CRIC Project - Outsourcing of Research and Development (Project completed)

• The Problems Addressed
• Empirical Work and Data Sources
• Key Results and Outcomes
• Significance of Results and Outcomes
• Key Publications

The Problems Addressed

The focus of this package of work is on the role of research and technological knowledge outsourcing. It examines how firms seek research and development (R&D) and technology resources to incorporate in their knowledge base to use for innovative purposes . Firms, even large multinational corporations, can no longer expect to be totally dependent on their own in-house research and technical resources to maintain their innovative performance. Companies are increasingly having to source parts of their technological and underlying knowledge requirements to other firms and organisations. How they articulate these technological requirements, coordinate and absorb them with their own in-house knowledge capabilities is of fundamental importance to their competitive success in the knowledge-based economy.

This topic is important for a number of reasons. Firstly, because of the absolute and relative growth of R&D externalisation and outsourcing in advanced industrial economies; representing a growing phenomenon which deserves more attention. Secondly, the study seeks to analyse such technology sourcing activities within the perspective of the firm's knowledge capabilities and competences. It centres on analysing what might be termed the 'knowledge boundaries' of the firm and identifies where organisations seek to undertake R&D to generate technologies or knowledge themselves and where they gain external sources of knowledge or specific technologies to incorporate and bundle within their own knowledge base to provide new products and services. Thirdly, the growth in the external sourcing of R&D and other design and technical activities by firms has played an important role in the creation and development of the 'research market', in terms of the commercial purchasing and trading of R&D and technical knowledge. Finally, it is clearly one important element in the broader problem of analysing distributed innovation, to which CRIC attaches such importance.

Empirical Work and Data Sources

The project is based on two strands of research. The first is concerned with mapping and measuring the wider process of research and technology outsourcing. This analysis is based on in-depth case study work involving a range of companies and organisations, including organisations from Association of Independent Research and Technology Organisations (AIRTO), an umbrella agency made up of some 50 member organisations employing 8,000 workers and with a combined turnover of £400 million in 1998/9. Details of this analysis are in Howells (1999a; 1999b). On the basis of this work a more extensive questionnaire survey is being undertaken in late 2000 covering the chemical and pharmaceutical sectors and working in co-operation with the relevant industry associations.

The second strand of work is a research project derived from the first investigating the decision-making process behind external technological knowledge sourcing by firms (Howells, James and Malik 2000). This project (which also involves funding from the EPSRC IMI Programme) centrally involves a number of core partners, namely: Abbey National, AIRTO, AMTRI, BT, Central Manchester NHS Trust, ICI, and Pilkington. Other companies and organisations will also be subsequently included in the later stages of prototype testing and for further modifications and development of the model. The research here is involved in detailed case study work of particular projects and in turn will lead to the development of a Decision Support Framework (DSF) which will be tested and used by participating companies.

Key Results and Outcomes

The work so far has identified a number of key trends and issues occurring in the process of research and technology outsourcing. Many companies are still reluctant to outsource 'critical' technologies to outside suppliers, but over time as innovation is becoming more distributed no single firm has the resources or capabilities to generate innovations on their own. Increasingly firms have to enter collaborative arrangements with other organisations or more directly buy in R&D and technical capacity. In this latter respect a nascent, but rapidly growing 'knowledge market' associated with innovation is developing led by dedicated contract research and technology organisations, and a much wider set of partial players, who may over time become more central participants (Table 1). Research and technology outsourcing is 'coming of age' and seen as a major industry in its own right; the development of demand and consumption patterns in this developing innovation knowledge market are therefore important (linking into the new CRIC Consumption, Innovation and Demand framework). However, large parts of the nature and operation of this 'knowledge market' for innovation remain virtually unknown.

The work has also revealed that the traditional assumptions of highly systematic decision-making based on complete information do not appear to be borne out so far by the case study analysis. Decision-making is frequently undertaken on what can be described as subjective 'hunches' or desires to meet corporate targets (in particular cost-cutting), which have little to do with gaining the best for the firm's long term research and technological requirements and aspirations. R&D cost and efficiency measurement within even the most advanced firms remain highly partial and incomplete and appear to have provided a poor framework for managers to make informed decisions about what might be 'best' for the firm. Even under simplified decision contexts, executives only consider a limited amount of available information. Decision-making in relation to technological and knowledge capabilities is much more complex heuristic process than is made out in much academic literature.

Types of New Entrants in the Contract Research and Technology Market: UK Examples

Source: adapted from Howells (1999a)

Much of the literature on outsourcing in relation to (manufacturing) firms using contract (service) firms for research and technological inputs has assumed a highly contractual and formalised set of relationships. This is despite recent research on R&D collaboration between manufacturing firms which has shown the strong informal and non-contractual relationship ties existing between firms which are research partners. However, although contracts were often in place, with much of R&D being an uncertain (and frequently serendipitous) process, as strict parameters on the outcomes were not laid down by the parties. Trust, sharing and reciprocity were much in evidence, helping to increase certainty. Even where contracts were strictly laid down in more routine technical activities, these were 'put under the table' and were not referred to again. Although the parties involved could therefore, in extremis, refer back to them if serious problems occurred and no agreement could be found, generally they were ignored and more informal discussions and bargaining took place to resolve difficulties. Formal, contractual documents bore very little relation to the usual and day-to-day contacts that were the 'real' research and technical links between parties. This misrepresentation may reflect much of the literature which has focused on more routine supply of service activities, where costs and efficiency criteria can be readily assessed under more predictable outcome conditions. It may also reflect the fact that a snapshot of an individual research and technical link between a firm and a contract research and technology organisation tends to ignore the wider 'envelope' within which the relationship may exist. The partners may have links stretching back decades, with close personal and informal links between them, so illustrating the importance of informally instituted practices in the generation of knowledge.

The study also revealed that the standard, implicit model of manufacturing firms deciding, a priori, to outsource part of their research or technical activity and then selecting a service firm to deliver the service or 'solution' can often be misplaced. This is associated with the continued perception of service firms being 'passive' or 'reactive' in the innovation process. The study has revealed that there are a number of examples of service firms, in the form of contract R&D or research and technology organisations, which initiate and develop a new product and only 'puts out' the final, more routine stages of the development. This is associated with the tooling up and production of the new product by a single manufacturing firm or set of companies (where independent components or systems were required to be incorporated into the final good). In this context, manufacturing firms react to the initiation of ideas and action by the service firms and supply limited technical capability and manufacturing as their input to the whole process. Here the focus is on the service firm (as a contract or technology intermediary firm), as the key actor in the innovation process and the manufacturing firm undertaking a more peripheral role. Indeed such firms may move into manufacturing to fully capture the benefits of the innovation process, following the 'soft' model of firm formation. This particular construct therefore turns 'on its head' the simple linear, uni-directional model which is typically envisaged in the research and technical outsourcing literature.

Significance of Results and Outcomes

The research has a number of important implications for the CRIC research agenda. Firstly, it has elaborated certain aspects of the Distributed Innovation Processes framework being developed by CRIC. The research has identified some of the reasons why firms enter into a more collaborative and networked system of innovation and the decision-making associated with this. The decision-making process surrounding the issue of whether to use external research and technology is much less rational and optimal than frequently assumed, with decisions generally made on an ad hoc, informal basis. The view that contract research and technology activity is formal, routine, repetitive, cost-based and having short time horizons and levels of uncertainty is being challenged as contract research and technology organisations are moving towards longer, more relational types of research and technology partnerships. Different forms of knowledge and technology outsourcing are becoming less distinguishable and increasingly blurred over time.

Secondly, from a micro perspective the research feeds into the wider CRIC framework of new forms of competition in relation to how firms manage their knowledge competences and core capabilities. One aspect concerns the capacity of firms to absorb knowledge from external sources, associated in turn with the ease of knowledge appropriability. A problem expressed by firms outsourcing their research or technical requirements was that although they may formally receive all the codified knowledge associated with the project they would not gain more tacit elements associated with the process. Managers were also concerned that although the external partner may competently deliver a piece of technological knowledge at the end of the project they may also share this knowledge with other competitors. Firms have come to acknowledge that technological knowledge is not a simple one-way flow of resources; collaboration involves sharing of future (unknown) complimentary knowledge 'assets'. New knowledge fields may only be developed by combining complimentary knowledge sources from a variety of different contributors (Theorising Multi-Firm Innovation). The decision involves an important 'matching' process to see whether a project to gain new technological knowledge is viable. This leads into the issue of core competences which firms hold in relation to a particular knowledge area. External knowledge sourcing may be useful to identify, explore and learn about new technologies. However, if subsequently the technology 'set' is identified as being strategically important, despite short term claims still favouring external sourcing, long term considerations will suggest switching back to generating the new technological knowledge in-house.

Thirdly, this study of research and technological knowledge sourcing and its changing dynamics also contributes to notions underlying the systems of innovation approach through widening its articulation and conceptualisation of how innovation systems may be conceived. It has challenged the notion of the role of service firms and the support infrastructure in systems of innovation approaches. Service firms and innovation and knowledge intermediaries, such as contract research and technology organisations, should no longer be seen as passive agents or 'supporting cast' in relation to innovative activity.

Lastly, and related to the above, the project has highlighted the increasing role that the service sector is playing in the knowledge-based economy. Increasingly service companies are taking on more proactive, central and pivotal roles in the innovation process. Indeed the service sector is becoming an important source of demand for external research and technology services in its own right. All these issues suggest that our current view of services in advanced industrial economies needs to be challenged, if not altered, on the basis of these prospective change elements.

Key Publications

Howells, J. (1999a) "Research and technology outsourcing" Technology Analysis & Strategic Management 11, 17-29.

Howells, J. (1999b) "Research and technology outsourcing and innovation systems: an exploratory analysis" Industry and Innovation 6, 111-129.

Howells, J. (1999c) 'Research and technology outsourcing and systems of innovation' in Metcalfe, J. S. and Miles, I. (Eds.) Innovation Systems in the Service Economy: Measurement and Case Study Analysis Kluwer, Norwell, MA, 271-295.

Howells, J. (2000) "International co-ordination of technology flows and knowledge activity in innovation" International Journal of Technology Management 19 (7-8), 806-819.

Howells, J. and Roberts, J. (2000) "From Innovation Systems to Knowledge Systems" Promotheus 18, 17-28.

Howells, J. James, A. and Malik, K. (2000) 'Distributed Innovation Processes and the Sourcing of Technological Knowledge: Developing a Decision Support Framework for Companies' Paper presented at the R&D Management Conference 'Wealth from Knowledge', Manchester, 10-12 July, 2000.

[Back to projects]

Top

CRIC has combined with PREST to form the Manchester Institute of Innovation Research (MIoIR).

New book: Trust in Food, A Comparative and Institutional Analysis by Unni Kjaernes, Mark Harvey & Alan Warde.

CRIC Final Report to ESRC:"Main Report" and "CRIC Performance Indicators 1997-2006".

'Instituted Or Embedded? Legal, Fiscal and Economic Institutionalisation of Markets' by Mark Harvey

'Beyond Efficiency and Market Shares: Competition within the Finnish Games Industry' by Mirva Peltoniemi

'Accounting for Economic Evolution: Fitness and the Population Method' by Stan Metcalfe

'Innovation and Final Consumption: Social Practices, Instituted Modes of Provision and Intermediation' by Andrew McMeekin & Dale Southerton

'Alfred Marshall’s Mecca: Reconciling the Theories of Value and Development' by Stan Metcalfe