In today's global market, companies of all kinds outsource the vast majority of their R&D to stay competitive. But if not managed correctly, outsourcing can negatively impact innovation because the engineers doing the work have no vested interest in maintaining a culture of innovation that a CTO may espouse, or they may try to steal intellectual property. Striking a balance between driving innovation and protecting intellectual property has never been more important. Here, Knowledge Center contributor Jerry Smith explains how companies can both protect valuable intellectual property and drive the critical innovation that sets them apart from the competition.
outsourcing strategies are killing the very nature of innovation and
limiting the revenue growth potential of companies at the expense of
cheaper operational costs. At this point, there should be no doubt that
outsourcing has fundamentally changed the way in which ISVs are
operating, with 84 percent of ISVs outsourcing some part of their
Consolidation, new technology, new business models, global recession
and regional talent shortages are drivers for this outsourcing wave.
The paradigm of "selling locally but developing globally" is the
centerpiece of most successful ISV strategies.
But the fact remains, while outsourcing drives lower costs,
innovation drives profitable growth. Recent research states that
companies that are best-in-class at product portfolio management are
four times more likely to achieve margin premiums of 75 percent or
higher for new products. This is a very impressive return. Innovation
is, therefore, confirmed as a lever of growth and value creation.
Profitable growth is ensured with a repeatable pattern of innovation
and execution with global operational excellence.
In this globalized ecosystem, however, decision makers are losing
their confidence in engineering's ability to lead the innovation
initiatives. According to one study, only 17 percent of global CEOs
mention R&D when listing their source of innovations. Of those,
less than three percent of CEOs consider their global development
operations capable of leading enterprise business innovation. But why?
Expanding the innovation horizon
To answer this question, we must both define what innovation is and
the role engineering plays in the innovation process. Unfortunately,
there is no standard definition of innovation, at least one that is
actionable. Some believe that innovation is the process whereby ideas
for new or improved products are developed. Others see it as purely a
new idea, method or device. Most are useless and very few, if any, can
One should view innovation as the successful implementation of an
invention or idea that adds sustained value that can be measured in the
form of new revenue and more profit, culminating in increased
valuations. The goal, then, is to tie the process of creation with the
realization of value. Both are important and measurable. With this
definition as the basis of understanding, let's briefly look at why
traditional outsourcing breaks the innovation process.
Software engineering is a complex system of interacting processes,
people and technology, driven by market conditions and user needs.
While many software development methodologies depict the process as a
series of connected activities, one feeding into the other, it is in
reality a complex mesh-with each node connected, in some form and
weight, to all the others.
This is where the problem lies with traditional outsourcing. In
traditional outsourcing, products are often defined in-house, owned by
local product managers. Requirements are then created by analysts, from
which an outsource team is assigned engineering tasks. Engineering
activities are driven by a jointly agreed upon timetable, mostly
task-based. At the end of the process, the product is delivered back to
the in-house product manager and the process repeats. Albeit an
over-simplified view of how traditional outsourced engineering works,
the key point is that it is measured by their ability to deliver
products on time.
Innovation, however, has a different interconnected life cycle. As
shown above, ideas come from all phases of the software development
process. When engineering takes places in-house, these natural feedback
loops enable ideas to flow back to those responsible for product
strategy, a form of collaborative socialization. However, when
engineering is outsourced, the feedback loops are broken and the
collaborative innovation process is severed.