capital funds, and aseparate group focused solely on alliance management." In1998, Nokia established a third division or "leg," separate fromits two core businesses of mobile phones and networks, tofocus on exploring and developing the future. This organization,Nokia Ventures, is headed by the president of the Nokia Group.One arm of the organization invests in businesses, often inconsort with other investors, that help complement and expandlong-term growth in business areas of Nokia, and the otheris a "greenhouse" or information gathering tool for exploringthe future of the mobile information society.

• Codify practices that work. Each partnership and deal willhave its own important nuances, but this does not preventthe leading firms from establishing principles, processes, and

Exhibit 2: Companies use a wide variety of channels for external sourcing

The Innovation Chain

Channel Types

Discovery Development Commercialization

Buying innovationon the market

Sponsored Research

Innovation-for-hire

Strategic procurement

Investing ininnovators

Early-stage venture capital

Late-stage venture capital

Equity plays

Co-sourcing Discovery partnership

Development partnership

Commercialization partnership

Community sourcing

Open problem solving

Enabled development

Standing customer panel

Resourcing Contracting for outside tools and talent

Contracting for outside tools and talent

Contracting for outside tools and talent

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This information also helps our partners know how to buildsuccessful relationships with the Laboratory." GMP Companies,a pharmaceuticals, diagnostics and medical device company,insists that every one of its licensing, sponsored research andconsulting agreements with university researchers is thoroughlyreviewed at the beginning. Dr. Michael Salem explains, "We have spent a lot of time developing standard operatingprocedures, including a review by the appropriate conflict ofinterest and conflict of commitment committees. We preferto disclose everything up front rather than having unpleasantsurprises later on."

even document templates they can pull off the shelf to makedeals easy. Says Donna Smith of Los Alamos NationalLaboratory, which is known for its successes at technologytransfer and commercialization: "We engage in a number ofdifferent types of interactions with companies, includingshared staff, shared facilities, straight-up licensing, sponsoredresearch and collaborative research." Smith tailors managementpractices to the type of relationship at hand. She continues,"In the last year, we went through an exercise to analyze oursuccessful partnerships. We identified the common factors,and we will try to replicate them in every strategic relationship.

Exhibit 3: Types of innovation sourcing channels

Buying innovation on the market: Organizations ranging from universities and consulting firms to private research labs offer innovation for hire. This type of channel is well established in all the industries we studied, although firms in different industries invoke it more frequently at different parts of the innovation chain. ABB, an oil and gas technology firm, for example, actively sponsors research at local universities. In contrast, retailers and automotive firms with strong brands and market power shift the onus of innovation onto suppliers through a process called "strategic procurement." These suppliers compete for purchase orders by investing in and offering differentiated products. For example, UK retailers Boots and Sainsbury's have not only contracted out their information technology to outsourcers, but also the identification of innovative uses of IT in business processes.

Investing in innovators: Companies take equity positions in innovative firms to benefit from breakthroughs. Lilly has two small venture capital funds to seed technologies in the biotech arena and in the information technology space. Dave Thompson explains, "We will do 250+ confidentiality agreements, 100 negotiations, and 30 to 40 deals. It is a massive, systematized process to search the world for innovation." Electronics companies also make heavy use of this channel. For example, Nokia, a global leader in wireless telecom equipment and handsets, has shied away from acquisitions, preferring instead to set up venture funds to invest in companies that complement its own product and business development. Some companies invest in innovators as a strategy to skirt entrenched business models, corporate inertia or top management resistance to investing in small markets. One high technology executive notes that investing in innovators helps to resolve the "innovator's dilemma," where established firms resist innovation that might cannibalize existing offerings.13 Through an equity partnership, a firm can participate in and nurture an emerging market.

Co-sourcing innovation through consortia, partnerships, and joint ventures: As innovation in some arenas becomes more expensive, firms band together to share the costs. In industries like oil and chemicals, these groups often include direct competitors. Automotive firms use co-sourcing to address regulatory requirements like emissions standards that affect them all. Much of Nokia's success with mobile phones stems from innovative co-sourcing through the consortia and technology standardization boards of GSM and 3G, wireless industry associations. One leading high technology firm locates its own research laboratories inside universities. Partnerships across all segments of the innovation chain are also used to bring together the diverse skills and talents a project requires. ABB's Rune Stromquist describes one innovative partnership like this, "We felt we had most of the competency we needed, but there were a few gaps. We selected a technology partner, and we had participation from a university as well as four of the firms that would ultimately buy the solution."

Community sourcing: Over the past decade, a new approach to innovation has captured the attention of the business community. It involves tapping loosely connected communities of sophisticated users. This approach has been successful in the software industry, where one form of it is called the "open source" movement.14 eBay uses community-based innovation extensively to identify new sales categories and expand the capabilities it offers customers. For example, eBay executives would say that its community of buyers and sellers identified and built what is today its largest sales category, automobiles. Additional community members built important new auction management tools that plug into the eBay platform to facilitate these high-ticket auctions. NTT DoCoMo employs community sourcing for the information content it distributes over its I-Mode mobile data service by allowing any company or individual to set up an I-Mode compatible website. Nokia relies on community sourcing for the applications software for its Media Terminal, the centerpiece of the firm's wireless home entertainment system. Resourcing:

Companies support their staffs by contracting with outside suppliers for on-demand talent and innovative new tools. DuPont Crop Protection is increasingly looking to firms in India, Russia and China for a cost effective supply of high-quality researchers. This provides flexibility in managing R&D and recognizes the increasingly global nature of a high quality research capability. Aventis looks outside for cutting edge technologies to improve its product development productivity. It brings these in house when a clear leader emerges among competing technologies and its value for the internal efforts has been proven.

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• Implement performance measures. This sounds simple, butvery few organizations have anything but anecdotal data abouttheir innovation partnerships. Leading firms such as Nokiaassess long-term development relationships regularly andinclude an innovation metric on supplier scorecards. Firmsthat use innovation channels actively will opt for measuresthat capture each innovation channel's contribution to theorganization's overall innovation goal.

To institutionalize channels, companies manage innovation in away that invites external opportunities. By positioningthemselves as the partner of choice, these firms attract newideas. Lilly, Boots, IBM, Nokia and GMP Companies all reviewthousands of opportunities a year, most of which are unsolicited.Dr. Michael Salem of GMP remarks, "We keep our patent-holdersand inventors involved throughout the process. If you do right bythem with the first technology, they will consider you for theirother discoveries and they will also tell their colleagues." Bootstakes a different approach. It helps venture capital firmsevaluate the market potential of biotech start-ups looking forfunds. Boots prefers not to take equity positions in these

companies, but acting as a due diligence gatekeeper gives Bootsexecutives an early look at emerging health care products.

An Innovation Channel Means Managing At theInterface

Establishing innovation channels involves working across a seriesof boundaries—across the innovation chain, across organizationalcultures, and across time and space. To use external sourcingeffectively, executives must identify the boundaries they are tryingto cross and establish processes to bridge them on both therational and emotional levels (see Sidebar C: Common boundariesthat innovation-sourcing processes must bridge). Some boundariesare more easily addressed through routine, accepted businesspractices. For example, most sourcing processes use some kind ofcontractual negotiation to deal with organizations' differing goalsand agendas and financial interests. As one executive says, "Themost important issue is who pays, and who profits."

Exhibit 4: The relative strengths and weaknesses of alternative innovation sourcing channels

InnovationSourcing Channels

Ease of integrationCost

Ability to retainownership

Control overresults

Ease of management

Ease ofdifferentiation

Buying innovation on the market

Sponsored research

Innovation for hire

Strategic procurement

Investing in innovators

Venture capital/ Equity plays

Co-sourcing

Within innovation sectors

Across innovation sectors

Community sourcing

Resourcing

Worst Best

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Innovation sourcing also involves bridging some more subtle andproblematic boundaries. More often, these are the unspoken andemotional ones. They include culture, pace, information flows andwork processes. Most external sourcing processes, for example,have no formal way to deal with cultural fit. Lilly's is an exception.When Lilly considers a new alliance partner, it completes acultural "due diligence" assessment along with the rest of thebusiness case.

How do leading firms bridge these gulfs to create effectiveinnovation channels? First, they recognize barriers and boundariesexplicitly. Successful partners acknowledge the differences thatseparate the organizations and build the bridges they need. LosAlamos National Lab improves partnerships by stationing individualsin the partner organization for two-year stints. Says Donna Smith,"When issues arise, we use the informal communication channelsour person has set up to get us through the rough spots. This oftenlets us turn problems into opportunities." Some universities haveestablished organizations that sit on the boundary between privateindustry and academia—for example, MIT's Industrial LiaisonProgram—to manage university research with a commercial mentality.

Successful firms also bridge "like to like" processes. For example,ABB manages projects with the academic world through its ownclosest equivalent, the corporate research center. Its business unitsmanage focused development projects with smaller firms. At thecorporate level, it establishes and manages larger developmentpartnerships with external partners of its own size. In each ofthese cases, the innovative activities are comfortably settled withinone segment of the innovation chain. Even though the projectcrosses firm boundaries, the individuals share a common mindset.Ph.D.'s manage relationships with Ph.D.'s; developers work withdevelopers.

Sourcing innovation across sectors of the innovation chain requiresa different approach. In these situations, effective processes mustbe designed to cross mindset differences as well as corporateboundaries. For example, many commercial firms report they havedifficulty working with universities because academic institutionsoften lack a commercial approach to deadlines and deliverables.Dr. Michael Salem of GMP Companies explains, "The greatuniversities have up to hundreds of patents disclosures a year andmay commercialize very few of them. Our company was set up to

Sidebar C: Common Boundaries That Innovation-Sourcing Processing Must Bridge

Work process expectations. The innovation process varies amongcompanies, but it usually includes threebroad categories of activities: discovery,development and commercialization.Each of these segments of the innovationchain involves a very different workprocess. The way an organization discoversnew molecules, for example, is dramaticallydifferent from the way it develops salableproducts, which is again different fromthe way it commercializes new drugs.When external sourcing is intended togive a company access to other segmentsof the innovation chain, the sourcingapproach must create a bridge betweenthese different mindsets.

Pace. Some firms are particularly sensitiveto the differences between small and

large firms when they arrange externalsourcing. Small firms are often more agileand decisive. Several companies in ourstudy asserted they are shifting workfrom universities to private labs becausethe latter are more likely to work at acommercial pace.

Information boundaries. The sourcingapproach must provide enoughinformation flow to keep the innovativeactivities on track. Executives at bothLimited Brands and a premier automotivecompany believe that the subtle nuancesof their brands need to be fully understoodby outside partners before they cancontribute effectively. This requires outsidepartners to make a knowledge investmentup front or risk undermining theircredibility with the sourcing firm.

Time and space differences. DuPontCrop Protection's efforts are global,encompassing research alliances inEurope, Russia, India, China and theUnited States. This entails managingacross time zones and appreciatingcultural differences.

Disciplinary specialties. Externalsourcing frequently means seeking outfirms specifically for their unique set ofskills or expertise. However, as oneexecutive wryly put it, "The biochemistsdo not respect the clinicians; theengineers do not want to speak to thescientists.” Different disciplinaryspecialties also have their own entrenchedand incompatible reward systems.

Manage Innovation Holistically

The most sophisticated innovators are not content just to driveproduct and service advances through innovation channels. Theyaim for bigger ideas (Exhibit 5). These companies focus internalinnovation on creating entirely new market spaces and businessmodels. These big ideas define new problems—whole newcategories of need, which these firms use to orchestrateinnovation holistically across all sources.

The firms that manage innovation holistically use externalsources very differently from the companies that sourcetransactionally. They don't look to outsiders primarily to supportinternal staff or to provide "non-core" development. Becausethese leading firms are using big ideas to open new categoriesof products and services, they often find themselves short on thecritical expertise they require. They turn to outsiders, then, forthese core skills. The firms in our study used three mainorganizing principles for driving innovation holistically.

Business Models. Boots, a global retailer headquartered in theUnited Kingdom, develops new business models to drive growthand focus innovation. For example, Boots recognized that theUK National Health Service was having difficulty responding topatient demands for diagnostic tests. Leveraging its trustedbrand and customer franchise in pharmaceutical retailing, Bootsdevised a new business model whereby it offers convenient andaccessible well-being and disease management services through

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commercialize that untapped pipeline." To address the mindset gap,GMP helps both the university and the patent holders align theirinterests toward achieving commercial success. It establishes aseparate legal entity for the venture and shares equity with theuniversity. The patent holder participates on the developmentteam, but does not lead it. This keeps critical knowledge close tothe project and accords the inventor respect, but maintainsproject leadership with a focused, deadline-driven mindset.Throughout a well-defined process for turning patents intoproducts, GMP relationship managers—ex-academics, physiciansand scientists—shepherd the communication-intensive process.

Though many of the executives we interviewed acknowledgedthe existence of cultural barriers, they did not take them as given.One of the most frequently mentioned barriers to external sourcingis organizational pride, which appears as the not-invented-heresyndrome. This barrier can exist at any level of the organization,from bench scientists to senior executives. Open-minded executivesoften deal with it through a combination of goal setting andrecognition processes that reward people not for internalinnovation, but for ideas successfully commercialized. When thebarrier is at the top of the organization, however, perseveranceacross generations of management is often the only solution.

Exhibit 5: Innovations range from incremental improvements to big ideas

Big ideas

Most long lead, highest investment, highest risk

Incremental improvements

Fastest, lowest investment, lowest risk

Retail

New branded formats

New branded product lines

Wholly new products

New packaging or me-too products

Pharmaceuticals

New disease areas

New drugs

New formulations

New applications of currently approved drugs

Oil and Chemicals

Effective new compounds

New applications of existing compounds

New solution paradigms

High Tech/ Electronics

New generations

Upgrades and new releases of existing products

New technology platforms

Automotive

New models and line extensions

New features and functions

Wholly new transportation solutions

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its 1400 UK "high street" locations. Barry Clare, executivedirector of strategy explains, "We have access to consumers.When we can develop innovative tests that can be provided inour stores, we can take enormous costs out of the system." Thispromising new business model frames an open space for productand service innovation, and Boots turns to outside sources foranswers. Clare continues, "We do not need to invent all thesolutions. We prefer to make money by being the exclusivecommercializer of new technology—by bringing these valuablenew services to our customers. We are working with venturecapitalists to spot interesting opportunities."

Scenarios. A luxury automobile firm uses mind-maps andscenarios to orchestrate automobile innovation. It manages theinnovation process on two levels: bottom-up and top-down. Eachyear it collects hundreds of ideas for distinctive ways to improveits cars from customers, engineers, centers of competence andcompetitive intelligence. Each idea is summarized in a one-pagedocument that describes anticipated costs and benefits. In addition,the senior development staff prepares a series of functionalscenarios, each one describing a different view of the car of thefuture. This top-down, big idea look enables executives to bundlecollections of good ideas into focused, long-term initiatives with

clear market logic. It also opens up white space that makes roomfor external contributions. One senior executive explains, “Our goalis to have one major breakthrough innovation per year. In the past,we had a very analytical process in which we tried to rank thehundreds of individual ideas. By introducing functional scenarios,we have defined the areas we want to search in. It also gives moretop management weight and attention to innovation management.”

Product domains. Lilly's innovation philosophy is "discoverywithout walls." It aims for a fluid approach, using internal andexternal sources to generate a surfeit of innovation. (Exhibit 6shows an example of its holistic innovation sourcing strategy.)Explains Dave Thompson, "We aggregate innovation bytherapeutic focus—such as central nervous system, oncology anddiabetes. Each of these areas has its own strategy and knows theproducts it would like to have that it does not yet have. Out ofthat the area develops a priority list that guides both internalefforts and external sourcing." Lilly employs standard categoriesfor therapeutic focus that are common throughout the industry,which makes it easy to communicate priorities and needs toexternal suppliers of innovation.

Exhibit 6: Innovation sourcing strategy example from Eli Lilly and Company*

Discovery Development Commercialization

Innovation strategyHave the “stuff”—distinctive products

Use a surfeit of innovation to maximize value

Innovation arenas Focus innovation through therapeutic categories and technology platforms

Sourcing “Discovery without walls:” Get innovation wherever possible

Sourcing approaches within sectors of the innovation chain

Collaborating with independent labs and universities

* Illustrative; includes only selected examples in each category.

Use community sourcing to solve hard chemistry problems

Access other pharmaceutical firms’ products and sales and marketing resources through collaboration

Sourcing across sectors of the innovation chain

• Partnering with biotech firms for discoveries

• Early stage venture capital to invest in biotech exploration

• Late-stage venture capital• Partnering with competitors to capture

value by commercializing IP

Managing the innovation chain

• Portfolio management• Stage gate management• Annual relationship physical for strategic partnerships• Central relationship management organization to manage external sourcing• "Company within a company" organization to manage development and commercialization

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What practices are missing from this list? Two prominent onesare portfolio management and stage-gate processes. Many ofthe firms we researched rely on these well-known approaches toorganize and evaluate innovation projects. They do provide anoverall financial and risk-related portrait of a company'sinnovations-in-process. They do not, however, create the samekind of innovation guidance found in the three types of big ideasoutlined above. Even the best portfolio management processgives no indication about where to look for the next innovation.That is exactly what a big idea does do.

Still, portfolio management and stage-gate processes areimportant components of innovation management. However,they must be tailored to the nature and context of the firm'sinnovation agenda to be effective.14 Lilly, for example, has auseful variation on the traditional "yes/no" decisions made atstage gates: "no for us, yes for someone else." If a new drugcompound is not right to take to the next stage at Lilly, thecompany's corporate business development function considerslicensing it to another firm outright, licensing it with the optionto bring it back into Lilly later, or joint development with apartner. Lilly also pays careful attention to time cycles in itsstage gates, employing an "early warning system" forcompounds that are within 90 days of the time scheduled topass through a stage. However, portfolio management andstage-gate processes do not distinguish firms that manageinnovation holistically from those that do not.

Implications for Executives

An economic downturn is both a blessing and a challenge forestablishing an innovation sourcing strategy and broadeningexternal sources. As margins have come under pressure, employeeshave been laid off, and the slack that enables fresh ideas hasshrunk, many firms are forced to replenish the innovationpipeline with outsiders' contributions. Many will take atransactional approach. We highly recommend an alternative: anexplicit innovation sourcing strategy driven by a holistic approachto innovation.

Adopting an innovation sourcing strategy implies a very differentmodel for managing innovation than most companies now employ.Because of companies' strong focus on product innovation,many innovation executives currently have scientific or technicalbackgrounds. With an innovation sourcing strategy, expertise incommercialization and channel management may be morerelevant to innovation success. Similarly, innovation managementprocesses such as portfolio management approaches or stage-gates may have to be tilted toward value capture rather thaninternal development. In addition, performance measurement isessential, even if it is imperfect. Companies should certainly notabandon internal, product-based innovation. However, there is amuch wider and richer array of innovation sources available, andcompanies should weld these into effective channels. This is amuch more complex world for innovation-oriented executives tomanage, but a potentially much more rewarding one as well.

Viewed broadly as a process that includes not only ideation anddiscovery, but also commercialization and value capture,innovation is the key to long-term growth in any business. Infact, successful commercialization can be a more reliable routeto financial returns than other aspects of innovation in someindustries. One of the retail executives we interviewedcommented, "It is not the product innovators who end up rich—it is the merchants." Companies that can bring innovativeproducts to market—whether they developed them or not—arethe big winners.

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About the Authors

Jane C. Linder is a Senior Research Fellow and Director ofResearch at the Accenture Institute for Strategic Change. Shejoined the Institute from a large manufacturing firm, where shewas director of demand/supply planning in the worldwidelogistics organization. Previously, Jane was a professor atHarvard Business School in the information management area.Jane also spent more than 10 years implementing businessprocesses and the associated information systems at majormanufacturing firms. Jane may be reached at 1+ 617 454-8461or at [email protected].

Sirkka L. Jarvenpaa is the James Bayless/Rauscher PierceRefsnes Chair in Business Administration at the University ofTexas at Austin. She is the editor-in-chief of the Journal ofAssociation for Information Systems and Joint Editor-in-Chief ofthe Journal of Strategic Information Systems. Srikka can bereached at [email protected].

Thomas H. Davenport is the Director of the Accenture Institutefor Strategic Change and holds the President's Chair inManagement and Information Technology at Babson College. Heis a widely published author and acclaimed speaker on the topicsof information and knowledge management, reengineering,enterprise systems, and electronic business and markets. Hislatest book, published by Harvard Business School Press, isentitled The Attention Economy: Understanding the New Currencyof Business. He can be reached at 1+ 617 454-8201 or [email protected].

About the Institute for Strategic Change

The Accenture Institute for Strategic Change was founded in1996 and conducts original research focused on businessinnovation. Based in Cambridge, Massachusetts, the Instituteconsists of management researchers working collaborativelywith executives and other researchers to bring innovative andactionable ideas to decision-makers.

The Accenture Institute for Strategic Change publishes its own"Research Notes" (short single issue commentaries) and"Research Reports" (in depth, comprehensive findings). Inaddition, it has published hundreds of articles in such leadingpublications as Harvard Business Review, Sloan ManagementReview, CIO Magazine, Across the Board, Leader to Leader andmany other top publications. The Institute is often referenced inmajor newspapers including the New York Times, Wall St.Journal, Financial Times, USA Today, Los Angeles Times andBoston Globe. Institute researchers have taught at leadingbusiness schools including Harvard Business School, Tuck Schoolof Management at Dartmouth College, Sloan School at theMassachusetts Institute of Technology, and the Graduate Schoolof Business at the University of Chicago. Harvard BusinessSchool Press and other top-tier business presses regularlypublish the Institute's books. We have worked with hundreds oforganizations across the globe to apply our findings and ideas inorder to help them accelerate and achieve their strategic visions.

Its home page is www.accenture.com/isc. Please contact us [email protected].

About Accenture

Accenture is the world's leading management consulting andtechnology services company. Committed to deliveringinnovation, Accenture collaborates with its clients to help themrealize their visions and create tangible value. With deep industryexpertise, broad global resources and proven experience inconsulting and outsourcing, Accenture can mobilize the rightpeople, skills, alliances and technologies. With more than 75,000people in 47 countries, the company generated net revenues of$11.6 billion for the fiscal year ended August 31, 2002. Its homepage is www.accenture.com.

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6 Innovation is defined by Webster's Ninth NewCollegiate Dictionary as "a new idea, method, ordevice." Executives we interviewed have muchbroader and varying interpretations of whatcomprises innovation, for example, "doing itbetter, faster, [and/or] cheaper," "a differentway to solve a problem," "something that hasnever been done before" or "an accumulation ofinspiration."

7 See, for example, J.B. Quinn, "OutsourcingInnovation," for a discussion of the benefits ofoutsourcing of innovation as capacity, expertise,speed and risk diversification.

8 Robert G. Cooper and Elko J. Kleinschmidt,"Winning businesses in product development:The critical success factors," Research-TechnologyManagement 39, no. 4 (July/August 1996): 18-29.

9 This point is discussed at length by J. B. Quinn,J.J. Baruch, and K.A. Zien, Innovation Explosion.The pace of innovation in the company can beaffected both positively and negatively by theuse of external relationships for innovation. Onthe one hand, entering into such an agreementmay threaten those within the company whoare affected, and the incorporation of theexternally generated ideas may be resisted. Onthe other hand, an internal group may bespurred to innovation by competitive spirit uponseeing the entrance of a challenger.

10 H. W. Chesbrough and D. J. Teece, "When isVirtual Virtuous? Organizing for Innovation,"Harvard Business Review (January/February1996): 65-73.

11 See the following: Clayton M. Christensen, TheInnovator's Dilemma: When New TechnologiesCause Great Firms to Fail, (Boston: HarvardBusiness School Press, 1997), and C. H. Fine,Clockspeed: Winning Industry Control in an Ageof Temporary Advantage (Reading: PerseusBooks, 1998).

12 E. Von Hippel, "Innovation by UserCommunities: Learning from Open-SourceSoftware," MIT Sloan Management Review 42,no. 4 (summer 2001): 82-87.

13 Firms in our study reported surprisingly few IPproblems with co-sourcing. This might be aresult of having mostly large firms in our sam-ple. Large firms tend to have sizeable profes-sional legal staffs and formal IP processes formanaging their interests in collaborative activi-ties. Small firms operate more informally, andthe costs arising from litigation against thosewho violate the agreements are often beyondthe financial means of the organization.

14 Stage-gate processes can be problematic inhighly uncertain and dynamic environments.See V. Krishnan and B. Shantanu, "TechnologySelection and Commitment in New ProductDevelopment: The Role of Uncertainty andDesign Flexibility," Management Science 48,no.3 (March 2002): 313-328.

Notes:

1 Investment in innovation does not alwaystranslate into economic returns. See EdwinMansfield et al., "Social and Private Rates ofReturn from Industrial Innovation," QuarterlyJournal of Economics 91, no. 2 (1977): 221-40.An Accenture study by Paul Nunes and BrianJohnson found that while measures of innova-tion, e.g., the overall number of patents grant-ed, are up, consumers still express dissatisfac-tion with the level of innovativeness in productsand services. See "Mind the Gap: ConsumerAttitudes to Innovation," Accenture Institute forStrategic Change Research Report (November2002) available on www.accenture.com/isc.According to some studies, the growth in inno-vation has not uniformly improved overall pro-ductivity and economic performance. See R.Barrell, G. Mason and M. O'Mahony, Productivity,Innovation, and Economic Performance(Cambridge, UK: Cambridge University Press,2000). Finally, despite increasing investments inresearch and development, large firms in thechemical and pharmaceutical industries havedeclining rates of innovation. For example, USPatent data in the chemicals class indicatesthat the number of US patents granted to thetop 100 private sector companies (as measuredby the total number of patents grantedbetween 1977 and 2001) declined between1993 and 2001. (Source: US Patent andTrademark Office.)

2 Interview on September 6, 2002 with GregSedgwick, group business development directorof BOC Group.

3 See, for example, the following articles: D.Rigby and C. Zook, "Open-Market Innovation,"Harvard Business Review 10, no. 10 (October2002): 80-90; J.B. Quinn, "OutsourcingInnovation: The New Engine of Growth," SloanManagement Review 41, no. 4 (2000): 13-28;R.M. Kanter, J. Kao, and F. Wiersema, eds.,Innovation: Breakthrough Thinking at 3M,DuPont, GE, Pfizer, and Rubbermaid (New York:HarperBusiness, 1997); D. Leonard-Barton,Wellsprings of Knowledge: Building andSustaining the Sources of Innovation (Boston:Harvard Business School Press, 1995).

4 Interview on September 26, 2002 with DaveThompson, senior vice president of strategy andcorporate development at Lilly.

5 See reports by C.J. Sylvester, UBS Warburg,December 19, 2002 and Ken Kulju et al, CreditSuisse First Boston, December 19, 2002.

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