Tuesday, June 01, 2010

Outsourcing Innovation

Over the last 20 years or so, as global barriers fell and telecommunications and information infrastructure increased, it has become easier and cheaper to outsource some functions.  In the US this started with NAFTA for manufacturing and then moved to Taiwan and to mainland China.  For services it started in the nineties as many firms moved high overhead operations like call centers to places like India and the Philippines.  Today, we are reaching the point where anything that can be reduced to information can be outsourced.  For example, when you have an x-ray or CAT scan, there's a good chance someone overseas is reviewing that and sending information back.  It won't be long before much of our backoffice accounting and financial planning will be done overseas as well.

Richard Florida wrote a post today entitled The Global Innovation Paradox, which points out that we think that much of the low margin work is getting outsourced but we also believe that the US leads in general innovation.  In his article he points to new research by the National Science Foundation that finds that many US firms are outsourcing R&D.  In the most extreme example, foreign-based Automotive R&D accounts for 40% of the total R&D for US companies.  In a number of other industries, from pharmaceuticals to semiconductors, an increasing amount of the R&D is happening overseas.  I'm glad he pointed out the research, but I don't understand his title of an Innovation Paradox.  It's not a paradox to see American companies outsourcing their R&D when they want to make products for the global market.  These firms are leveraging smart, well connected people in a number of different geographies to create new products and services faster, and more relevant in all markets.  Additionally, as the developing world catches up with the US in investments in education, they are "climbing the learning curve" by taking on more innovative research and development.  Soon, countries like India and China will do what Finland has done - match the US in innovation research and output, no longer following our lead but competing with us for the innovation lead.

Anything that can be outsourced - done less expensively at the same level of competence - will be outsourced.  Whether that is answering phones for customer support or designing circuit boards, it can and will seek the best people at the lowest cost.  That's a reality.  What we in the States need to understand is that we can either attempt to differentiate on cost, or differentiate on innovation and creation.  For the most part we've ceded the cost battle to other countries, so we can't afford to cede the innovation battle.  That means we need to continue to innovate in traditional R&D forms where we can, and also create new innovation models in new forms.  Notice that much of what Florida points out in the NSF research is still basic "R&D" which will become for the most part new physical products.  We in the US can continue to innovate in new products, but can open up new innovation opportunities in services, customer experiences, business models and so forth.  As these other countries develop, their customers, too, will demand the new products, services and business models we've created.  The benefit to being a follower in this case is that other countries get to learn from our mistakes and can be fast followers rather than pioneers.

We in the US have to remain the innovation pioneers.  We have to continue to break new ground, because we can't assume that we'll retain the "innovation" lead, whether we measure that in dollars of R&D invested or patents generated or whatever measure we choose to use.  There are too many smart, motivated people outside the US who are using our models and our methods that we've perfected over a 20-30 year time horizon.  They benefit from the fact that we have perfected the models and that we offer the world a compelling, ever growing market that demands new products and services.  So, to some extent, we are building our own gallows, demonstrating the best methods and models for innovation, and consuming the products created by others using our techniques.  If that is the case, we have to continue to invest in innovation and develop new techniques and new insights that continue our lead - in R&D yes, but in all facets of innovation.  The alternative is stagnation, loss of innovation leadership and being forced to compete as a high cost, low innovation economy.  Not the best situation to find oneself in.
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posted by Jeffrey Phillips at 7:23 AM


Blogger Admin said...

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2:31 AM  
Blogger Judy said...

Outsourcing innovation is just the start of the debate! Very topical at the mo. Thought you might like this innovation video developed to showcase innovation tools and how they can 'solve the financial crisis' - hope you like it - http://creativity.city.ac.uk/

7:10 AM  
Blogger Lisa said...

It is indeed a reality that business owners will look for inexpensive laborers who has the same skills and competency as their counterpart. We must not forget that outsourcing not only means sending jobs to developing countries, outsourcing is also any outside supplier/company under contract that will do a service for you.

For example, you have a small start-up business, you got your main employees, but for the moment, you do not need full time IT personnel. So, what you can do is hire a reputable IT outsourcing (Boston) company to set up computers, build firewalls or set up wireless networking (Boston) for you on a project or contract basis. This is favorable because you will be hiring knowledgeable and expert personnel in the IT field. It will also be cheaper this way since they are not employed full time. If the time comes when there is a problem and it is covered by the agreement, they can come back and fix it for free.

6:21 PM  
Anonymous Barbara said...

Just like the rest of the means in getting business,outsourcing can be risky or can attract success, it all depends on several factors that clients should consider.I've read some of them on some articles, it does help to consider both sides of the vendors and the client.

4:24 PM  
Anonymous Sean Countryman said...

Globalization definitely has changed the landscape of business processes today. Internal functions like product assembly through PCB design layout are outsourced to achieve the same quality at a lower cost. In turn, outsourced product development
creates a stronger global market where innovative products are done across different geographies.

I definitely agree that since basic functions are already outsourced, it leaves a greater room for industries to continually innovate and strive to raise the standard in product development. Quality manufacturing is already present in other countries, that's why the US should make itself relevant by maintaining its position as the global leader for innovation. As the market grows, it should be able to find new ways of improving different industries and their respective processes.

Very informative article. Thanks for sharing!

9:18 PM  
Blogger Vicki said...

It is true that most business owners tend to outsource services and supplies. Outsourcing is seen as a good business strategy since it oftentimes cut production costs and companies are assured that functions are given to the right persons since they are trained specifically for the job.

I think that my boss did a good job outsourcing an IT company to do the networking functions. Fortunately, in Houston, computer network support agents are highly trained and they are very dependable, too. Whenever we have system errors, they'll sure to produce excellent results. Well, I appreciate you for sharing this informative post on outsourcing innovation. I sure hope that people would see this not as an opportunity for growth. Thanks again.

2:23 AM  
Anonymous Outsourcing Philippines said...

There has been a lot of discussions and debate about outsourcing. Hoping people around the globe would understand clearly the meaning of outsourcing and how it works.

7:47 PM  
Anonymous Abe Johnson said...

Outsourcing definitely found a good niche in auxiliary business processes. Communication channels like call centers are continually thriving because of the need to disseminate information in real time.

The emergence of better communication means have helped industries to reduce costs. More importantly, it gave a lot of space for the company to focus on their core functions. I agree that to some extent, that time must be used wisely to maintain the competitive advantage that US based industries have.

In the age of a highly capable market, it's always strategic to maintain the upper hand. Thanks!

9:20 PM  
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1:25 AM  
Anonymous Outsource Call Center said...

Cost benefit is the biggest advantage regarding call center outsourcing. Previously, most of the companies used to have in-house call center services. They provided one-on-one customer services, which brought excellent results.


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Anonymous Houston IT Service said...

It is actually practical to outsource, provided that you've made the right choice on who,what,when, and where to outsource from. A mistake on this could be very costly on your time and money.

But on the bright side, if you did make the right choice, then welcome to productivity heaven.

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If you run a design company, it probably isn't the best idea to outsource all your design work. You want to be able to fully control most work related to the core mission of your business. However, other services such as data entry, email management or Web copy creation may all be good candidates to entrust to outside workers.
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