R&D is Becoming Externalized, Moving Away from In-House Processes
By Jason Searfoss, CFO, Co-founder, Boomtown Accelerators
In today’s world of rapid change, innovation is an imperative. Organizations that fail to innovate face disruption and, eventually, extinction.
In response to today’s turbulent economic environment, some companies have opted to cut back on their innovation efforts, opting instead to prop up outdated research and development methods in the mistaken belief that will still allow them to generate new products, services, and software. Out of fear, some leaders are retreating even further into the status quo, hoping against hope their organizations will weather change and disruption.
This approach impairs the ability of organizations to turn ideation into impact, according to Boomtown, which believes in the transformative power of innovation. Boomtown designs and executes unique, custom-tailored innovation platforms that drive real outcomes and high value for its clients.
“If you only play ‘not to lose,’ someone will eventually catch and surpass you,” said Jason Searfoss, chief financial officer and a Boomtown co-founder/partner. “Other players in the market, including ones that are sometimes well below your radar and are unencumbered by the restraints of risk aversion – are taking big swings and innovating, putting a dent in the position of incumbents.”
The R&D landscape has fundamentally shifted and will look very different over the next seven to 10 years, according to KPMG’s “R&D 2030” report. It’s moving away from traditional stakeholders performing R&D and becoming “largely externalized, shifting away from a predominantly in-house controlled process,” the report said.
A comprehensive new study by the Becker Friedman Institute at the University of Chicago shows that the allocation of inventors and other “creative talent” within the U.S. economy has a direct effect on innovative capacity.
The study built a model of “creative destruction” where an innovator with a new idea has the option to work either at a new entrant (read: startup) or an incumbent firm. If the innovator chooses the startup, the innovation is implemented and the startup displaces the incumbent firm.
But if the innovator – lured by the higher wages – goes to work at the incumbent firm, they often find that strategic considerations and the status quo persuade the corporation to kill the inventor’s idea. To test this hypothesis, the study’s researchers combined data from the employment history of more than 760,000 U.S. inventors, using information from the Longitudinal Employer-Household Dynamics (LEHD) Program at the U.S. Census Bureau.
What they found was this: (1) inventors are increasingly concentrated in large incumbents, less likely to work for young firms, and less likely to become entrepreneurs, and (2) when an inventor is hired by an incumbent, compared to a young firm, their earnings increase by 12.6%, but their innovative output declines by 6% to 11%.
The conclusion: Big tech and other large incumbents are hiring an ever-increasing number of innovators to fuel their R&D efforts, but those inventors are less productive once they join. In other words, joining a large company might be good for your career, but it’s bad for innovation.
The driver of this? Many leaders in large organizations are busy maintaining the status quo, and in doing so, they often overlook the need to implement robust and diverse innovation to advance their missions.
‘Walk a Fine Line’
“A CFO has to walk a fine line,” said Boomtown’s Searfoss. “On the one hand, you want to have a high degree of certainty with many of the investments the company is making. On the other hand, if you fail to green light all ‘riskier’ projects that could have outsized returns (or go to zero), you might be stifling much-needed innovation.”
Being a good steward of capital requires finding the right balance of projects that have varying probabilities of success and varying magnitudes of payoff, Searfoss said.
“It is certainly a mix of art and science,” he added.