Sunday, March 13, 2005

Outsourcing Innovation (Business Week, March 21, 2005)

Question: What makes America's Motorola different from India's Wipro?

Answer: (Choose all that apply)

  • American vs. Indian-based
  • High vs. Low-cost of Labor
  • In-house Innovation

The last one will not be a differentiator much longer. Ever since outsourcing began, it has been clear that the complexity of work shipped to India, China, and Eastern Europe would continue to increase. It was clear that one day the most demanding R&D would be done oversees just as manufacturing is now. This week, Business Week magazine profiled this trend in their cover story on Outsourcing Innovation.

  • Accenture says, "R&D is the biggest single remaining controllable expense to work on."
  • Motorola says, when outsourcing "you have to draw a line, core intellectual property is above it, and commodity technology is below."
  • Flextronics says, "Western tech conglomerates are on the cusp of a sweeping overhaul of R&D that will rival the offshore shift from manufacturing."
  • Nokia says, "Nobody can master it all. You have to figure out what is core and what is context."
  • Lucent says, R&D outsourcing "frees up talent to work on new product lines. Outsourcing isn't about moving jobs. It's about the flexibility to put resources in the right places at the right time."

Summing all of this up and dividing by the ever advancing trend to outsource, you arrive at a logical conclusion that R&D is a cost to be minimized. Anything labeled R&D is no longer going to be held in-house. Instead, much of this work will be outsourced to foreign companies that are better at it than the US-based conglomerates.

What will remain in-house is anything that creates new intellectual property (IP). This is the cream from the top of the R&D milk bucket. Companies want to retain only the IP and the resources required to create it. Once the IP is created and patented, they are happy to have all of the rest of the work done by anyone anyplace. Companies want to become IP holding companies more than manufacturers or researchers.

Where is this headed? Look at consumer electronics and automobiles. Flextronics, Wipro, and Quanta are the Toyota, Honda, Sony, and Sanyo of tomorrow. American customers will soon be able to choose between two identical phones, one labeled Motorola and the other labeled Compal. Motorola's will cost $199, Compal's will cost $49. Which do you think the customer will choose?

Azim Premji, chairman of Wipro, humbly and slyly states that, "To be a successful product company requires intimacy with the customer", implying that only an American company can achieve that with American customers. So how did Toyota, Honda, Sony, Samsung, and LG build such strong positions in the American product market?

Clayton Christensen described the unstoppable advance of disruptive innovation in his 1997 book, The Innovator's Dilemma. Taking over R&D is the next step along Christensen's famous graph.

Debating whether this is good or bad is largely a political activity. In business, it is part of the economic evolution of the global marketplace. It is going to happen - see "Technology Impacts on Business: Disruption, Globalization, and Innovation Management".

The Business Week article is fantastic, but be sure to read Christensen's book as well.


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