Open Innovation and Alliances (PDF Version)
“Good practices” in Open Innovation
Matthew W. Sagal is a senior partner in the Alliance Management Group, Gladstone, New Jersey. He was an R&D, manufacturing, and business development executive at Bell Laboratories and AT&T. He earned a bachelor’s degree in chemical engineering from Cornell and a Ph.D. in physical chemistry from MIT. He is the co-author of The Strongest Link: Forging Profitable and Enduring Strategic Alliances. His email address is firstname.lastname@example.org.
The purpose of this article is to describe twelve good practices. We shy away from the term “best practices” because today’s firms are complex entities. A practice that works well in one firm may not produce the same results in another. Rather, we describe “good practices” that work in a wide variety of firms. The practices we describe are market proven, well-established in leading OI firms and encourage employees to behave in ways that foster inter-firm cooperation.
The “Want-Find-Get-Manage” Model offers a framework for describing these practices. The model emerged out of the pharmaceutical industry in the 1990s. It was developed to bring rational thinking to the fast paced world of biotechnology Open Innovation activities. Since then, the model has been embraced by the consumer products, food, electronics and increasingly by the chemical industries. We will use the model to describe good practices in each segment of the Open Innovation lifecycle. It starts with asking the question; “what does the firm Want to meet its growth objectives?” Next, the firm must Find the asset in the outside world. Then Get the asset contractually and finally Manage the OI relationship to success. Figure 1 graphically depicts the lifecycle. This lifecycle approach to OI has an important advantage. It encourages management to see OI as a series of four interrelated competencies; each with well established tools and management techniques.
Some background on how we selected the twelve good practices: The authors have observed (and in many cases, contributed to) hundreds of OI relationships over the past 25 years. Our selection of good practices is based on our observations of the connections between practices and OI results. An example of a result is: Does the alliance meet both partners’ marketplace expectations after three years of implementation? As an example of our observations: In the Want phase, when firms describe required external resources at an appropriate level of detail and establish priorities among many possible Wants, the subsequent Find and Get phases have less wasted effort and lead to more successful collaborations in Manage. We have applied similar observations to Find, Get, and Manage; and developed our list of twelve good practices.
An important caveat is that we have not validated our selections using disciplined investigation methods. We hope that this article will encourage our academic colleagues to rigorously test our selections. But we believe that our experiential evidence is strong enough for corporate leaders to apply these practices to their firm’s OI efforts.
The starting point of OI success is a clear understanding of what asset(s) the firm requires to improve its products and services or access new markets (the want). A want is any asset that will allow the firm to develop a better or cheaper product faster or enable a new market entry. A want may be satisfied through internal development or normal procurement channels, in which case there is no need to pursue an OI relationship. An effective Want process includes mechanisms for making the trade-offs between internal development, direct purchase, and external acquisition. In today’s world of complex products, a Want may involve aspects of two or even all three modes.
Three practices are often found in firms that execute Want well:
Want Practice 1 – Incorporate external thinking into the strategic planning process. Open Innovation must be based on a strategic planning process that includes the external world as a source of talent, technology and other resources. Product objectives arising from an insular planning process tend to be extensions based on the firm’s current asset base. The equation in Figure 21 describes the impact of focusing on internal assets during the planning process.
The variable C represents what the customer really wants, as captured in the strategic plan. The variable A represents the firm’s current asset base and assets the firm can create internally within a commercially relevant time frame. The variable B represents external resources the firm must acquire to meet customer needs. This simple equation suggests why the traditional planning process is inadequate for Open Innovation. When managers focus on A during the planning process, C is determined by the firm’s in-place resources. Managers cannot pursue a more valuable C because they are constrained by current skill sets, technologies and physical assets.
The variable B unlocks the equation. By explicitly including external skill sets, technologies and other assets as inputs to the planning process, managers enable a far more valuable C. The power of the equation is its ability to communicate a key concept: New value results from linking external and internal resources. By encouraging managers to redefine C as an objective enabled by A and B, the firm fosters productive Want behavior.
What should managers do? Start by Building the potential for acquiring external assets firmly into the strategic planning process. Encourage planners to include B as a core part of strategic planning as a way to think their way to a more valuable C. The planning process should include identification of external assets that complement the firm’s internal asset portfolio in meeting customer needs.
Want Practice 2 – Convert the outcome of the strategic planning process into a set of prioritized Want briefs.
A well-crafted plan translates strategic intent into a set of required assets that the firm wants. These assets are captured in a document, called a Want Brief, that clearly describes the want in terms that enable a subsequent decision regarding internal or external sourcing and an efficient Find effort. The Want Brief describes the want and its motivation completely. For a Want to be pursued externally, this would include:
The Want Brief should include criteria governing go/no-go decisions that will be applied during the Find and Get phases. The Want Brief also points to likely sources of information relevant to the Find effort. Finally, the Want Brief is an iterated document. It incorporates new information collected during the Find phase and feeds that information back to relevant internal stakeholders.
Want Briefs are prepared only for Wants that are a high enough priority to justify the resources needed for subsequent Find, Get, and Manage phases, which are resource intensive processes. Setting priorities in the Want phase is a critical skill for a successful open innovation effort, as an under-resourced open innovation effort can have implications far beyond the current project.
With this in mind, we recommend developing a firm-specific Want Brief format that captures the information required to enable the Make/Buy/Partner decision and set the stage for an effective Find initiative.
Want Practice 3 – Utilize a structured process for making the Make/Buy/Partner decision.
Even where a firm is committed to open innovation, some wants will be better developed in house or procured through traditional channels. This requires the firm to have a reliable system for making the “Make/Buy/Partner” decision. Few firms have developed a rigorous process for making this decision. If the choice is between Make and Partner, the traditional decision-making process is biased toward the make option because managers often underestimate the time and resources needed to develop an asset internally, neglect the net present value (NPV) added by the earlier market entry made possible by collaborative development, or overlook the opportunity cost of dedicating technical staff resources to a project that could have been pursued collaboratively. Furthermore, managers are frequently reluctant to deal with the additional administrative overheads of planning and executing an OI effort.
In this context, the Make/Buy/Partner decision-making protocol must take into account the full cost of internal development, the NPV effect of a potential early market entry, the effects of staff allocation to high value projects, and the likely challenges of executing an OI relationship. This protocol must be rigorously applied to each Want Brief, so that OI resources can be focused on those wants most likely to be fully satisfied by a collaborative development. Firms should assess the relevance and completeness of their Make/Buy/Partner decision-making protocols and ensure that they are rigorously applied to Want Briefs in a way that eliminates biases toward the Make option.
A set of well-executed Want Briefs is the starting point for Find. During Find, the firm locates possible sources of external assets. Firms vary widely in their approaches to Find. Some establish designated scouts inside specific business units; others use third-party agents, who use tools such as proprietary expert networks to locate sources of external assets. An increasing number of firms use the Internet to solicit third-party inputs. The choice (or mix of choices) is dependent on the firm’s objectives, its Wants, and the scope of its existing contacts with potential sources.
Find Practice 1: Look inside first
Many firms underutilize existing knowledge within the firm. Employees, corporate databases, and external consultants are a rich source of Find knowledge that can be used to plan the Find approach. For example, employees may have existing professional ties to prospective Find sources and have insights into the strengths and weaknesses of potential sources. These professional ties can be used to facilitate initial introductions in Find. Employees with knowledge of possible sources will also know (or can be briefed) on the nuances of the Want, and they will have freer access to sensitive information that may be important to the effort, but that the firm is reluctant to share with external agents. This inside information helps shape the Find process, and gaps in inside knowledge can be used to plan agendas for first discussions with potential sources. And, the use of inside knowledge can reduce the costs of third-party Find agents by focusing their searches on gaps in the firm’s knowledge base.
Looking inside first goes beyond mining internal tacit knowledge. Internal efforts should also include patent mapping to identify sources of likely intellectual assets, literature searches, and visits to academic institutions and other companies active in the areas of interest.
For this process to work, the firm needs a system to communicate Wants to the relevant internal communities and solicit inputs. Such systems do not have to be elaborate; they can be part of existing intranet systems. Managers should assess the existence and effectiveness of the internal system for communicating Wants and accessing internal knowledge at the Find phase.
Find Practice 2: Treat Find as a bilateral process
Find is a bilateral process. As the firm is trying to find the best partner for collaboration, potential partners are also seeking the best match for their needs. There is fierce competition for high-quality partners, particularly in highly networked industries such as pharmaceuticals and electronics. The Find process is increasingly competitive in the durable equipment, chemicals, foods, and packaged consumer goods sectors. The bilateral aspect of Find demands specific actions. Consequently, the firm must demonstrate that it is itself a promising partner. Typically that requires more than a description of assets; it also requires that the firm demonstrate that it is effective, efficient, and committed to implementing the partnership and commercializing the results.
This bilateral aspect of Find and the associated demands on the firm’s managers is one reason that Want prioritization is so important. If the Want list is too long (relative to the size of the firm, business unit, or its new product or service strategy), then the resources will not be available to support an energetic bilateral Find process and a potential partner may interpret the lack of resources as lack of interest. The firm will not be seen as the partner of choice.
The firm should establish a comprehensive process for bilateral Find that calls on managers from across business units. Managers should measure the extent to which the firm presents itself as a desirable partner in a crisply executed Find process.
Find Practice 3: Use Find to refine the Want Brief and select a short list of potential partners
The outputs of the Find phase are a short list of potential external sources and information about each source. The list might include only one source, if that source appears clearly superior to others; in this case, the Get phase is abbreviated. When it includes two or more sources, Get must determine which source’s resources are superior upon closer evaluation and whether a mutually acceptable alliance agreement can be negotiated with any of the sources.
Like Find, Get is a bilateral process. While the firm is determining which source has superior assets, the candidates on the list are engaged in the reciprocal process. Thus, Find Practice 2 continues in the Get segment.
Get Practice 1: Establish and maintain internal alignment
Inside Company A, functional groups (R&D, marketing, finance), individual business units, and senior leadership must be aligned on the objectives and terms of the alliance with Company B. Alignment does not mean total agreement, with no differing opinions. Rather, alignment means that all stakeholders have an opportunity to participate in the Want, Find, Get phases; that their views are considered; that each stakeholder understands the details of the alliance as it takes shape during Get; and that they commit their organizations to making it work. The same standard applies to Company B.
A lack of alignment inside one or both companies is a key reason alliances fail. Without alignment, different stakeholders hold different understandings of the purposes, terms, and priorities of the alliance. As a consequence, the coordination of internal resources needed for successful implementation is impossible. If Company A managers differ in their understanding of what each company is expected to do, or have differing views of priorities, some Company A resources will be applied in a timely way while others will not. Or, if Company A managers have varying views of the intellectual property terms of the alliance, some Company A groups will share information appropriately and others will over or under disclose proprietary information. This leads to a situation similar to one an executive described to us: “Working with [Company B] is like dating an octopus: two arms are hugging me, two are strangling me, and I don’t know what the other four arms are up to.” This executive was dealing with a non-alignment problem inside the partner organization.
Alignment during Get is not a one-time matter. Alignment must be established at the start of the process and maintained throughout negotiations as compromises are made and initial positions are modified. That requires continuous systematic feedback to internal stakeholders as negotiations progress. Firms should establish a process to create and maintain internal alignment during Get and measure the extent to which stakeholders share a common understanding of the objectives and terms of the prospective alliance.
Get Practice 2: Use a disciplined, structured process during internal planning and negotiations
Negotiations are also a bilateral process. The negotiated terms must be acceptable to both parties. A Want Brief usually does not address the strategic needs of an external source. Find discussions typically minimize discussion of potentially contentious issues. Conflicts in alliance terms will emerge during Get and must be resolved there.
We have found a clear correlation between the use of a disciplined, structured Get process and Get success, whether that success is defined as a mutually acceptable agreement or a quick realization that a mutually acceptable relationship is not possible, minimizing wasted resources and opportunity costs associated with fruitless negotiations.
We do not use the terms disciplined and structured lightly. The firm must have a process that is understood by all stakeholders, followed rigorously as planning and negotiations proceed, and clearly communicated internally and to the prospective partner.
We have developed a process for this purpose, the Alliance Framework,®2 but the firm may choose to use another process or design its own. Whatever process the firm decides to use, it must engage with internal shareholders at every stage. A designated team should identify the relevant elements of the alliance and prepare positions on those elements for internal review and input. Stakeholder input must be ongoing, in order to maintain internal alignment in both firms, all elements should addressed in parallel, since they are interrelated. For example, intellectual property rights may be connected to termination provisions. Clearly written, iterated documents avoid the trap of fuzziness on intentions.
In negotiations, both partners prepare positions on the identical list of alliance elements, using the same definitions of those elements. This enables effective negotiation by melding positions on each element, and avoids the “by the way” and “I didn’t realize you meant that” problems in negotiations. If the parties can agree on all elements, the document becomes the starting point for contract drafting.
Get Practice 3: Negotiate with a focus on “Win-Win-Lose-Lose-Lose”
The third good practice is often overlooked during negotiations, although it is directly linked to important aspects of the negotiating process. By their nature, negotiations usually involve attempts by each party to gain an advantage over the other. As a simple example: If one firm is going to pay royalties for use of the other firm’s technology, the licensee will try to minimize the royalty rate and limit the circumstances requiring payments. The licensor’s objective is exactly the opposite. When this adversarial attitude is applied to each of the many terms of the alliance, negotiations become long and arduous. It may be impossible to reach mutually acceptable positions, and even if agreement is finally reached wounds may carry over into alliance implementation.
Aside from wounded feelings, there is a more serious consequence of adversarial alliance negotiations that impacts on implementation. The winner of a win-lose negotiation may feel good about building an advantageous position into key terms of the alliance agreement. But such satisfaction will be fleeting. The end of Get (execution of the alliance agreement) is the beginning of the relationship, not the end. Experience shows that for implementation to succeed, both parties must perceive the agreement as fair. Using the royalty example: If stakeholders in a technology source believe that their firm is receiving an unreasonably low royalty, those stakeholders will not perform well during implementation.
The “Win-Win-Lose-Lose-Lose” principle is a simple guide to reaching an agreement that is fair to both parties. The idea is that acceptable compromises can be reached and a fair outcome achieved by a focus on how both parties can achieve their objectives, or win, while other marketplace participants lose in the heightened marketplace competition enabled by the alliance. The partners are better able to reach compromises when they focus on mutual interest, enhancing their ability to serve customers better than competitors. “Win-Win-Lose-Lose-Lose” defines how the alliance will impact all market participants, not just the alliance partners. Our years of participating in OI negotiations have clearly shown the power of a “Win-Win-Lose-Lose-Lose” mindset in reaching acceptable compromises on sticky alliance terms.
GOOD PRACTICES IN THE MANAGE SEGMENT
Once the contract is signed, Manage begins. The goal is to coordinate and integrate the partners’ resources and meet the specified objectives. Many executives tell us that their firms conduct implementation poorly, even after negotiating a carefully structured alliance agreement. A common challenge is ensuring that each firms’ team members understand who does what, what types of information must be exchanged, and how information exchange should be carried out. Disconnects in these matters quickly lead to mistrust just when healthy working relationships are essential. Mistrust, once created, is hard to reverse.
There is no magic bullet for all pitfalls during Manage. But there are three practices that are useful in establishing and maintaining the required relationships productively.
Manage practice 1: Hold a kick-off session to enable integration of formal and informal management systems.
Here is how a systems disconnect works to damage a working relationship: A few weeks after the start of Manage, Large Company and Small Company managers agree that a change must be made in a project milepost. The Large Company manager tells the Small Company manager that he must get approval from the Large Company’s executive review board to implement the change. The Small Company manager points out that he (a nominal peer) has authority to make the milepost change, without further Small Company approval. Not only is the Small Company manager unhappy with the delay in an important decision, but also he reports back to his management team that the Large Company is bureaucratic and slow to act. The Large Company manager reports that the Small Company is undisciplined and its senior management team is unaware of an important project change, which will lead to trouble later. The negative implications of this scenario are clear. The two partner firms are already suspicious of each other, and the alliance has just begun.
The problem caused by systems disconnects are especially damaging since, without intervention, they tend to emerge gradually over the early months of Manage. Each newly perceived disconnect will cause friction during those early days when creating good working relationships is essential. The managers in both firms then spend months in a clumsy trial-and-error process trying to integrate their systems and processes, while damage increases and project progress stagnates.
Over the last decade, tools and management techniques have been developed to integrate the activities of partnering firms.3 These tools focus on handling intellectual assets, integrating decision-making processes, and linking project management systems. To avoid the damages from trial-and-error solutions, the best practice is to identify and resolve differences immediately upon starting Manage. The mechanism for this is a kick-off session in which each firm clearly describes the decision-making processes and management systems that will guide its actions during the alliance. This allows team members to identify barriers in their systems and work together to design integrated working processes.
We have found that all significant disconnects may not be resolved in a single session. The “session” may require more than one meeting, and senior-level attention may be needed to resolve some issues. But a well-planned and executed kick-off meeting is an important vehicle to identify disconnects and start the process of resolution. Early identification of disconnects with a plan to resolve them will avoid the damage done by the gradual emergence process.
Manage Practice 2: Use the kick-off session to insure that stakeholders in both firms have the same understanding of the operating principles established in the agreement.
Indeed, the legal agreement and underlying planning documents are often not shared with all key staff working together during Manage. Scientists, engineers, and marketing people may get their understanding of the alliance from their supervisors, who themselves may not have read the agreement or have a clear view of the alliance terms. Even worse, staff from partner firms may all believe they understand the agreement’s terms, but their understanding is different, leading to confusion.
The kick-off session provides a mechanism for team members to get a clear and consistent explanation of the terms of the alliance and how the terms should guide their actions. The lead negotiators from both firms should facilitate the discussion, which should include staff members of both firms and describe the alliance contract in terms of working-level actions. Developing this common understanding in the kick-off session averts potential confusion and its consequences.
Manage Practice 3: Train managers in both firms in the principles of conflict resolution
Understanding the twelve good practices is one thing, implementing them is another. The best place to start is with the Want. Share this article with the strategic planning group. Ask them to evaluate their planning process for its ability to encourage external thinking. Once wants are identified, develop Want Briefs, prioritize them and apply the firm’s Make/Buy/Partner methodology.
When the answer is partner, develop a scouting strategy that begins with an internal search and expands logically into high probability external areas. Scouting strategies work best when the scouts realize that Find is a bi-lateral process. The potential partner is seeking your firm, but comparing your firm to others. That thinking extends into Get. How do your terms and financial model compare to your competitors? Are you positioning yourself as “Partner of Choice”? A rigorous methodology for planning and structuring the relationship helps this process.
Finally, managing the relationship to success is not an ad hoc process. The normal skill sets of middle managers are necessary, but not sufficient to implement a collaborative R&D relationship. Use the join-up session to build a common understanding of the relationship. Help your partner understand well-established conflict resolution techniques and employ them in the alliance.
The practices we have described require management attention and resources. They suggest that the firm pursue a limited number of high priority wants. If you are new to OI, we agree with that suggestion. If you are experienced, you are already following it. High priority is the key. OI is too resource intensive a process to apply to every want.
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