When Should You Outsource R&D? Consider Capabilities and Project Characteristics

This content relates to : NEW PRODUCT & SERVICE DEVELOPMENT


Opportunities to outsource R&D are more likely to exist in contexts ripe for “open innovation” compared to contexts where “closed innovation” is still dominant. 

Even in “open innovation” contexts, managers need to consider whether outsourcing is consistent with their company’s broader technology strategy and organizational capabilities.

Managers should also take the characteristics of the R&D project itself into consideration when determining whether to outsource. 

Jason Pattit

University of St. Thomas

For several decades after World War 2, many firms relied exclusively on their own in-house R&D labs to supply them with new products and technology. However, this “closed innovation” paradigm began to break down in the 1980s, in part due to fears that in-house R&D was yielding fewer valuable, “game changing” new products and processes than it once did. In response to these concerns, some firms began to experiment with technology licensing and other ways to obtain technology from external sources. 

In this study, we examine one of these “open innovation” pathways: outsourcing. Specifically, we set out to develop a multi-level decision framework that managers can use to help them better understand when it might be appropriate to outsource a specific R&D project. Our framework outlines 7 “environmental factors” under which the conditions are ripe for outsourcing. 

However, even if the environment is favorable, it is still important to consider how outsourcing fits into a company’s overall technology strategy. Firms that invest heavily in R&D may find it difficult to shake loose of the “Not Invented Here” syndrome, highlighting that breaking free from this mindset often requires a top management champion to lead the effort. It is also important for managers to determine if their firm possesses the technical and relational skills necessary to support outsourcing. While outsourcing can be used to fill a technical skills gap, some degree of internal expertise is likely to be necessary to utilize the outputs from an outsourced R&D project. 

Finally, our framework suggests that managers should also examine aspects of the project itself to assess whether it should be kept in-house or outsourced. Projects that involve modular technologies and “plug-and-play” components and that are in later stages of development are likely better candidates for outsourcing. Overall, our framework underscores the importance of involving different levels of management in the outsourcing decision, as managers from each level are likely to focus on different considerations. Bringing these different perspectives together can lead to a better-informed discussion of the factors surrounding a specific project. 


Jason Pattit, ’12 Ph.D.

Associate Professor, Opus College of Business, University of St. Thomas


To learn more, read: 

Pattit, J.M., Raj, S.P., & Wilemon, D. (2014). The R&D outsourcing decision: Environmental factors and strategic considerations. International Journal of Innovation and Technology Management, 11(2): 1450002 (22 pages).  https://doi.org/10.1142/S0219877014500023