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Much has been made of the concept of core competencies.  In a hypercompetitive world, a CEO can easily argue that a firm should do what it does well and outsource the functions that others do more efficiently or effectively.  Emphasis on outsourcing has grown to encompass entire business processes or entire functions.

What, then, can we say about outsourcing innovation?  If a business can readily outsource its procurement functions, or its manufacturing processes, can it, or should it, outsource its innovation functions?  And if so, to whom?

Let’s start by stipulating that few firms can claim innovation as a core competency.  If we follow the logic that a firm should outsource functions or processes that aren’t a core competency or that the firm doesn’t do well, then by all means, clearly most firms should outsource innovation.  But it certainly doesn’t seem to make much business sense to follow that dictum.  Innovation is critical to growth, profits and long term strategy.  Outsourcing innovation may lead to short term gains, but over the longer term can an innovation “outsourcer” fully understand a firm’s goals and strategies?  Does a third party offer that much better insight into your customers’ need and wants?

If we then argue that it is dangerous for a firm to outsource innovation entirely, then perhaps we can argue that certain functions can be safely outsourced to third parties with deep capabilities or experience.  We consider innovation to be an end to end process defined by these phases or steps:

  • Trend spotting and scenario planning
  • Identifying unmet or unarticulated needs
  • Idea Generation
  • Idea management, evaluation and selection
  • Prototyping
  • Concept testing
  • Commercialization

Let’s examine the possibilities of outsourcing one, or several, of these phases.

Trend Spotting and Scenario Planning

Few firms do a good job of trend spotting and scenario planning, so this is a capability that can be outsourced to third parties that understand how to collect and assimilate trends and develop scenarios.  However, any third party developing scenarios must understand your strategy, your vision, your customers and your time horizons in order to develop meaningful scenarios.  That work can’t be done in a vacuum, and your strategies and definitions must be carefully communicated to a third party, otherwise the scenarios and their implications won’t amount to much.

Identifying unmet needs

The concept of ethnography and other qualitative research can help identify unmet needs or unarticulated needs, yet few corporations have these skills in house.  This work can be outsourced to firms that specialized in identifying customer needs and wants using qualitative research tools.  However, these firms must be educated about your products, your strategies and your goals.  While ethnography and other tools can provide compelling insights, differing scope definitions, a poor understanding of your purpose or needs can create meaningless insight.

Idea Generation

Many firms assume they can outsource idea generation – to customers, consumers, business partners.  This is a reasonably safe assumption if your firm does a good job providing scope, strategy and context.  If this “framing” is provided effectively, others can generate ideas in your behalf.  If you fail to provide strategy, scope or can’t define a problem or opportunity effectively, then the people who attempt to provide you with ideas will return a large quantity of ideas, but with little applicability to your needs.

Idea management and selection

While you could conceivably outsource idea management and selection, this work should be done by people on your staff.  Picking a new product which will drive new revenue and defining the features and attributes of that product should be driven by your internal teams, in conjunction with your development teams. 

In fact, after idea generation, I’ll argue that it is exceptionally risky to outsource any step, with the possible exception of testing a potential solution with consumers.  If your product development capabilities are on par with your industry, there should be little reason to outsource anything after idea generation.

Note as well that even in the phases where it may be possible to outsource innovation work that there are several consistent caveats, mostly focused on strategy, vision and scope.  Innovation, whether accomplished with internal resources or external agents, simply can’t function effectively without these factors, well-documented and well communicated.  It won’t matter if you have leading third party consultants or an embryonic internal innovation team.  If you can’t provide clear strategy, clear guidelines and clear scope, you can’t outsource innovation.

One last barrier

Finally, let’s assume you’ve successfully outsourced innovation, and a brilliant consulting team has identified an important need, generated ideas and selected an idea for development.  Now, all that’s required is to translate that idea from the consulting team to the product or service development team.  Simple, right?

Not typically.  Product development teams have their own priorities and most likely weren’t involved in the development or generation.  Rather than seeing the consulting team as a partner in innovation, they may see them as a threat.  So it is entirely possible that good ideas originating from a renown consulting firm can’t be commercialized effectively due to a transition barrier from idea to product, external to internal.

Conclusion

While core competencies matter, and firms should stick to what they do best, it is difficult to outsource innovation effectively even in the best of circumstances.  There are certainly specific steps or phases of an innovation effort which may be outsourced without difficulty, but only if the goals and strategies are well defined.  Any firm outsourcing an entire innovation process is likely to discover it has also outsourced its strategy as well.

Written by Jeffrey Phillips. Jeffrey is a senior consultant and VP Marketing for OVO Innovation.

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