Tuesday, January 11, 2011

In Vitro Innovation

Outsourcing: Not Just for Manufacturing Anymore

Irises of many colors in a garden
Over at the normally worthless and unreadable Forbes Osman Ozcanli has posted an insightful must-read article on how large companies can successful harness innovation. Most large companies are structurally and culturally unable to foster true innovation from idea to shipped product. Somewhere along that path some combonation of organizational inertia, ass-covering, or battles over fiefdoms will align to destroy the tender shoot of the idea long before it flowers and fruits.
Innovation is risky business... It is too much risk for its employees and the company itself. Shareholders and everybody else working there want predictability. They would rather get a predictable return then a high-risk move for what they have invested in. Nobody is to blame. This is just the nature of business.
(A handful of companies, e.g. Apple and 3M, are the rare exceptions that prove the rule.)

For almost all large companies it works better to outsource innovation to entrepreneurs, independent inventors and small companies. And turn them loose.

The key point, notes Ozcanli, is that the effort must be outsourced; hiring such people will not work regardless of how prolific their creativity is:
Tell them you want them to innovate. Give them a budget and some direction to work with... Don’t get in their way. Just finance them. Let them own the vision for their product. But give them deadlines. Let them start their own company. Hold their hands just a little. Let them produce and start selling when the time is right. ...they will not only create an innovative product, but in about five years they will create a brand and it will be a true brand that represents their passion behind the product. People will love it.
The company can set up the option to own everything at the outset; if the startup fails they lose. If it succeeds, they own the brand, the product, and the scale-up and product-line opportunities.

Large companies would be smart to evolve their strategic investment approach in this way. Companies can still wait for entrepreneurs to build companies to the point where their idea has technical and commercial validation but the cost of acquisition then is much higher as they are funding the entrepereneur's and investors' exit event. As venture capital continues its decade-long contraction the funding fissures for startups yawn wider. Large companies in the United States are sitting on record amounts of cash and are loathe to invest in plant, equipment, and new hires until consumer demand improves. Where shall they deploy all that cash? The solution to their investment dilemna is the same as that to their R&D and competitiveness problem, and it is all around them: in university spin-outs, angel investment forums, entrepreneur networking groups, and startup incubators. All they need do is go after them.

Let a thousand startups bloom.

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