Procurement missing link innovation published

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Procurement groups have a much greater role to play in helping their organizations to innovate. The internal driver is the compelling need for revenue growth - growth that can be propelled by stronger success rates in product innovation. The new role flows from the principles of open innovation and is made possible by the rapid emergence of Internet-facilitated “seeker-solver” networks.

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Procurement missing link innovation published

  1. 1. COLLABORATION GROWTH ANALYSIS TECHNOLOGY FRAMEWORKProcurement:The Missing Linkin Innovation ABy Corey Billington and François Jager 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’sgreater 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 wouldneed 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 tosuccess 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 productionprinciples of open innovation in 1996 of 53,000 ounces at a production cost of $360 an ounce, theand is made possible by the rapid mine was producing 504,000 ounces at a production cost of $59 anemergence 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 Corey Billington is professor of operation management and procurement at IMD Business School in Lausanne, Switzerland. He can be reached at: corey.billington@imd.ch. François Jager (francois.jager@imd.ch) is a research associate at IMD.22 Supply Chain Management Review · J a n u a r y / Fe b r u a r y 2 0 0 8 www.scmr.com
  2. 2. procurement group in the context of predetermined sup- in-class procurement groups are doing. Although thereplier criteria. Essentially, Goldcorp had not only broken are quite a few informal efforts among leading compa-with the idea of seeking innovation only from its own nies and some impressive new structured problem-solv-staff, but also had gone beyond looking “locally” for inno- ing networks, we know of no instances of networks thatvations from its established suppliers.1 formally involve procurement staff. It will be necessary, Now that the Internet has greatly reduced the cost of we believe, for procurement professionals to developacquiring knowledge and made it so much faster to do new ways to define and identify needs inside their orga-so, we expect such unconventional procurement activi- nizations, to assess the capabilities of the organizations’ties to gather momentum. Indeed, we expect it to trans- internal resources to meet those needs, and to matchform procurement’s role in not only containing costs, but them against all available external resources.also in driving innovation and therefore top-line growth.Essentially, the new conditions call for a re-examination Innovation: A Growing Problemof the make-vs.-buy decision. The approach looks well Nowadays, CEOs are under more pressure than everbeyond fixed relationships within a carefully screened to accelerate revenue growth. To drive growth, they are“extended enterprise” to more one-off transactional rela- looking for more innovation—and more productive inno-tionships with organizations and even individuals with vation—particularly in products and services. Definingwhich there is rarely a pre-existing relationship. We urge success criteria for RD productivity is notoriously dif-supply management professionals to recognize that pro- ficult. But CEOs realize that the great majority of theircurement processes lie at the root of much innovation innovation investments fail to deliver lasting value. Inactivity. Further, we propose that the organization must 2005, the global 1000’s top RD spenders spent anprovide the processes to enable and encourage such average of 3.84 percent of sales on RD2. But innova-problem-solving relationships— processes that we call tion productivity is dismal. Recent research shows that“seeker-solver networks.” (For more on the seeker-solver only 4.5 percent of innovation initiatives produce suc-concept, see accompanying sidebar.) cessful outcomes—defined as reaching predetermined This marks a major shift from what even the best- return-on-investment (ROI) targets.3www.scmr.com S u p p l y C h a i n M a n a g e m e n t R e v i e w · J a n u a r y / Fe b r u a r y 2 0 0 8 23
  3. 3. Innovation In many industries, RD expenses have gone up been well used for years by contract design firms such aswhile 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 RD 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 lessuct lifecycles). The story is similar in many other sectors.expensive, but it’s much faster and more cost-effective toAs rising development costs combine with shorter prod- find existing mature solutions and adapt those solutionsuct life cycles, executives have an increasingly difficult to your challenge. By itself, the concept of procurement helping reach outside their companies forWe expect the Internet to innovation is not new. In the late 1980stransform procurement’s role in not and early 1990s, for example, Chrysler sup- 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 RD 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 directorcesses. Yet suppliers face the same type of challenges as of the Center for Open Innovation at the University oftheir customers. California, Berkeley’s Haas School of Business, defines We have found that many RD managers who try to open innovation this way: “The use of purposive inflowsutilize 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 companiesers 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 tothem to the same dead ends, or their definitions are too advance their technology.”5loose to net any new answers. We have found both types Lately, the Internet has added a powerful twist to theof defects in our research. Too often, RD managers are open innovation concept that can significantly reduce the“reinventing the wheel” of procuring services, making cost of innovation, pairing corporations (seekers) withexpensive mistakes as a result or making very slow head- RD challenges and external scientists (solvers) who canway or losing process capability when managers retire or approach problems from many different angles. The coretransition out of the RD organization. premise is not only that somebody “out there” may already have solved your problem (or has the wherewithal to doCollaborative Approaches to Innovation so easily) and is willing to do so for a fraction of what itSupporting evidence for the effectiveness of “procur- would take to replicate the solution in-house, but thating” solutions by finding them rather than creating they can be found and contacted quickly and efficientlythem is found in research about knowledge brokering. via the Internet and that the transfer of intellectual assetsThe 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 inideas and putting promising concepts to the test—has 2001 by Eli Lilly.6 Seekers, who are nearly always cor-24 Supply Chain Management Review · J a n u a r y / Fe b r u a r y 2 0 0 8 www.scmr.com
  4. 4. porations, pay an annual fee of $100,000 to access the can make it far cheaper and more effective to tap vol-network; InnoCentive gets a percentage of the bounty unteers or low-paid hobbyists to resolve what once werepaid to the solvers. The fast-growing network of solvers seen as specialized technical issues soluble only by RDwas approaching 130,000 by mid-2007. departments. However, for all of their apparent benefits, Ed Melcarek, an InnoCentive solver, was able to there is a persistent limitation to many open-innovationanswer an interesting challenge: finding a more efficient structures—even to the Internet-enabled networks suchway for getting toothpaste ingredients into a tube. The as InnoCentive. They do not yet actively engage the pro-Canadian engineer’s solution suggested putting a posi- curement professionals whose job it is to help definetive charge on fluoride powder, then grounding the tube. make-or-buy parameters and support decisions accord-Colgate-Palmolive, the InnoCentive cli-ent that reportedly posted the problem, To begin with, supply chainliked the idea, according to Melcarek. Heearned $25,000 for a few days of work. managers and procurement chiefs``It’s a beautiful way of doing business,” in particular have to be seen—and to seehe said.7 Colgate-Palmolive’s returns weregood, too, compared to what the company themselves—as “drivers of revenue throughmight have spent to achieve the same solu- innovation.”tion using traditional RD approaches. Nine Sigma uses a similar operating model, but its ingly. Although the process of man-knowledge exchange focuses on the management of inno- aging the “inflows and outflows ofvation. Launched in 2000, Nine Sigma says its mission knowledge” should sound familiar tois “to work on behalf of its clients to source innovative any supply management organizationideas, technologies, products and services from outside (managing the interface with exter-their organization quickly and effectively by connecting nal suppliers is, after all, one of thethem to the best innovators from around the world.” By function’s primary roles), it is oftenmid-2007, Nine Sigma’s network of expert solvers had not part of procurement’s charter.expanded to 1.5 million globally. This network is made We contend that supply managementup of scientists, university research departments, and professionals will have to becometechnology incubators. more proactive at managing these sources of innovation. The obvious benefit of such networks is that they Up Against Real-World Barriers EXHIBIT 1 There is no shortage of reasons why procurement organi- Larger Networks Mean Higher zations do not traffic in innovation ideas. For a start, the Returns on Innovation Investment vast majority are still rewarded for and therefore focused on cost savings. Talk to most procurement heads today Return on Innovation Investment about other ways for their groups to contribute and they will quickly point out that their metrics first need to change from price reduction to revenue generation. At Potential Contribution to Innovation 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 morewww.scmr.com S u p p l y C h a i n M a n a g e m e n t R e v i e w · J a n u a r y / Fe b r u a r y 2 0 0 8 25
  5. 5. Innovationprevalent than truly open and collaborative information shar- ties had in the 1980s.ing. And rightly or wrongly, RD managers typically have For its part, the typical procurement organization hasdeveloped their processes for acquiring innovation without too much work to do, too many suppliers to support, andsupport from other departments. Thus, they are unlikely too few staff to do it all with. It is unrealistic to expectto welcome unsolicited approaches from the procurement any hard-working procurement group to reach out toorganization. Also, RD communities have many of the support their colleagues in RD without change-makingsame 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 practicesA “seeker-solver network” is an informal collection of people or companies that facilitates a productiveworking relationship between two previously unconnected and it soon becomes clear that new ways of innovating— Internet-driven methods that actively involve procure- ment departments—are not easy to achieve.parties, usually on a one-time basis. (Exhibit 2 offers agraphic description, contrasting it to traditional practice.) Toward a More Robust SolutionThe Internet provides the facilitation mechanism to link Those barriers notwithstanding, we believe there isa problem presented by one person or organization (the much that procurement professionals can do to help“seeker”) with the myriad people worldwide (“solvers”) drive innovation from the outside in. However, beforewho are have the skills and time to consider the problem we describe specific steps that should be taken, it isand resolve it. Usually, the seeker offers prize money as an important to address a few of the preconditions for suc-incentive. cess that procurement can influence (but not control) In essence, a seeker-solver network is a procurement and that other corporate functions can help with.structure enabled by the Internet. Such networks are To begin with, supply chain managers and procure-becoming useful because they are significantly less expen- ment chiefs in particular have to be seen—and to seesive than conventional mechanisms for developing and themselves—as “drivers of revenue through innovation.”procuring innovation solutions. A recent pharmaceutical Of course, it will help if they start acting accordingly.industry study found that a seeker-solver network can But in most organizations, senior executives will needbe more than 20 times less expensive than regular RD to sponsor the new approach to innovation, fosteringpaths.9 Investigators carefully studied 12 challenges and links between procurement and RD as well as withfound that the gross value created was $10.3 million— human resources (HR) departments. HR plays a key rolea 2,600 percent return on investments that comprised because performance metrics must be adapted to suit$333,500 in prizes awarded to solvers and total internal the changes. HR also can help employees cope with thecosts of $60,000. cultural fears associated with the procurement of ideas Critics allege that seeker-solver mechanisms do not while creating new measures that recognize procure-always work. But the cost of unsuccessful challenges is ment’s contributions to revenue growth rather than pricezero or at least significantly less than the cost of a failed take-down.internal RD effort. Another aspect that is likely to require input from EXHIBIT 2 other departments is control over the company’s intel- lectual property (IP). Procurement managers are quite RD Before and After Seeker-Solver Networks used to ensuring that they have “bulletproof” processes Before After for controlling IP transfer in their conventional contracts Casual Partners with suppliers. Even though the challenges on seeker- Long Standing Partners Long Standing Partners solver networks are posted anonymously, some manag- Employees Employees ers fear that industry insiders can deduce which chal- RD RD lenges are theirs, thus signaling the competition about their actual RD objectives and approaches. This issue can be addressed by “thinly slicing” challenges—that is, constructing them in such a way that they do not dis- close the strategy or the commercial intent behind the26 Supply Chain Management Review · J a n u a r y / Fe b r u a r y 2 0 0 8 www.scmr.com
  6. 6. challenge. The company’s legal counsel may be able to 2. Track Results and Build Bridgeshelp to define challenges specifically enough while mak- Once procurement managers are alert to all the exter-ing sure that any unnecessary information is not exposed nal networks available and after they have launched theirto the world. In other words, procurement managers are seeker-solver experiments, they should document andlikely to need some assistance to learn the art of “hiding track every experiment and discuss and absorb its lessons.in plain sight.” The experiments should be gauged in terms of the costs of the solutions developed, the interest levels of poten-First Steps for AcceleratingInnovationCompanies that want to harness the full power “We have to get over ourof seeker-solver networks must ensure that their reluctance to use the skills ofprocurement professionals make rapid progresson three fronts: outsiders: outside RD, outside the company, and even outside our industry.”1. Launch Multiple ExperimentsProcurement managers need to adopt an experimental tial solvers, the numbers of solutionsmindset in order to make the most effective use of such they offer, the actual success rates,networks. A good starting point is to create a few pilot and eventually the returns on invest-programs in which real business problems— albeit not ment. From an internal perspective, ifnecessarily mission-critical challenges—are posted on procurement managers are to becomean existing network such as InnoCentive. (Ideally, the active solution seekers, they will haveexperiments should be tried on different networks to to be proactive at creating “wish lists”better understand the unique characteristics of each.) In by interacting with different depart-essence, procurement leaders should be including real ments—with RD in particular. Then they will need toseeker-solver networks in their toolboxes. be prompt and efficient at delivering proposed solutions. It is important to begin with a low profile and to Procurement and RD heads will have to create bridgesavoid overselling the concept to senior management. between their respective departments, enabling a trust-The experiments should be in different topic areas and ing atmosphere and ensuring that bench scientists remainshould reflect different conditions if the procurement supportive and don’t feel threatened.teams are to gain a comprehensive understanding ofwhat seeker-solver networks are all about. In such exper- 3. Lay Foundations of an “Innovation Culture”imental phases, the procurement teams, together with Eventually, all of these early seeker-solver projects shouldappropriate RD staff, must learn how to properly sub- be assembled under a larger “change” program. The headdivide an RD problem and then how to properly frame of the procurement organization can provide processa challenge for solvers, using the right terms and offering leadership and prove cost effectiveness, but corporatesolvers appropriate incentives. They also have to master behavioral change on such a scale is likely to require C-the skills needed to capture, sort, analyze, manage, and level support. As such, C-level management—probablyrespond to the responses. the CEO or chief operating officer—must appoint an One InnoCentive user, Dow AgroSciences, gives a innovation process champion who will take the learn-glimpse of a typical approach. “The approach was a bit ings from the experiments far beyond defined RD andad hoc at first, but we learned quickly that we needed procurement initiatives so that they become part of ato put some structure around it and help drive it,” says new corporate innovation culture. That means that theDan Kittle, the company’s vice president of RD. He “make-buy” decision processes typical in, say, engineer-points out that you need to condense a seeker-solver ing departments, will have to be modified and adapted tochallenge down to a problem for which the seeker an open innovation context. We expect that seeker-solverrationally believes there is available expertise, under- networks will evolve in many areas other than RD. Forstanding, and capability in the “outside” world. “You example, marketing may choose to have selected branddon’t want to put all of your recalcitrant challenges tasks performed by “solvers” identified by evolving net-out there,” explains Kittle, “Because that doesn’t works. IT will likely experience more development tasksoffer the greatest opportunity, and not all problems fit procured from outside “solvers.”InnoCentive.”8 At the same time, the procurement group’s met-www.scmr.com S u p p l y C h a i n M a n a g e m e n t R e v i e w · J a n u a r y / Fe b r u a r y 2 0 0 8 27
  7. 7. Innovationrics 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 responseflourish in environments where managers are unafraid rates from solvers constitute successful “returns” fromto experiment and where they may even be rewarded challenges posted on seeker-solver networks? What doesfor taking measured risks. it take to manage the interactions with unknown solv- ers? How can procurement best reach out to and addProcurement’s New Obligation value for RD groups? How can RD groups get betterOur 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, weThere is no shortage of reasons why firmly believe that the procurementprocurement organizations do not organization has the best match of skills to allow open innovation to be donetraffic in innovation ideas. For a start, the cost-effectively. We are confident thatvast majority are still rewarded for and therefore it willteach open-innovation concepts, ingly happen. As universities increas-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 topicnow procurement’s new obligation and that one day, the of intense interest and one that we feel holds enormousprocurement group will be judged on its ability to add potential. As such, we will be continuing to develop ourvalue 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 theyhaving uncompetitive innovation processes. Because of have yet embraced open innovation or begun to exploreprocurement’s skills and competencies in outsourcing seeker-solver networks. jj jand supplier management, CPOs need to be at the fore-front of refining these competencies to provide the pro- Sources:cess guidance necessary to manage knowledge exchange 1 or another perspective on the Goldcorp story, see Fthrough seeker-solver networks. Wikinomics: How Mass Collaboration Changes Everything, by The procurement groups that are most ready to fill Don Tapscott, Portfolio Hardcover (December 28, 2006).this new role are those where there is already a healthy 2 “Smart Spenders, The Innovation 1000”, Booz Allen Hamilton. respect for the groups’ existing roles, where the cor- 3 Larry Keeley, Doblin Group.porate culture has adopted an experimental mindset, 4 “Innovation Factory, Harvard Business Review, May-June 2000. and where seeker-solver networks are viewed as a new 5 pen Innovation: The New Imperative for Creating And Ovalue-adding capability. Companies such as Hewlett- Profiting from Technology, Chesbrough, 2005.Packard, Harley-Davidson, Dow AgroSciences, Colgate- 6 www.innocentive.com.Palmolive, and Procter Gamble are making theright moves. Trailblazers like the auto industry’s Tom 7 Boston Globe, August 21, 2006.Stallkamp long ago showed that it is possible to break 8 hemical and Engineering News, June 26, 2006 Volume Cwith conventional procurement approaches. It is now up 84, Number 26 pp. 24-25.to procurement executives to make sure their companies 9 Ibid.28 Supply Chain Management Review · J a n u a r y / Fe b r u a r y 2 0 0 8 www.scmr.com

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