R&D: In-house vs. Outsourcing—Making the Right Product Development Decision

Picture this scenario. The sales team tells you that eight of 10 customers are asking for X product. That’s something you know you should be able to make, and you think you can, but there are some holes in your capabilities. Filling those holes requires expanding your technology in one or two process areas.

Or perhaps it’s a material you’ve never worked with or even an entirely new product you’re going to have to figure out how to make. Now it becomes an R&D problem to create it within certain management directives. For example, “we’re only going to be able to sell it for Y dollars, so don’t come back with something that costs double that to produce.”

APPROACHES TO THE PROBLEM
Many companies have traditionally approached this problem the same way: by turning to their in-house R&D team and tasking them with developing the needed product, process, or component. But that’s not always the optimal solution. Sometimes, outsourcing to a third party under contract, or accessing the needed technology via licensing from someone who already has the expertise in the area you are seeking and may only be using it in a non-competitive way, can provide a quicker, more cost-effective solution, and perhaps do so with less risk to ultimate success. The best approach needs to be considered by management on a case-by-case basis, balancing each of these factors.

Let’s look at each of these options separately:

• In-house R&D. I can tell you from experience that having everything developed by your in-house R&D department risks speed to market and dramatically increases risk of completion, especially if they are working on something entirely new to them. Your own team has limits in their resource capacity and expertise, and as competitive forces continue to put pressure on costs, these constraints surely will only increase—so pick the “go it alone” projects carefully and play to your strengths.
• Hiring an outside developer. If you are willing to go to an outside innovation shop that has expertise in disciplines closely adjacent to what you’re looking to do, they may be able to turn around your project (or a key portion of your project) much more quickly than your own R&D team could, while dramatically reducing the risk of completion success, as they are already familiar with the challenges that will be encountered and have better insight as to how to overcome them. Drawing on their experience, they also may be able to give you a more solid timeline and possibly even a fixed cost, which dramatically reduces your cost and completion risks.
• Licensing another company’s existing technology. With this option, there is less risk of completion, increased speed, and a limited learning curve. Many innovative companies have technologies “sitting on the shelf” that they never deployed, or are being used in a non-competitive way—these technologies can be turned into revenue generators for them and you by creating a win-win licensing deal. In some cases, outright acquisition of the company with the desired technology may even be the most logical path to consider.

IRONING OUT THE INTELLECTUAL PROPERTY RIGHTS ISSUE
Intellectual property is a key issue that must be considered carefully before an approach is decided upon, any contracts are signed for outsourced development or licensing, and certainly before any related product is sold. If you use your own team, you may be able to preserve your new IP as a trade secret and never incur the cost and limited protection duration of patenting.

Just provisional patents can cost thousands of dollars to establish, with many thousands of dollars down the road to finalize and file, while still having limited time periods and geographic scopes of protection. So it may be preferable to try to keep IP as a trade secret as long as possible—this will be heavily dependent upon your internal controls and company culture. If you outsource the innovation, the contract will have to be carefully written to preserve your intellectual property interests. When licensing, careful consideration must be given to the deal structure to ensure some degree of exclusivity is provided with the license to deliver long-term value and competitive advantage.

Deciding which approach will be best for you should be done on a case by case basis. The approach to your decision should not simply be to fall back on what you’ve always done before, but decide only after considering:

• Your required speed to market
• Development budget
• The prioritized pipeline your internal team is already working on, and matching internal projects to core competencies
• The type of skill sets you have in-house or are willing to invest in hiring or developing for now and further projects in the future
• Risk of completion success, and how the different methods/options can reduce risk and improve outcome
• Avoiding overly straining your resources so that you have them available for additional projects that may come along at any time that fit your core competencies
• Intellectual property position

Overall, it’s important to ensure that the decision you make meets both your current and future strategic needs and is not simply “the way things have always been done.” By exploring and utilizing all your options, you’ll be able to meet cost goals and fulfill the market’s product requirements, while maintaining your competitive advantage.