Outsourcing Innovation and Design

29 Mar ’05

Business Week recently covered outsourcing in a series of articles looking at it from different angles. Two articles particularly caught my eye. First, on outsourcing innovation – quote:

Underlying this trend is a growing consensus that more innovation is vital — but that current R&D spending isn’t yielding enough bang for the buck. After spending years squeezing costs out of the factory floor, back office, and warehouse, CEOs are asking tough questions about their once-cloistered R&D operations: Why are so few hit products making it out of the labs into the market? How many of those pricey engineers are really creating game-changing products or technology breakthroughs? “R&D is the biggest single remaining controllable expense to work on,” says Allen J. Delattre, head of Accenture Ltd.’s (ACN ) high-tech consulting practice. “Companies either will have to cut costs or increase R&D productivity.”

The result is a rethinking of the structure of the modern corporation. What, specifically, has to be done in-house anymore? At a minimum, most leading Western companies are turning toward a new model of innovation, one that employs global networks of partners. These can include U.S. chipmakers, Taiwanese engineers, Indian software developers, and Chinese factories. IBM (IBM ) is even offering the smarts of its famed research labs and a new global team of 1,200 engineers to help customers develop future products using next-generation technologies. When the whole chain works in sync, there can be a dramatic leap in the speed and efficiency of product development.

Wherever companies draw the line, there’s no question that the demarcation between mission-critical R&D and commodity work is sliding year by year. The implications for the global economy are immense. Countries such as India and China, where wages remain low and new engineering graduates are abundant, likely will continue to be the biggest gainers in tech employment and become increasingly important suppliers of intellectual property. Some analysts even see a new global division of labor emerging: The rich West will focus on the highest levels of product creation, and all the jobs of turning concepts into actual products or services can be shipped out. Consultant Daniel H. Pink, author of the new book A Whole New Mind, argues that the “left brain” intellectual tasks that “are routine, computer-like, and can be boiled down to a spec sheet are migrating to where it is cheaper, thanks to Asia’s rising economies and the miracle of cyberspace.” The U.S. will remain strong in “right brain” work that entails “artistry, creativity, and empathy with the customer that requires being physically close to the market.”

Next, an interview with Flextronics CEO Michael Marks on outsourcing titled “Design is a Commodity”. Quote:

Design no longer is a competitive advantage. Design is a commodity. Yet design in big companies is just as inefficient as manufacturing and supply-chain management used to be. So brand companies might as well buy the designs for their products off the shelf.

A big electronics company may have 10,000 designers, but maybe only 50 are doing real architecture for new products. Some of them will go down to 300 engineers. It’s going to get ugly. The electronics manufacturing services [EMS] and the Taiwanese ODMs [original design manufacturers, meaning they design as well as assemble what they produce on a contract basis] will completely restructure design in the electronics world just as we did in manufacturing. We’ll have huge design centers in China, India, and Ukraine.

You can save 15% to 20% by moving manufacturing to a low-cost country. But with design, the drop can be much more dramatic.

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