Open Innovation and Strategic Sourcing

Posted by David Ritter on Dec 16, 2010 1:33:51 PM

By David Ritter, Chief Technology Officer, InnoCentive

In this post, I’d like to build on my previous comments regarding the similarities between Open Innovation and Strategic Sourcing.  I think this metaphor can help executives understand the imperatives and challenges they face when considering their innovation strategy.

To compete in the global economy, companies need to establish core capabilities that enable them to take advantage of their scale.  Strategic sourcing is a classic example – manufacturing companies aggregate their demand across their factories for materials and negotiate with vendors from a position of strength and volume.  Sometime after 1960, strategic sourcing became a competitive necessity.  Companies that make stuff in any volume absolutely had to create the organization, processes, and culture that enable strategic sourcing, or they’d be driven out of business by others that had built this capability.

To implement strategic sourcing, firms had to overcome a major cultural barrier:  the traditional role of the factory chief as the “CEO of the plant”.  Many factory heads operated with high levels autonomy.  Management believed that plant managers required complete freedom to operate, or they couldn’t be held accountable for results.  To take purchasing away from them and allow a “central corporate bureaucracy” to buy their critical materials – this was viewed by many the highest form of heresy.  To create this core capability, years of careful organization design, change management, and communication were required.  The companies that were successful are still around – others not so much.

Today, companies face a very similar situation as they consider Open Innovation.  Leading enterprises are well on their way to building a strong, repeatable OI capability.  It’s dangerously naïve to believe that all of the knowledge and skills required to compete exist within the four walls of your company.  Firms that have yet to begin this journey are already disadvantaged.

In many organizations, Open Innovation is battling a cultural barrier very similar to that which faced the pioneers of strategic sourcing.  In this case, it’s the R&D function that’s being challenged to do things differently.  As one senior executive in the pharmaceutical industry put it to me recently, “In our group, admitting that I can’t solve a problem by myself is a bad reflection on me.”  The notion of reaching out to find answers is foreign and feared.  Employees feel that they can’t even seek help WITHIN the company – the cultural stigma is too strong to even allow assistance from down the hall, let alone from another business unit.

Enterprises must embark on a concentrated change program to overcome this inertia – to make “Proudly Found Elsewhere” (PFE) a success celebrated with the same joy as “Invented Here”.  This will require a sustained commitment to creating the organization, processes, culture and infrastructure that enable and empower their people to reach beyond their current boundaries.  And to achieve this transformation, you have to start somewhere.

In both strategic sourcing and Open Innovation, a first critical step is the aggregation of needs.  In strategic sourcing, needs for raw materials must be pulled together across factories.  To be effective practitioners of Open Innovation, companies must aggregate their need for solutions – and then make smart choices about where the solutions can be found, inside or outside of the boundaries of the company.  Aggregating the need for solutions requires a central organization with supporting processes and infrastructure.  We’ve designed our ONRAMP program and the InnoCentive@Work platform specifically to help our clients establish this core capability.

To this point, our October release of InnoCentive@Work includes a major new facet – an interactive workbench that allows our clients to find and collaboratively formulate their key problems.  This new facility brings our unique methodology for challenge development into a powerful but simple interactive space.  Carefully formulating the problems that matter is a foundation for better innovation.  Our tools now bring our leading approach to our clients in a compelling way.  In my next post, I’ll talk more about the Challenge Workbench and how it can help transform your innovation capability.

Topics: Innovation Insights

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