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PROCUREMENT:
The Missing Link
in Innovation
By Corey Billington and François Jager
A
few years ago, Goldcorp
Inc., one of the world’s
top gold producers, had
a big problem. Some of its
mines were performing very
poorly compared to other mines
in northwestern Ontario, Canada.
Procurement groups have a much After trying everything that his mining engineers knew, Goldcorp’s
greater role to play in helping their CEO, Robert McEwen, made a very risky bet. He broadcast the entire
geological data record of the company’s Red Lake Mine, in effect trig-
organizations to innovate. The
gering a new kind of gold rush. He offered $575,000 in prize money,
internal driver is the compelling with a top award of $105,000 to the person or company that would
need for revenue growth—growth give Goldcorp an effective way to mine more gold.
McEwen’s bet paid off handsomely. The broadcast of the chal-
that can be propelled by stronger
lenge via the Internet—a novel approach in the year 2000—led to
success rates in product innovation. two Australian companies collaborating to come up with a three-
The new role flows from the dimensional depiction of the mine. The 3D graphical data produced
an astonishing breakthrough at Red Lake. From annual production
principles of open innovation
in 1996 of 53,000 ounces at a production cost of $360 an ounce, the
and is made possible by the rapid mine was producing 504,000 ounces at a production cost of $59 an
emergence of Internet-facilitated ounce by 2001.
Goldcorp had tried and succeeded with a markedly different type
“seeker-solver” networks.
of procurement activity. The company had outsourced part of its
engineering activity to a supplier—not one of its preferred or even its
regular suppliers of goods and services but a supplier it hadn’t known
previously. The supplier team had identified itself and the service it
would provide rather than being found and evaluated by Goldcorp’s
In many industries, R&D expenses have gone up been well used for years by contract design firms such as
while the profitable outcomes of research have gone IDEO and Frog Design. Their business model recogniz-
down. The pharmaceutical industry offers a typical es that knowledge is unevenly distributed and that reus-
example: Its declining R&D productivity has obliged ing mature ideas in different contexts is more cost-effec-
executives to focus their resources on blockbuster drugs tive than inventing the same ideas from scratch. Asking
(drugs that will net more than $1 billion over their prod- a supplier to invent on your behalf may be a little less
uct lifecycles). The story is similar in many other sectors.expensive, but it’s much faster and more cost-effective to
As rising development costs combine with shorter prod- find existing mature solutions and adapt those solutions
uct life cycles, executives have an increasingly difficult to your challenge.
By itself, the concept of procurement
helping reach outside their companies for
We expect the Internet to innovation is not new. In the late 1980s
and early 1990s, for example, Chrysler sup-
transform procurement’s role in not ply chain executive (and later president)
only containing costs but in driving innovation Thomas Stallkamp achieved spectacular
wins by developing collaborative partner-
and therefore top-line growth. ships with the automaker’s supply base.
Stallkamp’s approach helped improve prod-
time justifying heavy R&D invest- uct quality and cost efficiencies at a time when other
ments. In the automotive industry, industry procurement executives stuck firmly to cost-
for example, purchased parts costs squeezing “iron fist” relationships with their suppliers.
account for around 80 percent of the In recent years, the concept of “open innovation” has
cost of a car, on average. Not sur- gained more currency, with companies looking not only at
prisingly, industry executives have how they can bring innovation in from outside their firm
looked to their suppliers for innova- but at how they can sell some of their unused “informa-
tion in component designs, in quality tion assets”—such as patents and trademarks—to increase
processes and in manufacturing pro- shareholder value. Henry Chesbrough, executive director
cesses. Yet suppliers face the same type of challenges as of the Center for Open Innovation at the University of
their customers. California, Berkeley’s Haas School of Business, defines
We have found that many R&D managers who try to open innovation this way: “The use of purposive inflows
utilize seeker-solver networks often make costly mistakes and outflows of knowledge to accelerate internal innova-
by poorly constructing their challenges. (In knowledge tion, and expand the markets for external use of innova-
brokering parlance, a “challenge” is a question that seek- tion, respectively. This paradigm assumes that companies
ers broadcast to potential solvers.) Either their challeng- can and should use external ideas as well as internal ideas,
es are too tightly defined, with inherent biases that lead and internal and external paths to market, as they look to
them to the same dead ends, or their definitions are too advance their technology.”5
loose to net any new answers. We have found both types Lately, the Internet has added a powerful twist to the
of defects in our research. Too often, R&D managers are open innovation concept that can significantly reduce the
“reinventing the wheel” of procuring services, making cost of innovation, pairing corporations (seekers) with
expensive mistakes as a result or making very slow head- R&D challenges and external scientists (solvers) who can
way or losing process capability when managers retire or approach problems from many different angles. The core
transition out of the R&D organization. premise is not only that somebody “out there” may already
have solved your problem (or has the wherewithal to do
Collaborative Approaches to Innovation so easily) and is willing to do so for a fraction of what it
Supporting evidence for the effectiveness of “procur- would take to replicate the solution in-house, but that
ing” solutions by finding them rather than creating they can be found and contacted quickly and efficiently
them is found in research about knowledge brokering. via the Internet and that the transfer of intellectual assets
The knowledge brokering cycle described by academics is safe and secure. (See Exhibit 1.) The premise has tre-
Andrew Hargadon and Robert Sutton4— capturing good mendous appeal to open-minded organizations.
ideas, keeping ideas alive, imagining new uses for old One striking example is InnoCentive, launched in
ideas and putting promising concepts to the test—has 2001 by Eli Lilly.6 Seekers, who are nearly always cor-
Suppliers
the same time, purchasing managers are only now start-
Network Solvers
Internal R & D
ing to see their roles in broader value-based terms, and
as such they are just beginning to explore the possibili-
ties of contributing to top-line growth. Not surprisingly,
1990s C-suite executives still mostly view procurement as cost
cutters, not catalysts for growth. A vicious cycle is at
work: The longer that procurement is seen as a support
Now function, the fewer chances its professionals have to
1970s-
1980s
acquire and demonstrate new ideas, much less sell those
ideas to the organization.
10 102 103 104 105 106 107 Corporate silos compound the problem.
Number of People Involved Communications do not flow naturally between depart-
ments; unfortunately, information hoarding is often more
prevalent than truly open and collaborative information shar- ties had in the 1980s.
ing. And rightly or wrongly, R&D managers typically have For its part, the typical procurement organization has
developed their processes for acquiring innovation without too much work to do, too many suppliers to support, and
support from other departments. Thus, they are unlikely too few staff to do it all with. It is unrealistic to expect
to welcome unsolicited approaches from the procurement any hard-working procurement group to reach out to
organization. Also, R&D communities have many of the support their colleagues in R&D without change-making
same fears about outsourcing that manufacturing communi- intervention by senior business leaders or without a clear
and widely shared incentive to do so.
Add to these hurdles the inertia of the average
Defining the Seeker- Fortune 1000 organization and the persistence of com-
Solver Network pensation schemes and other incentive mechanisms that
reinforce existing and often outdated business practices
rics will have to be expanded to accommodate the new can and do accelerate their innovation performance.
innovation tasks. Clearly, seeker-solver approaches will Many questions surface, of course. What response
flourish in environments where managers are unafraid rates from solvers constitute successful “returns” from
to experiment and where they may even be rewarded challenges posted on seeker-solver networks? What does
for taking measured risks. it take to manage the interactions with unknown solv-
ers? How can procurement best reach out to and add
Procurement’s New Obligation value for R&D groups? How can R&D groups get better
Our goal for this article was to show that procurement at asking “make-buy” questions—and how can procure-
now has a much broader and more valuable role to ment groups get better at helping them to do so?
Despite such open questions, we
There is no shortage of reasons why firmly believe that the procurement
organization has the best match of skills
procurement organizations do not to allow open innovation to be done
traffic in innovation ideas. For a start, the cost-effectively. We are confident that
vast majority are still rewarded for and therefore itingly will happen. As universities increas-
teach open-innovation concepts,
focused on cost savings. we expect procurement’s new recruits
to have the skills to implement the
play. The department best known necessary changes. Once open innovation is understood
for containing costs with a predeter- at every level of the organization, procurement groups
mined array of suppliers is now in will be better placed to acquire and assign the resources
prime position to accelerate innova- to take on their new roles. And with the steady escala-
tion and thus drive the organization’s tion of procurement’s status come the conditions that
top-line growth. Two factors make will enable procurement to significantly influence rev-
it so: the growing acceptance of the enue growth.
principle of open innovation and This article reflects our insights and longtime indus-
the recent emergence of Internet- try experiences, but it is not the result of any exten-
enabled seeker-solver networks. sive research program and certainly is not intended as
Indeed, we would argue that fostering innovation is a detailed blueprint for change. However, it is a topic
now procurement’s new obligation and that one day, the of intense interest and one that we feel holds enormous
procurement group will be judged on its ability to add potential. As such, we will be continuing to develop our
value in this way. Without the active process support of argument and we welcome managers’ shared experi-
the procurement organization, companies are at risk of ences, comments and questions—whether or not they
having uncompetitive innovation processes. Because of have yet embraced open innovation or begun to explore
procurement’s skills and competencies in outsourcing seeker-solver networks. 嘷嘷 嘷