One
of the most striking things about the concept of open innovation is how
open it is - for example, to interpretation. Exactly what does Procter
& Gamble Co. CEO A.G. Lafley mean when he says he wants 50% of
P&G's innovations to come from outside the company? "I think the
scorecard is deliberately nonspecific," says Jeffrey Weedman, P&G's
vice president for external business development and global licensing.
"What A.G. is really talking about is that we have to be very
externally focused. We need to be very open to the idea of bringing in
technologies, businesses and products from the outside."
In other settings, meanwhile, open innovation remains open to
question. Though P&G is deeply committed to it, some companies
wonder about the practicalities of following suit. Larry Huston, vice
president for R&D, innovation and knowledge at the consumer
products giant, greets a steady stream of visitors looking to benchmark
the "Connect and Develop" initiative he leads. 'They're basically
asking if this is a workable idea," he explains. "Is it realistic to
build a pipeline that leverages external assets at this level?"
Yet open innovation also shows signs of building the critical mass
it needs to be truly open in a third sense: for business. Besides
P&G, companies from E.I. du Pont de Nemours & Co. to Boeing Co.
to Air Products and Chemicals Inc. have embraced some form of it in
recent years. Miles Drake, vice president and chief technology officer
at Air Products, tells of the sense of urgency that started building a
few years ago at the Industrial Research Institute, a group that pulls
together some 200 major-company R&D executives. "Everybody was
recognizing that there's an imperative to be good at accessing
technologies from outside the company and bringing them into the
company," says Drake, who's also the current IRI chairman. "And also to
be good at taking intellectual assets that aren't being used in the
company and moving them outside to realize value from them."
Paradigms shift more slowly, and less often, than we imagine. Still,
it's reasonable to believe that we are in the early stages of a major,
systemic change in the way that big companies conduct research and
development and that this change is part of a broader shift in the way
those companies approach new products, new markets and, indeed, the
whole spectrum of strategy and corporate development decisions. Put
simply, this is a shift away from trying to generate most advances
in-house and toward collaborations of all kinds. The reasons are two:
Demands for corporate growth, coming amidst an explosion of technology
and science that not even an organization such as P&G - which has
7,500 scientists and a research budget of $1.6 billion - can hope to
keep up with on its own. "It's just clear to us that the current
R&D business model has reached its limits," Huston says.
The big question, of course, is what the new model will look like.
Business school professor Henry Chesbrough offered a sketch in a 2003
book that looked back at developments such as Intel Corp.'s mid-1990s
adoption of a decentralized approach to R&D (with university
connections and venture capital as major components) and forward to
questions such as how companies can better manage their intellectual
property. Just grouping these and other related phenomena under a handy
rubric - Chesbrough's title is "Open Innovation" - is probably half the
battle, paradigmwise.
But bringing the other half into focus isn't easy. As much as these
open innovators like to compare notes, they are all big, complicated
and hard to generalize about. Better, then, to examine in some detail
how open innovation is unfolding at just two of them.
One is Cincinnati-based P&G, the 167-year-old maker of Tide,
Pampers and many other consumer products, with $50 billion in sales,
nearly 300 brands in 160 countries and (until recently) a culture that
was deeply skeptical of ideas that originated outside the company. "We
invented 'not invented here,' " Weedman jokes. The other is Allentown,
Pa.-based Air Products, a 64-year-old maker of gases and chemicals,
with $7.4 billion in sales and a culture shaped by the multiple
acquisitions and alliances it has used to reach customers in industries
ranging from energy to home healthcare. "Historically, we've been
pretty open," Drake says.
In many ways, the two companies are as different as the Mr. Clean
you keep under your sink and the nitrogen trifluoride (NF3) that Air
Products supplies to manufacturers of semiconductors and liquid crystal
displays. But they have plenty in common, too, starting with the fact
that both those products have been shaped by open innovation. Both
companies, moreover, are thoughtful venture capital investors, strong
believers in collaborations with universities and active managers of
intellectual assets. Both also use a couple of small, Web-based
services with big visions, known as NineSigma Inc. and InnoCentive Inc.
These two young companies are trying to invent what P&G refers to
as e-R&D - a process whereby companies post some of their research
challenges on-line, for possible solution by talented people around the
world. It's not yet certain that either or both will thrive. ("They're
noble experiments," says Chesbrough, who now directs the Center for
Technology Strategy and Management at the Haas School of Business at
the University of California, Berkeley.) But along with their
participation in IRI and other groups, working with the e-R&D
companies is one more way for P&G, Air Products and other
like-minded companies to try and blaze a trail.
How did the two companies come to share this path? Start
with P&G. It's now regarded as a leader in open innovation, thanks
to a high profile on the topic and successful products such as Olay
Regenerist (a face cream made with a peptide molecule licensed from
Sederma SAS) and Glad Press 'n Seal (a food wrap produced in a joint
venture with Clorox Co.). But few people thought of P&G as open in
late 1996, when Weedman was forming a small intellectual asset
management group for the company. "At that time, we were totally
focused on out-licensing stuff that P&G wasn't interested in,"
Weedman says. "It's morphed an awful lot since then, thank goodness."
You could say the same about P&G itself. As Weedman's operation
developed, it emerged as one part of an epic, companywide effort by the
famously insular P&G to remake itself as a nimbler, faster-growing
organization. The changes accelerated drastically when Durk Jager
became CEO in early 1999 and pushed ahead with plans to replace a
geographic structure with one based on business units, meanwhile
refocusing the company on higher-growth segments such as healthcare and
personal care - and also stepping up the pace of innovation and new
product development. All that proved too much for P&G to handle at
once; Jager was removed from the CEO job after just 18 hectic months, a
period marked by low morale and disappointing profit.
When Lafley took over in 2000, he followed much the same course, but
with a defter touch has managed to lead a widely noted turnaround.
Under Lafley, P&G has seen major change on multiple fronts, ranging
from big outsourcing deals to job cuts to the replacement of top
executives. One way he has delivered on his goal of bringing in
innovations from outside is by means of some significant acquisitions;
he bought the Clairol hair-care business in 2001 for $5 billion and
this year finally wrapped up a drawn-out battle for Wella AG, paying
more than $6 billion for the German hair-care company.
Meanwhile, open innovation moved ahead on other fronts. By the
1990s, Huston recounts, the R&D organization had evolved from a
centralized model to a transnational one that networked its multiple
technical centers around the world. "That enabled us to leverage maybe
the packaging out of Japan, the chemistry out of the U.S. and the
fragrance out of France - that kind of thing," he explains. The next
step came in 2001 when Huston started the connect and develop
initiative, with a mandate to build an external networking capability
linking the R&D operation with venture capitalists, individuals,
other companies, national laboratories, P&G's huge supplier base
and still other sources of innovation.
Weedman's group was growing as well. It turned out there wasn't much
external interest in assets that P&G itself didn't want. On the
other hand, there was plenty of interest in the rest of the patents in
the portfolio - once a new rule made them all available for licensing
either five years after they were awarded or three years after they
were first used in a P&G product, whichever came first. Royalties,
which had initially been claimed at corporate level, were now sent back
to the relevant business unit. Next, Weedman's group added in-licensing
responsibilities, working with business units, R&D and other
organizations to find what they needed and structure the deals to
secure it. As of 2001 the external business development group was on
its way to being what Weedman says it is today: a "preferred portal"
for anyone looking to work with P&G to create value.
Back east in Allentown, Air Products, too, was getting better at
intellectual asset management. That function has been led since 1994 by
John Tao, who directs an operation called corporate technology
partnerships and reports to chief technology officer Drake. CTP handles
the internal tracking of intellectual assets (from the idea stage
through the patent stage) as well as out-licensing and in-licensing
deals. Tao thus combines some of Huston's connect-and-develop-type
duties with the kind of IP management and dealmaking that are among
Weedman's responsibilities. As at P&G, outlicensing income flows
back to the unit that owns the intellectual property - a carrot to
complement the stick that bars the units from hoarding that property.
"We have a company policy that all of the assets are corporate assets,"
Tao says. "Everything is on the table. We don't even have a time
limit." Similarities between the two companies' approaches are not
purely coincidental. Both Weedman and Tao are members of a group called
The Gathering, a couple of dozen leading IP managers who have met
regularly for the past decade or so to develop best practices.
Facilitated by the Intellectual Capital Management Group, their work
has been reflected in "Rembrandts in the Attic" and other books.
As Tao was refining intellectual asset management practices, Air
Products as a whole was undergoing big changes. The pivotal event was
an attempted acquisition in 1999 that would have nearly doubled the
size of the company - a joint $11.9 billion bid with Air Liquide SA of
France for Britain's BOC Group plc. With the deal blocked by U.S.
regulators the next year, the setback forced the company to rethink its
strategy. So under chairman and CEO John Jones, who moved up from his
previous role as president in late 2000, Air Products set about
assessing its operating units, which then numbered 18, for their growth
potential and return on invested capital profiles.
When the dust settled in 2001, Air Products had a new strategy: to
focus on four high-growth segments, which are electronics, healthcare,
performance materials and refinery hydrogen and energy solutions. These
areas now receive the bulk of the company's investment - including,
Drake says, about 75% of total R&D spending. And the company also
formed a third major component of its innovation-and-growth apparatus:
a corporate development office. Previously, corporate development-type
activities had been dispersed around the company, with a special
project management office created to run the giant BOC deal. Now these
activities were gathered in one place.
In 2002 the company brought in a new head of business
development, M&A and ventures: John Marsland, a young executive
with finance and M&A experience at General Electric Co. and Stanley
Works.
"I spent the first six months figuring out that there were 15 to 20
people spread throughout the company who thought they were responsible
for M&A, but if you asked the CEO, he didn't know any of them,"
Marsland says. "There was a desire to centralize that, bring some
professionalism, create a standardized process." The following year
Marsland was promoted to vice president of the corporate development
office, adding responsibility for strategic planning and corporate
economics, among other things. Like Drake, Marsland reports to Art
Katsaros, the group vice president for technology and development.
The M&A team is situated differently at P&G. There it's part
of the finance organization, which is also where Weedman's operation
was eventually placed. M&A chief Stan Boric reports to treasurer
John Goodwin. Weedman, who reports to CFO Clayton Daley Jr., says his
team routinely works side by side with Boric's. "What we often talk
about is that the deal structure is one of the last things you work
on," he says. "What you really work hard on is whether there's a value
creation potential in a relationship with an outside company. And if
so, how big can that value be? And what's the most intelligent
structure to deliver against it - for both companies?"
Weedman is quick to point out that neither team's efforts are easily
described by lines on an org-chart. "Flow to the work" is the modus
operandi. The external business development group now numbers more than
40, with people coming in from all over the company - marketing, sales,
R&D, finance, purchasing - and then often rotating back. Even that
number understates the group's impact, though, since many of Weedman's
internal clients (which include nearly all of the business units and
all of the corporate functions) have people who work almost exclusively
with his group. Seamless integration is the goal. "Who's on my head
count and who's not is sometimes kind of a mystery," he says. "And I
like it that way."
From his vantage in the R&D organization - where he reports to
chief technology officer George Gilbert Cloyd - Huston continues the
theme. "It's one big activity system," he says. Weedman's team scours
the globe for technology and product possibilities, but so,
increasingly, do the R&D folks. Taking the lead is a group called
technology entrepreneurs, who now number more than 50. "They tend to be
very senior scientists - seen it all, done it all," Huston says.
It was a technology entrepreneur - or, more precisely, his wife -
who started the chain of events that led to the creation of Mr. Clean
Magic Eraser, a handy way to clean tough scuff marks. She found the
product on a grocery store shelf in Japan, marketed by a small Japanese
company that had discovered the cleaning properties of a packing foam
made by Germany's BASF AG - which, as it happened, was a major P&G
supplier. Eighteen months later (the blink of an eye at the old
P&G) the company had a valuable extension to its well-known brand.
Air Products, too, has multiple channels through which ideas and
technologies can enter and be developed. Air Products' position as the
world's largest supplier of NF3 had its beginnings in a university
partnership. Meanwhile, the company's position in healthcare is being
built up by Marsland's M&A team, which led the charge on the $165
million acquisition of American Homecare Supply LLC in 2002 and
continues to shop for home healthcare providers.
To keep the ideas flowing where they are needed, Air Products has
developed a couple of new key roles over the past two years. The first
is that of the business technology manager, who works in a business
unit and reports to both the manager of that unit and to the R&D
organization. "Their role is to deliver the technology options into the
business to feed the strategy and propel growth," CTO Drake says. "They
are agnostic on where the technology comes from." The second has been
dubbed the capability director. These people work inside R&D and
are responsible for tracking and marshaling resources (again, both
internal and external) in a given technical area.
All these structures will no doubt continue to evolve. Marsland and
Drake are co-leading an internal initiative known as CI squared, or
"continuous improvement for innovation." The goal is to bring together
all of the company's innovation processes and tie them into a
long-range planning process that tries to anticipate social and
economic trends as far as 10 years out - way beyond the typical
business unit planning horizon of three years.
"For those things that are seven to 10 years out," Marsland says, "I
probably don't want to be doing internal R&D except for maybe some
pathfinding work. But I may want to be seeding some long-term research
through our partnerships with universities. If I'm looking at something
five to seven years out, maybe I start to bring in some of my venture
investing, and maybe some corporate-level R&D. Items that are three
to five years out are definitely into my venture investing, and I
probably want to start getting into my internal R&D. And for the
stuff that's one to three years out, I'm almost certainly doing
internal R&D and looking at joint ventures and acquisitions."
That schema nicely captures the way that the forces converging on
R&D continue to transform the model. With companies wanting to grow
their businesses faster, they're pushing their R&D organizations to
anticipate market opportunities and customer needs. To enable them to
serve the market in a timely fashion even as science and technology are
spiraling ever upward and outward, they are equipping them to partner
effectively. "Look at all the new science that comes out of a category
like the laundry business," Huston says. "Life science, enzymes,
biotechnology, nanotechnology, high-throughput screening. There's just
so much investment to be made."
And, it seems, knowledge to be shared - as opposed to just sold.
Operating in a networked, deal-driven world means opening one's own
shop on both levels. The benchmarking visits and the conference
presentations are of a piece with the out-licensing and the
in-licensing, the joint ventures and the alliances. In a prescient
paper published by IRI in 1998, based on member input at workshops, the
group looked ahead 10 years and anticipated not just the importance of
partnerships and the absorption of R&D by what it called the
"innovation function" but also the growing importance of networking.
Certainly, P&G and Air Products went on to do plenty of
networking. For example, P&G has more than once made common cause
with Eli Lilly and Co., the Indianapolis pharma company known for its
skill in using alliances to tap innovation and strengthen other
business capabilities (See Corporate Dealmaker, Summer 2004). Lilly is
a backer (and a user) of a sort of contract R&D service P&G
started and spun off, Your Encore, which makes retired scientists from
some 150 companies available for project work. It was Lilly's venture
unit that started e-R&D company InnoCentive, and when it did,
P&G became the first non-Lilly customer. Huston describes Alpheus
Bingham, who is InnoCentive's chairman as well as vice president for
strategy at Lilly Research Laboratories, as a "kindred spirit."
But as he thinks about that new R&D business model, Huston's
thoughts range beyond the adjacent pharma industry. "The toy industry
is largely an open-innovation model," he says when asked about
open-innovation pioneers. "I think parts of the entertainment industry
are." In the pharmaceutical industry, by contrast, alliances may
abound, but Huston doesn't think that most pharmaceutical companies are
yet showing a systematic, high-level commitment to open innovation.
"What's driving this at P&G is our CEO," he says. "You can say
you're doing open innovation at one level, but until you really elevate
it to strategy, it's piecemeal."
A piecemeal approach is not what Lafley has in mind. Huston reckons
the company now gets about 35% of its innovations from outside. That's
still shy of Lafley's 50% goal, but it's good progress, for which
Weedman's team and Huston's group can claim a lot of the credit. The
goal now, Huston says, is to move beyond the point where a couple of
corporate-level organizations are providing the leadership, to a
situation where looking outside the company's walls for new ideas about
products, marketing, technology or anything else is standard behavior.
"We want everybody doing it," he says.
Now that would be some model. - Kenneth Klee
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