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WINTER 2011 V O L . 5 2 N O.

By Jason Amaral, Edward G. Anderson Jr. and

Geoffrey G. Parker

Putting It Together:
How to Succeed in
Distributed Product

Please note that gray areas reflect artwork that has been
intentionally removed. The substantive content of the ar-
ticle appears as originally published. REPRINT NUMBER 52209

Putting ItTogether:
How to Succeed in
Distributed Product
Handing off various parts of your innovation process
can work if you are willing to spend the time upfront
and follow these suggestions.

COMPANIES HAVE TRADITIONALLY been protective of the innovation activities they

use in product and process development, seeing the activities as part of their crown jewels. That
thinking, however, is starting to change. The increase in outsourcing, offshoring and alliance build-
ing has resulted in innovation efforts that often require the orchestration of multiple organizations
separated by cultural, geographic and legal boundaries.1 At one extreme are centralized arrange-
ments, with a clear lead organization and subsidiary supplier
THE LEADING organizations. At the other are innovation efforts performed
QUESTION by decentralized open-source networks.2 In between is the
If you work realm of outsourcing and offshoring the key building
with others to blocks in a trend called distributed product development or
develop a new DPD, whose success factors are still not widely understood.
product, how
This article is an attempt to remedy that. Outsourcing
should you
manage the complex product development work subjects companies to
process? significant uncertainty. Companies can make perfectly rea-
sonable decisions and still find themselves needing to make
expensive changes, ranging into the millions or even billions
The flippant answer
very carefully of dollars. Our contention is that, by anticipating some of
is also the right one.
these changes, managers can reduce risk and, ultimately, cost.
must be perfectly We start by explaining why some seemingly well-conceived
clear, especially if DPD strategies have failed to deliver the expected financial or
the project involves
people from differ- performance benefits information that may be useful to
ent cultures.
senior executives starting to put their faith in DPD and invest
Incentives must be
carefully aligned. in it.3 Our central focus, however, is providing guidance to
Despite upfront
planning, you still
should be ready to Many global companies such as Pepsi, GE, Visteon, Hewlett-Packard and
adapt and realign IBM routinely work across corporate boundaries with companies in different
as the inevitable industries, geographies, times zones and cultures.These boundaries present
snags occur. additional challenges when working together to develop complex products.



ABOUT THE middle managers who, after all, must make DPD engineers off other projects and added them to the
RESEARCH work. Our recommendations have been developed imperiled one. Second, the supplier hired addi-
Since the mid-1990s, the
authors have worked at, over more than a decades worth of research and tional engineers to work with the manufacturers
consulted with and re- consulting. (See About the Research.) designers and improve coordination. And after the
searched Fortune 1000 immediate problem was solved, the manufacturer
companies that are engaged
in interfirm and interregion The Trouble That Arises took the extreme step of re-insourcing that is,
coordination of product de- Around Boundaries it acquired a regional design/manufacturing com-
velopment activities. This
work has been sponsored in
Two Cautionary Tales pany to avoid similar issues in the future.
part by the National Science We will start by acknowledging that DPD is no pan- In both examples, problems arose across corpo-
Foundation.i The research acea. Two illustrations make the point. Example rate boundaries. Boundaries are the places where
on which this article is based
one: A multibillion-dollar computer server com- different organizations that must work together are
includes in-depth surveys
and exhaustive interviews pany concluded that it could exploit the benefits of separated by being in different companies, indus-
with more than 100 people reusability by developing one subassembly that it tries, geographic locations, time zones or business
covering more than 60 proj-
could use in a number of products. That was cer- cultures. Boundaries arent exclusive to DPD proj-
ects at 20-plus companies in
multiple industries. tainly feasible. However, the working prototypes ects they exist even at companies that design, test
Among the companies the manufacturer developed demonstrated signifi- and manufacture every widget themselves. But
whose DPD efforts contrib-
cant unwanted electromagnetic, mechanical and boundaries are far more challenging when multiple
uted to the authors
understanding of the sub- thermal interactions, which degraded the perfor- organizations, in multiple places, are working to-
ject are Advanced Micro mance of the derivative products. gether to develop complex products.
Devices Inc., Applied Mate-
As the company turned its attention to studying
rials Inc., Cardinal Health
Inc., Dell Inc., Entergy Corp., the various performance impacts, the development Defining and Spanning Boundaries:
Fokker Aerospace Group, of the derivative products got put on hold. Valuable The Two Main Challenges of DPD
Frito-Lay North America
time elapsed. Ultimately, the company realized that
Inc., Fujitsu Siemens Com-
puters Inc., General Electric there was too much performance degradation by Defining the Boundary DPD requires that man-
Co., Heraeus Holding mixing and matching subsystems, and the idea of agers distribute work across various organizations.
GmbH, International Busi-
ness Machines Corp., IEM
using the initial product as a platform was scrapped. The key questions are, Who does what should
Inc., Lockheed Martin Corp., Several million dollars in development expenses we insource or outsource? and Where should we
Microsoft Corp., Motorola went down the drain. do it onshore or offshore?
Inc., Visteon Corp. and Zom-
bie Studios. We would like
Example two: A maker of medical imaging tech- To answer these questions, project teams must
to especially acknowledge nology decided to switch the supplier it used to analyze processes at the level of activities, by which
the help of the people at manufacture the high-performance processing we mean a set of related tasks, performable by a sin-
Hewlett-Packard Co. and
NetApp Inc. The authors col-
boards that went into its flagship product. The in- gle entity, resulting in specific deliverables. Activities
lected quantitative surveys coming supplier was already a known quantity, tend to be constant across development programs
and qualitative interviews having previously made circuit boards, quite reli- and over time, as opposed to tasks, which are often
from project engineers who
manage development part-
ably, for the manufacturer. However, the new situation dependent and harder to anticipate.
ners, and from the assignment involved a much higher level of prod- Theoretically, teams could analyze every activity
engineers direct supervi- uct complexity and performance. It also involved across all development business processes, but in reality
sors. Supervisors assessed
project outcomes along a an expanded scope: The new supplier would have not every permutation is realistic or feasible. The gen-
number of dimensions, in- to design the boards in addition to manufacturing eral locations of organizational boundaries are often
cluding performance, cost them. Somewhere in this handoff and amid the ex- mandated by senior executives based on their strategic
and timeliness. Project engi-
neer surveys included panded requirements, things went wrong. When analyses, or on technology, market and cost factors.
questions about the nature prototype testing began, the new boards exhibited When companies start DPD projects, we coun-
of the project (geographic lo- significant unexpected and unwanted electromag- sel them to focus on the potential boundary areas.
cation of the lead company
and supplier, language spo- netic interactions with the rest of the system, There are, in particular, three interrelated issues
ken by each party, size and causing a six-month delay in product launch. that implementation managers must address:
complexity), the integration To get the project back on track, the manufac- 1. Combining versus separating activities
and communication mecha-
nisms used, and manager turer and supplier were forced to take several 2. Insourcing versus outsourcing and
background and training. difficult steps. First, the manufacturer pulled key 3. Onshoring versus offshoring.4


Combining vs. separating activities Combining activities onshore. Employee continuity during
activities offers two potential benefits. If activities product development is important, and many
are highly interdependent, or coupled, combining widely used offshore locations have a reputation for
them within a single organization can simplify churning through workers.5 In addition to the re-
trade-offs, ease contingency planning and elimi- cruitment headaches it creates, this exodus exposes
nate the overhead associated with managing employers to a loss of proprietary information.
boundaries. The second benefit occurs if the out- Offshoring occurs for multiple reasons. The
put quality of the upstream activity is important main one is to gain access to sufficient talent and
but difficult to measure. In these cases, combining capacity at a favorable cost. Another important rea-
the activities improves accountability and moti- son is to satisfy local content regulations to gain
vates higher levels of performance. access to markets. A third reason can be to develop
Separating activities can also generate benefits. access to local market insights. For instance, in the
Lets say the activities require different competen- smaller apartments that typically exist in Japan,
cies. For example, one company we have worked there is a preference for smaller form-factor print-
with is expert at designing oil-well monitoring ers and display devices. A research and development
equipment but does not have the internal capabil- executive might never make this connection if her
ity to design the specialized circuit boards needed operation was based entirely in the United States,
to make the equipment work. In such a case, spe- for example, and was focused on performance re-
cialized organizations can more easily get the work gardless of the footprint implications.
done. It is also easier to monitor activities that have
been separated, facilitating accountability and Turning the factor analysis into recommenda-
avoiding opportunistic behaviors. tions After drawing process maps for the potential
boundary areas, project teams should evaluate activi-
Insourcing vs. outsourcing In any DPD initiative, ties according to the above three interrelated factors.
there are two main reasons to keep activities inter- For adjacent activities, there will be a net recommen-
nal. First, performing the activity may require dation of combine versus separate. For each activity, Gaining access to global
unique physical, intellectual or human assets; that there will be a net recommendation of in versus out ideas and insights led
Hewlett-Packard Co. to
creates the possibility that a supplier with these as- and on versus off. In most cases, the individual recom- design some of its computer
servers in Singapore and
sets could extract concessions, or could become a mendations will not conflict with one another. Where Taiwan, prototype them in
Taiwan, and manufacture
direct competitor. Second, if future uncertainty is they do, of course, the differences must be reconciled. them in China, Singapore,
high, contracting may be costly to negotiate initially India, and Australia.

and may require renegotiation. Spanning the Boundary Once the boundary has
On the flip side, there can be good reasons to been defined, it will need to be spanned so that par-
outsource an activity. One is to get the best possible ties on both sides of the boundary can coordinate
price in situations where there are multiple suppli- their work in an effective manner. (See Crossing
ers and low switching costs. The second is that Boundaries, p. 54.) To do so effectively requires five
suppliers may possess essential capabilities that are supporting mechanisms:
not available internally. Appropriate incentives to align the organizations

Onshoring vs. offshoring In most product devel- Clear specifications to describe how interactions

opment projects, the default preference is to keep should occur across the boundary;
activities onshore. There are two main reasons. Shared information systems to collaborate with

First, it reduces linkage costs which include partners and to synchronize data;
tangible costs like travel, telecommunications and Human value chain integrators to cope with the

secure data transfer, and less tangible costs like late- inevitable gaps in specifications and to resolve
night teleconferences, manager burnout and the minor disputes; and
potential for miscommunications. Appropriate governance structures to end disputes

Second, it minimizes employee turnover to keep that the value chain integrators cannot resolve.



Incentives Organizational alignment is notoriously that activities whose output is obvious and imme-
hard to achieve and requires the proper balance of fi- diate will be emphasized at the expense of activities
nancial and nonfinancial incentives.6 Financial whose impact is more subtle, and that wont be-
incentives as Einstein might have put it should come visible until later. 9 Put another way, the
be made as simple as possible, but no simpler. Long, difficulty of inspecting most aspects of a service in-
complex incentive schedules end up in the file cabinets evitably means that considerable weight is placed
of the lawyers, not posted above the desks of the project on those few remaining aspects that can be inspected.
managers and engineers. Incentives should take ac- That can lead to problems unless there are nonfi-
count of what clients truly value, and should therefore nancial incentives, too such as the chance of
help service providers make the appropriate trade-offs. repeat work and an implicit promise of a positive
At the same time, unintended consequences occur if recommendation when the supplier needs it to se-
incentives relate to things that are hard to measure, or cure other business. As every service provider
are misaligned, ambiguous or biased. knows, the best marketing is a delighted client.
Generally speaking, fixed-price contracts are While it may be tempting to push for low fees,
best when the scope of the work is well understood working toward fair fees is probably smarter. De-
upfront and there are unlikely to be any surprises sign services tend to be less transactional than,
during the execution of the contract. Cost-plus say, manufacturing services. Therefore, providers
that feel like theyre being nickel-and-dimed can
protect their margins in subtle ways that may not
CROSSING BOUNDARIES violate the letter of the contract but could lead to
Most companies routinely cross boundaries even when they design, test and
manufacture every item themselves. But when working with other companies, unsatisfactory outcomes. For instance, a provider
these five spanning mechanisms are critical for effective coordination. might transition its best and most expensive
engineers off a project. Or the provider might slip
Boundary in extra service charges and fees as soon as a change
Organization Culture request appears. Fair compensation combined with
Geography Industry
Lead Company Time Zone Laws Supplier/Partner nonfinancial incentives can avoid this, and may re-
Language Other sult in better organizational alignment.

Spanning Mechanisms Project Specifications Providing clear require-

Align incentives ments to partner organizations is among the most
Specify requirements important activities when working across company
Share information
boundaries. Nearly every manager weve met who
Empower the integrators
Create governance has been involved in a DPD initiative has empha-
sized this point. A high-level manager in a large
aerospace company summed up the issue as follows:

contracts work best for projects that are not well The Boeing Co. is an excellent aerospace com-
understood upfront, either because of the novelty pany. Yet when we work [on a product] with
of the project, because of uncertainty surrounding them, we find that we speak different languages.
the implementation challenge or both.7 We have different words for the same thing. And
Of course, there is room for hybrid approaches. we have different ways of doing the same thing,
For example, in one case, Toyota Motor Corp. cov- such as qualifying parts. Most of our procedures
ered 70% of the overrun incurred by a plastics dont even correspond cleanly to theirs. But we
supplier after an unexpected surge in the cost of oil know that both our companies are good at what
feedstock, a crucial input.8 they do. Sorting this out is difficult.
It is also important to keep in mind, given the
delays between actions (engineering work) and re- Cultural issues can make specifications even more
sults (product sales), that there is a significant risk problematic. An American supplier of capital equip-


ment who participated in our research was asked by MIND THE GAP
an engineer from an oil-services company in Asia Its important to double confirm that suppliers understand the intent and
interpretation of specifications. Communication gaps are often the result of
whether the suppliers equipment was monkey-
a lack of clarity, or patience, on the part of the lead company.
proof. You bet, said the supplier, who had worked
hard to provide user-friendly computer screens and Gaps in:
had gone to the additional trouble of color-coding the Geography
Time Zone
equipments buttons. Six months later, when the man-
Lead Company Language Supplier
ager visited the installation, he was brought to a jungle Culture
where, of course, his machinery was overrun by flesh- Industry

and-blood monkeys, happily gnawing through the Specifications

wires that connected various pieces of equipment. Requirements Requirements
That is an extreme (and comic) example, but the Coordination Coordination
Interfaces Integrators Interfaces
import is clear: When dealing with specifications across Test Results Test Results
cultures, it is best to double confirm a mutual under-
standing of intent and interpretation. (See Mind the Info Systems

Gap.) Nonnative speakers of a language can seem flu-

ent but miss important subtleties or meanings. It is also
true that we tend to underestimate the difficulty that fully whether she can achieve the project objectives. (It
other people have in understanding what we are trying will also, of course, keep the provider from claiming
to communicate. In other words, the curse of knowl- later on that the scope of the job increased and so the
edge the fact that once we know something, we can company is entitled to additional compensation.)
no longer imagine not knowing it10 extends to the
writing of specifications. When there are communica- Shared Information Systems Product development
tions gaps, it isnt necessarily because the person on requires companies to synchronize and exchange data
the other side is not paying attention, is not trying, is across organizations a requirement that is inherently
not motivated or is not smart. The problem may lie challenging with a multipart, distributed project. For
with us, in our lack of clarity or patience. most of the 2000s, the most frequent solutions were on
The communication of specifications depends on the low end of the technology spectrum e-mail, Web
how expert the service provider is. If the provider has conferencing, plain old telephone service or did
limited expertise, it is useful to think in terms of a devel- not use technology at all (such as face-to-face com-
opment plan. The best practice is usually to specify what munications). Poor image quality undercut the
needs to be done, and perhaps how not to do it (based claims surrounding video-conferencing systems and
on experience), without being overly prescriptive in discouraged their use.
terms of how it should be done. There are a lot of points In more recent years, however, technology has
on the continuum between tightly controlling the de- been making more of a contribution to DPD. Product
velopment process and simply throwing the completed development partners can turn to some increasingly
work over the wall, as the engineers like to say. It is up to valuable technology, from collaborative software to
the company leading the product development effort to far superior teleconferencing to shared enterprise re-
find the right balance. Managers can always transfer ad- source planning systems.11 If the relationship between
ditional activities as the service provider develops the partners is tight and both sides feel confident
expertise and proves it is up to the job. For that matter, about the future, it is common for there to be joint
managers can switch providers (or simply slow down databases or jointly run computer-aided design sys-
and/or reduce the scope) if things go wrong. tems. And with recent improvements in bandwidth
When a service provider has significant expertise, and computing power, virtual meeting technologies
it is more useful to treat the relationship as a partner- are finally starting to fulfill their potential. Several
ship. Specify what needs to be done and explicitly companies now offer telepresence systems, in which
define the major uncertainties and contingencies. high-definition video and identical furniture are used
That will force the service provider to consider care- to give individuals the sense that they are sitting in the



same room, and can practically reach across and touch hard to put in a job description. You must be able to
one another, even if they are separated by thousands play nice with others and you must be able to get
of miles and a dozen time zones. things done just by the force of communication.
There are several problems associated with using
Value Chain Integrators Even with smart incen- value chain integrators. The biggest is finding people
tive schemes, precise specifications and leading-edge who are qualified to do the work. The initial wave of
technology, there are many gaps that can create integrators were middle managers who had deep and
problems across the boundary.12 To address this, wide experience in manufacturing, design and other
many companies employ personnel explicitly to support functions within their once vertically inte-
face and manage the boundary. These value chain grated companies. As organizations product
integrators, as we call them, are much more than development efforts have become increasingly dis-
simply program managers or relationship manag- tributed, it has become harder to find people who
ers. Their job is to coordinate and negotiate across have the requisite combination of skills and experi-
the supply chain interface to maintain the integrity ence. Today, potential value chain integrators can
of the product vision from initial concept to cus- occasionally be recruited from specialized education
tomer delivery. They do this by marshaling an programs (like MITs Leaders for Global Opera-
exacting mix of technical and business skills. (See tions), from the ranks of large management
Value Chain Integrator Skills.)13 consulting businesses, from industries that remain
One communication skill is especially critical for vertically oriented in their product development ef-
the integrator, and that is the ability to clarify ambigu- forts and from end-user companies.
ous specifications. There is something we call the 50:1 Once integration personnel are in place, they need
Specification Multiplier; it asserts that, for every word time to develop. Our research shows a significant
in a contract or specification, another 50 words are learning curve for boundary-spanning effectiveness.
needed to clarify intentions, explain meanings and There is also a high incidence of burnout, particularly
When companies have correct misunderstandings. (As an aside: We use 50- with offshoring.14 If the integrators are located over-
different ways of doing
the same process, and to-1 because that is the ratio of pages [500] in the seas, they need to be rotated back to the home country
different words for the
same things, communica-
Federalist Papers to the U.S. Constitution [10], the of the lead company within, at most, a few years. Oth-
tion can be fraught with seminal document the papers were created to explain. erwise, they will lose touch with the home market
potential problems.
Product specifications are rarely crafted as brilliantly and with the company and lose effectiveness. If they
as the Constitution and so typically require at least as are based in the home country, the meetings at odd
much interpretation.) Without clarity of communi- hours (many offshoring partners are 10 to 14 time
cations, a tremendous amount of time gets wasted on zones away from the lead company) and the need to
irrelevant tasks, and important tasks are left undone. travel across those time zones mean that organiza-
Another critical skill is that of persuasion. The tions should rotate integrators out of their positions
difficulty in many outsourced or offshored relation- within a few years, lest they leave for an easier job
ships is that the people on the other side of the with fewer time demands and less stress.
boundary (the supplier side) do not directly report Providing appropriate compensation is also a
to the value chain integrator. In fact, the first level of challenge. Integrators can look like individual con-
common management may be many levels up in off- tributors even when managing a large virtual
shoring relationships and may not exist at all in team; if that is the case, it may initially be hard to
outsourcing. In either case, the integrator lacks the justify attractive salaries. Executives who were at
power to compel the supplier to do something his Hewlett-Packard when it set up its value chain inte-
way. The delays that occur when such issues get es- gration program in the 1990s found a way around
calated that is, when higher-level managers must this, explicitly compensating managers based on
step in and resolve them can impede progress and their span of control both internally and externally.
hurt morale. That makes the skill of persuasion criti-
cal. Its all in the soft stuff, one manager who has Governance Incentives, specifications and integra-
worked with value chain integrators told us. Its very tion personnel sometimes will not be enough they

can fail. Some typical signs of failure are the appear- VALUE CHAIN INTEGRATOR SKILLS
ance of ad hoc processes, heated arguments, strained What do you want to look for in an integrator? A lot. Specifically:

relationships and runaway costs. At one company in

A. Decision making: Estimating cost, timing and performance trade-offs
our research, a development problem spiraled out of for the design.
control, and there was so much mistrust and ani- 1. Systems engineering: Establishing product architecture, making technical
mosity between the project teams that it destroyed trade-offs across subsystems, and (where applicable) decomposing the
product into modular subunits and specifying module interfaces.
their working relationship. Senior executives at both
2. Business case evaluation: Understanding the product attributes that customers
companies tried to intervene, but it was too late: value and will pay for, estimating end-to-end product costs, balancing the various
They could not salvage the program. business objectives such as investment levels, features, schedule and margins.
Setting up governance arrangements before
initiating joint operations is key to heading off B. Project execution: Delivering a product that fits within the technical
and business budgets specified during the decision-making process while
problems. By governance, we mean speedy and in-
maintaining its integrity from concept to customer.
expensive procedures for dealing with the most 1. Hard project management: Setting objectives and milestones, identifying
likely issues and events preventing and resolv- risks and establishing appropriate mitigation or contingency plans, effectively
ing disputes, and dealing with change. In the early monitoring project progress and resolving project execution issues.
2. Soft project management: Effective motivation, persuasion, negotiation,
1990s, Mazda Motor Corp. and Ford Motor Co.
mediation, translation and resource utilization and development.
established defined escalation paths as part of 3. Communication: Explaining project requirements clearly so that they are not
their partnership, analogous to the red tele- misunderstood in person, on the phone, and especially via e-mail.
phones that linked Washington to Moscow
during the Cold War and that ensured an avenue C. Domain knowledge: Sufficient familiarity to communicate competently
and credibly with specialized functional experts, such that escalated is-
of negotiation before misunderstanding became sues can be understood, prioritized and resolved.
catastrophe. That may sound like an exaggerated 1. Product development: Understanding the underlying technologies and how
comparison to make, but if you have been part of they contribute to customer-perceived product performance (including tech-
a DPD effort gone wrong, you know that the anal- nical interactions between subsystems from multiple suppliers).
2. Operations management (especially supply chain management): Appreciat-
ogy is not far off. When these things explode, it
ing the importance of managing uncertainty, improving processes and
can be incredibly messy. trading off efficiency, responsiveness and risk.
3. Information technology: Acknowledging the capabilities and limitations of
Conclusion:The Three Rules for software applications and other IT systems; getting systems changed or
improved where necessary.
Successful Distributed Innovation
4. Finance: Familiarity with (often nonintuitive) corporate finance practices,
Large-scale product development comes with risks including budgets, cost allocations, discount rates, international tax advan-
that cannot be eliminated. The risks are even higher tages, customs, import duties and reporting (fixed costs, variable costs,
when different parts of the endeavor are distributed expenses, capital investments, accruals and so on).
among different companies. However, there are three
things that companies can do to take advantage of tions about how the handoffs will work across
opportunities when they arise, and to avoid pitfalls. internal and external organizational boundaries.

Rule #1: Analyze your DPD ecosystem Product Rule #2: Have a plan for spanning boundaries
development is often seen wrongly as being a The academic and popular press have at times
monolithic function. In fact, it comprises hundreds, banged the drum of modularity the notion that it
even thousands, of interrelated and parallel activi- is possible to achieve a clean decomposition of work
ties. Product development managers need to have a into parallel development efforts that can be seam-
clear sense of which activities create and sustain lessly merged later on.15 Modularity does in fact have
shareholder value, and which do not. Activities its applications. It usually makes more sense for a
deemed to be noncore can often be safely out- company to buy standard screws as opposed to mak-
sourced. The trick is distinguishing between these ing its own. However, most DPD efforts have too
and the core activities; the latter should be the orga- many interdependencies across the various subas-
nizations focus. And if a decision is made to hand semblies to rely purely on a modular approach.
the work off, there should be specific recommenda- Instead of attempting to assemble some ideal-



ized product from perfectly fitting components, Elusive Right Path to Engineering Offshoring, Strategy +
managers should figure out ways to span organiza- Business, January 11, 2010.

tional boundaries through appropriate incentives, 4. K.T. Ulrich and D. J. Ellison, Beyond Make-Buy: Inter-
nalization and Integration of Design and Production,
specifications, information systems, people and Production and Operations Management 14, no. 3 (Sep-
governance. That is an especially important point tember 2005): 315-330.
as companies new to DPD routinely underinvest in 5. L.M. Ellram, W.L. Tate and C. Billington, Offshore Out-
sourcing of Professional Services: A Transaction Cost
their boundary-spanning capabilities.
Economics Perspective, Journal of Operations Manage-
ment 26, no. 2 (March 2008): 148-163.
Rule #3: Cultivate a readiness to adapt DPD is 6. V.G. Narayanan and A. Raman, Aligning Incentives in
not a plan you set and forget. On the contrary, it is Supply Chains, Harvard Business Review 82, no. 5 (No-
vember 2004: 94-102; and T. Davis, Effective Supply
an ongoing process that should evolve in response
Chain Management, Sloan Management Review 34, no.
to macroeconomic issues, industry dynamics and 4 (summer 1993): 35-46.
technological innovation. In just about every one 7. C. von Branconi and C.H. Loch, Contracting for Major
of the examples of DPD that we have seen, some- Projects: Eight Business Levers for Top Management,
International Journal of Project Management 22, no. 2
thing that was being done one way at the beginning
(February 2004): 119-130.
was being done another way by the end.
8. Edward G. Anderson Jr. personal communication with
Indeed, the only thing you can be sure of is that supplier company.
changes will be necessary. If you are going to use 9. B. Holmstrom and P. Milgrom, Multi-Task Principal-
DPD, you need to create mechanisms to review, re- Agent Analyses: Incentive Contracts, Asset Ownership
and Job Design, Journal of Law, Economics and Organi-
define and respan organizational boundaries. To zation 7 (special issue1991): 24-52.
do anything else is to put at risk the friendships and 10. E. Newton, Overconfidence in the Communication
partnerships that allow DPD to create, rather than of Intent: Heard and Unheard Melodies (Ph.D. diss.,
destroy, shareholder value. Stanford University, 1990); and E. Pronin, C. Puccio and L.
Ross, Understanding Misunderstanding: Social Psycho-
logical Perspectives, chap. 36 in Heuristics and Biases:
Jason Amaral is a principal at Booz & Co. Edward G. The Psychology of Intuitive Judgment (New York: Cam-
Anderson Jr. is an associate professor of operations bridge University Press, 2002).
management at McCombs School of Business at the
11. Anderson, The Effects of Outsourcing, Offshoring
University of Texas at Austin. Geoffrey G. Parker is
and Distributed Product Development Organization on
an associate professor at the A.B. Freeman School
Coordinating the NPD Process; von Hippel, Democra-
of Business at Tulane University and director of the
tizing Innovation.
Tulane Energy Institute. Comment on this article at, or contact the 12. M.E. Sosa, S.D. Eppinger and C.M. Rowles, The
authors at Misalignment of Product Architecture and Organizational
Structure in Complex Product Development, Manage-
ment Science 50, no. 12 (December 2004):1674-1689.
13. G.G. Parker and E.G. Anderson Jr., From Buyer to In-
1. S.D. Eppinger and A.R. Chitkara, The New Practice for tegrator: The Transformation of the Supply-Chain Manager
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