Firms turn R&D on its head, looking outside for ideas
To roll out new consumer products, Procter & Gamble Co. has long relied exclusively on its famed research and development staff.
But over the next five years, fully half of the products it introduces are expected to come from partners, suppliers, universities, contract labs, and other sources outside the company. P&G, which owns Boston's Gillette Co., has been talking to Harvard Medical School and Massachusetts General Hospital labs, for example, about piggybacking on their skin-care research.
Other companies are converting their own researchers into ''technology scouts" who pick out good ideas and help broker deals with the organizations that own the intellectual property for those ideas.
Such moves signal a radical change in concepts of innovation, once regarded as the secret sauce of successful businesses and the one thing they should do in-house. As new technologies shake up their markets, making consumers more willing to defect, companies are shaking up their methods of bringing products and services to market. Among the outside parties they're reaching out to: their own customers.
Through a process known as ''outside innovation," companies are deputizing customers to help design new offerings, Boston high-tech consultant Patricia B. Seybold documents in a forthcoming book.
At the same time, Navi Radjou, vice president at Forrester Research in Cambridge, reports that internal research and development departments, struggling to keep up with changing customer demand, are being redeployed to scout for new products and technologies -- often overseas -- and help companies find more flexible business models.
It's all part of a scramble by business leaders to understand, and connect with, newly fickle and technology-empowered customers. Companies are also seeking to cut R&D costs, as Internet-enabled comparison shopping squeezes profit margins and a clamor for customized products and services strains resources.
Customer-led innovation is inevitable, said Seybold, chief executive and senior consultant with the Patricia Seybold Group, citing the rush of hobbyist-hackers to improve everything from Legos to computers to Segway scooters. ''Customers are going to do it whether you want them to or not," she said, ''and you can't anticipate the ways they are going to change your business. But you can try to harness it."
Seybold's book in-progress, titled ''Outside Innovation," cites many companies that have done just that. Lego Group incorporated design ideas not only from researchers at the Massachusetts Institute of Technology and Tufts University but also from consumers who had reverse-engineered and invented new parts for Mindstorms, a line of robotic toys that became a top-selling product.
Responding to customer feedback, meanwhile, Staples Inc., the Framingham office supply chain, took over management of computer and printer rebates and passed the savings to customers at the point of sale. And makers of cars, clothing, and computers have rolled out online ''configurators" enabling customers to design their own products.
Seybold, drawing on studies by Eric von Hippel, professor at MIT's Sloan School of Management, said forward-thinking businesses are setting up online forums to identify ''lead customers," those who are early adopters and passionate users of their products, and work with them to drive innovation. ''Lead customers are good prognosticators of what your customer base is going to need six months out," she said.
As outside innovation supersedes traditional thinking about product development, which Seybold describes as ''our experts are smarter than our customers," companies are grappling with a vacuum in their own organizations, which in the past designed products for the perceived needs of customers and then deployed their marketing arms to publicize the products and convince customers they needed them.
Eighty percent of company leaders surveyed by Forrester complained their inflexible R&D processes weren't keeping up with evolving customer needs. Radjou, who previously chronicled the emerging ''innovation networks" among companies, suppliers, and customers, issued a new report last month, titled ''Transforming R&D Culture," which identified the insular mindset of research and development departments as a barrier to innovation.
''Long cycles are the problem," Radjou said in an interview. ''The clock speed of customer demand is accelerating. In the past, customers played the role of passive recipients. They weren't aware of the choices they had in the marketplace. Today there's greater interest in newness. And nearly half of consumers have no brand loyalty."
Against that backdrop, P&G has decided that 50 percent of the products it rolls out in the next five years will come from outside the company, Radjou said. Others are taking a similar approach, assembling product portfolios from other companies, contract lab, suppliers in India, universities in China, and consumer goods manufacturers in Japan.
Their own researchers are morphing into technology scouts. Once confined to labs, they ''have to dust off their neckties and suits to play their new role," Radjou suggested. He said the Boston area, with its concentration of engineering and business schools, could emerge as a leader in training the new generation of researcher scouts.
The other task for research and development 2.0 is fashioning new business models for companies in sectors being transformed by technology. At Yahoo Inc., researchers first develop business models -- how to make money from Internet auctions or advertising, for example -- and then hunt for the right technology.
''Research and development used to be about finding a cool technology and getting the business types internally to back it," Radjou said. ''This is turning research and development on its head."
Robert Weisman can be reached at weisman@globe.com. 
