I have some bad news for you so I hope
you're sitting down the bad news is is
no matter what sector you're in whether
it's business academia government
nonprofit whatever most of the really
smart people and most of the really good
ideas are outside of your organization
now I didn't make up this maximum it's a
principle known as Joy's law of
management and it may be the reason why
these days there is so much chatter
about the importance of external
innovation in a time when the idea that
could transform the entire platform of
your industry might be developing in
someone's basement or dorm room bringing
in ideas from outside your company may
be the only way to succeed it makes
sense in theory but is it really true so
I leave the research and product
development topic for a large consulting
firm so I think about innovation a lot
and I talk about it a lot these things
do not make me the most fun at parties
but they do mean I have a perspective on
the subject and I'm here to tell you
there's just one problem with all the
hype external innovation doesn't work
and it doesn't work because we're doing
it wrong let me show you some data the
examples I'll use our pharmaceutical
companies because that's the industry I
focus on now if this is not your
industry please do not take this as a
cue to now glaze over for the rest of
the talk I promised you the principles
apply across industries now external
innovation is not a goal in and of
itself it's just a means to an end of
getting the most bang for your buck out
of Rd what we call R&D productivity and
if that doesn't sound grandiose you what
it means is for a given amount of R&D in
pharma more on better medicines and
technology more in better applications
and consumer goods more and better
designs you get the idea
so it's the right objective function to
measure so we can plot on the vertical
axis here Rd productivity the value
created per dollar of R&D spend and on
the horizontal axis we can plot each
company's usage of external innovation
essentially the share of their R&D
dollars that go externally rather than
internally and when we look at the
relationship between these two there is
no relationship now I can see a couple
of you right now squinting and tilting
your head trying to form a pattern here
somehow you are the creative people in
the audience statistically the r-squared
here is about 1% there is no correlation
and if you're not into statistics you
can think of this like you know eating
Donuts and running triathlons the two
just are not connected now maybe there's
something else going on here
maybe there's a particular kind of
external innovation that matters well
here's a whole grab bag of different
types whether we look at licensing or
acquisition or open innovation any of
these none of them correlate with R&D
productivity in fact they're all about
as close to zero as you could possibly
get so what's going on here why does
external evasion have absolutely no
effect so to answer that first we have
to understand what it is that really
drives R&D productivity the vertical
axis I just showed you and my team and I
have done a ton of work on this we've
spent late nights we've done all these
calculations and after all this work we
have finally come up with the answer
this took us millions of dollars of
consulting spent ok you may have seen
this before and thought it was a joke
it's not a joke
in fact sadly it is the central thesis
of my talk today which is what drives
rnd productivity is the success rate
just like wall-e here says and we were
able to show in the 2013 paper that what
drives Rd success is just two things
it's having access to great scientific
information and then it's actually
listening to that information when you
make decisions
so what does this mean for external
innovation well we know these are the
two things that drive R&D productivity
so we can look at these two factors and
see how external innovation stacks up
against them so first on the science
side we run right back into Joy's law
most smart people are outside your
organization even the largest
pharmaceutical company might have a
thousand biologists internally but there
are more than a million PhD biologists
in the world that is well under 1% even
in the largest companies internally to
illustrate that here's a map of all the
publications in one disease area
rheumatoid arthritis each dot is a
publication each line is a shared
co-authorship and the footprint of one
large pharmaceutical company is shown in
green it's a pretty significant single
contribution but you would be nuts to
think all the good sciences in that
little green circle now the flip side of
Joy's law is unfortunately what I'm
gonna call Joy's corollary which is most
bad ideas are also outside your
organization and it can be pretty hard
to tell the difference between the two
and so companies rely on their internal
experts to make sense of these external
ideas to sort through all the muck and
also to know how to marry them with
their internal ideas and capabilities
which brings me to the second of our two
items driving R&D productivity
decision-making because even once you
have access to all the right signs of
information you still have to listen to
that information when you make decisions
which could not sound more obvious but
it's not in fact it's the crux of where
the breakdown happens between external
innovation and R&D productivity as I
mentioned companies rely on their
internal scientists to evaluate the
external ideas but sometimes those
external ideas are meant to replace the
internal ones it is kind of like asking
your current spouse to evaluate options
for your next marriage and yet companies
are absolutely oblivious to this dynamic
in
of how they treat their internal experts
usually internal experts can become
absolute heroes by developing their own
innovation they they are just a cog in
the machine of evaluating external ideas
so where do you think they want to spend
their time what gets them emotionally
and intellectually excited even worse
sometimes external evasion is seen not
just as a time waster but is outright
competition I know examples where the
internal experts were reluctant to bring
in external ideas because it meant they
would have to kill their own internal
one that was similar but inferior they
only got credit for the internal one so
you can imagine how they reacted how any
of us would react in these situations
often the experts do the right thing
regardless of these issues but is a bad
idea to set up company incentives in
such a way that it create these issues
and make it hard for people to do the
right thing so if we want to get the
benefits of external innovation we have
to think of it not at the company level
but at the level of the individual is
responsible for doing the collaboration
with the outside world and set up the
incentives in such a way that it's in
their own personal interest to want to
take part so I want to show you this
chart again that dot is Janssen they're
the pharmaceutical arm of Johnson &
Johnson
they make among other things Remicade
which is for rheumatoid arthritis the
disease we looked at earlier Janssen is
not an extreme outlier I don't have an
extreme outlier to show you because no
one has yet successfully used
externalization to drive tremendous
value but they're on the right track
they're already in the top third of both
external innovation and R&D productivity
and they're doing the right kinds of
things the first thing you see when you
go to Jansen's website is a great big
slogan we collaborate with the world but
their approach doesn't end with a slogan
they work hard to address the issues on
both the science and decision-making
sides
on science that connect with
entrepreneurs actually buy housing a
facility that hosts 150 of them with all
the equipment they need to get started
and on decision making they give full
credit to their internal scientists
regardless of where the idea originated
Janssen has not figured it all out but
they're a great example of the kinds of
things that companies need to be doing
you need to be figuring out ways to
access the science you need to set the
incentives in such a way that the
individuals involved personally benefit
by collaborating only then can the
internal and external halves come
together to form a more effective whole
and only then will we actually see a
benefit of external innovation thank you
[Applause]