A recent study published by CAPS Research (the research arm of the Institute of Supply Management), underscores the importance of organizations adopting external innovation rather than relying solely on their internal research and development (R&D) efforts. Some companies set goals to increase revenues by adopting external innovation. Procter & Gamble, for instance, wanted to attain 50% of its revenues through external innovations — that is, licensing technologies — over five years (1).

A joint project from CAPS Research with Western Michigan University and Arizona State University, Innovation Sourcing: Contributing to Company Competitiveness was published in March 2011 (2). Its findings are supported by the seventh annual global survey of senior executives conducted by The Boston Consulting Group in conjunction with Bloomberg Businessweek (3). Three significant findings of the former stand out:

• After the recession, innovation is returning as a top priority for companies. Satisfaction with innovation return is slowly increasing.

• The current focus is cautious — on incrementally improving existing products and services rather than developing new ones — but broadening in the most rapidly developing economies.

• Risk-adverse corporate cultures, lengthy new-product–development cycle times, and inadequate measurement practices for innovation are limiting innovation.

Other People’s Intellectual Property

Another factor that influences the acceptance of external innovation is intellectual property (IP) protection. It makes no sense to duplicate something that already has been invented, tested, patented, and licensed. The work has been done, the idea has been validated, and intellectual property protections are already in place. To infringe on a patent risks legal action that would negatively affect your bottom line and could tarnish your reputation.

Open innovation is described as a strategic approach based on acceptance of the simple fact that “smart people” work at most every company (4). “Research does not have to originate internally to profit, and establishing better business models is more important than getting to market first,” the CAPS report explains. And companies can profit from others’ use of their own IP. “Companies should buy others’ IP whenever their own business model can be advanced.”

One example of a patent-protected new technology is e-LYNXX Corporation’s automated vendor selection (AVS) procurement procedure. This enables buyers of custom goods and services to streamline their procurement processes, gain full transparency, document every task, and reduce costs of the procured goods or services by 25–50%. The average savings for current licensees is ∼42%.

The AVS technology was invented in the 1990s and granted a series of patents in 2002, 2008, and 2010. It has been licensed to organizations across a broad range of industrial sectors: heavy equipment, construction, building materials, parcel delivery, utilities, computer hardware, retail, grocery, healthcare, finance, resale distributing, and associations. The technology itself is only part of the package. To create the transparency, strengthened quality controls, and 25–50% cost reductions, e-LYNXX developed a proprietary communications and workflow system and a series of tested best practices. For this inventing company, the successful outcome followed a tremendous investment in time and a huge allocation of resources.

External innovation recognizes the importance and benefits of inventions that are developed outside internal R&D departments. To external-innovation advocates, it is common sense to adopt a proven technology rather than trying to “reinvent the wheel” to achieve similar results — especially when an inventor offers a given invention for licensing and facilitates the process. For example, clients face no up-front costs in having AVS software installed and staff trained on the system. Buyer organizations eliminate unnecessary related R&D expenses, providing another bottom-line benefit.

Open-innovation strategies recommended in the CAPS report include establishing innovation definitions and metrics, enhancing supplier innovation efforts focused on company needs, budgeting for innovation training, working with universities and other third parties, and finding ways to discover and assess supplier innovation capabilities. CAPS Research encourages organizations that want to be competitive in today’s economy to adopt this as a business strategy. Senior-level executives need to encourage innovation from all sources, and they need to support and engage suppliers that are most likely to provide innovative solutions. “The company-wide innovation strategy should be more ‘open’ than ‘closed,’” the study concludes, “with an organizational culture that values and emphasizes innovation from supplier and other external sources.” Access the executive summary online at www.capsresearch.org/publications/pdfs-public/monczka2011innovEs.pdf.

Author Details
William Gindlesperger is chairman and chief executive officer of e-LYNXX Corporation, 1051 Sheffler Drive, Chambersburg, PA 17201-4851; 1-717-709-0990, www.e-lynxx.com.

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