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 / Summer 2006 / Issue 43(originally published by Booz & Company)


The Well-Designed Global R&D Network

A new study finds that organizations benefit when they configure their innovation networks for cost and manage them for value.

Consider the two faces of the global innovation movement. Company A, having grown through acquisition, produces multiple brands for multiple markets and operates a worldwide network of research and product development centers. Each of its R&D sites was initially responsible for its own brands and local market, but with globalization these distinctions have lost their importance.

Company B, on the other hand, was built largely through internal growth and has two global brands. It operates one primary R&D center supported by a handful of special-purpose sites around the world. This comparatively sparse network has helped Company B win wide admiration for the efficiency of its engineering.

Because expanding the number of nodes in a network exponentially increases its complexity, it is not surprising that Company A’s R&D structure is more expensive to operate. Company A has considered closing some sites, but has resisted doing so because it fears losing capabilities and insights, and roiling local markets. Meanwhile, incremental budget cuts have chipped away at engineer and supplier morale. Having built its network to maximize the value associated with market access, it is now forced to manage the network for cost.

Most global innovation networks look like Company A’s — and suffer the same problems. Company B’s R&D structure is clearly more productive, but it is not necessarily ideal either. Its network might be too compact, limiting its access to knowledge that could maximize its performance. Thus, to identify principles and practices for creating a truly well-designed innovation network, Booz Allen Hamilton and INSEAD, the international business school, surveyed R&D leaders in 186 companies in 19 nations in 2005. The survey results, and our own experience, suggest one central truth: Organizations benefit when they configure their innovation networks for cost and manage them for value. (Click here for an in-depth look at the survey results.)

The survey respondents, who together account for nearly 20 percent of global corporate R&D expenditures, clearly understand the problems that arise in overseeing a bloated, competitively disadvantaged innovation network. They named what they view as the primary R&D challenges: assessing the value of new knowledge, encouraging cross-site and cross-functional collaboration, managing the complexity of global projects, and optimizing innovation footprints. They also emphasized that having a well-managed R&D network is becoming particularly advantageous as companies expand R&D beyond their home turf. Between 1975 and 2005, the survey found, the share of R&D sites located outside the markets of their corporate headquarters has risen from 45 percent to 66 percent. That share is likely to increase, with 77 percent of the R&D sites planned over the next three years slated for China or India.

In the face of such obvious need to disperse innovation networks despite the risks, how can companies ensure that they configure their new networks for cost? First, they can accept that there are only two valid reasons to add a node: 1) to cost-effectively access critical knowledge that could not otherwise be tapped, and 2) to locate capabilities where they can deliver results better, faster, and cheaper than anywhere else in the network. Compared with traditional innovation networks, these leaner, more consciously designed networks can achieve 37 percent faster time-to-market and lower costs by 24 percent, according to estimates based on the aggregate experience of survey participants. In addition, there is a morale benefit when each R&D site has clear responsibilities and stimulating work to do.

Second, a well-planned multi-site network needs organizational processes and tools to foster innovation and collaboration across geographies, cultures, and organizational silos. The “technology innovators” in our survey — those who seek to be first to market and to introduce breakthrough technologies — use a number of hard and soft levers to ensure that their global networks deliver maximum value.

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