Chemical & Engineering News

February 10, 1997


Copyright © 1997 by the American Chemical Society

OUTSOURCING R&D TO GAIN AN EDGE

Chemical firms are leveraging their internal R&D with external resources to satisfy competing pressures

Ann M. Thayer
C&EN Houston


Industrial R&D is between a rock and a hard place. The reengineering and downsizing trend of the past several years has cramped resources and pushed R&D to produce short-term results. And now that the benefits from corporate cost-cutting have plateaued, companies are asking R&D to be a driver for growth and a source of new, sustainable competitive advantage.

Viewed in the most pessimistic light, industry has strayed from its tradition of building enterprises around new chemistries, as it did during its years of rapid growth. Today, R&D is structured to respond to existing business interests, focus on productivity, and sustain a company's core technologies. Under these circumstances, chemical companies are tapping into a variety of outside resources to add to their R&D and help meet both short-term and long-term needs.

"The methodology for growing new businesses out of entirely new materials was seemingly lost during the '70s and '80s as the emphasis shifted to [expanding businesses] as extensively and globally as possible," says Joseph Morone, dean of the Lally School of Management& Technology at Rensselaer Polytechnic Institute in Troy, N.Y. "You reach a point of diminishing returns from the pursuit of continued, incremental extensions of product lines that were established, in some cases, decades before."

However, Morone believes a "swing of the pendulum" is taking place. Under pressure for growth, industrial R&D must discover new technologies and product developments to create new opportunities. Working with tighter budgets and smaller staffs, managers say they have no choice but to leverage internal resources and capabilities with external sources of research and technology as effectively and efficiently as possible.

Outsourcing, generally thought of as contracting or relinquishing responsibility to another, has taken on a broader definition for R&D managers. In addition to the contracted technical services that have been used for many years, managers also view relationships with universities, national laboratories, contract R&D firms, consortia, and even with other companies as "outsourcing." Acquisition, licensing, and joint venturing also are thrown into the mix.

The recent research funding forecast published by Battelle in Columbus, Ohio, and R&D Magazine finds that almost half of all companies surveyed in a wide range of industries are involved with outside organizations for R&D. Most work with other companies, universities, and commercial labs. Leading chemical companies say they are doing this globally.

In its recent study of R&D trends, Washington, D.C.-based Industrial Research Institute (IRI) found a strong continuing commitment to cooperative work. Chemical producers made up one-third of the companies surveyed.

Hard data are difficult to get, but R&D managers surveyed by C&EN suggest that chemical firms spend a few percent of their R&D budget on external programs, with some of the more active ones spending slightly more.

In an era of limited resources, pragmatism is causing most R&D organizations to overcome the "not invented here" impediment - a resistance on the part of staff who may believe they are competing with outsiders. For example, a Union Carbide spokesman emphasizes that the problem does not exist at his company, which looks for opportunities wherever and whenever it needs them.

"Leading companies in the chemical industry that have done best in this arena recognize that it's not a traditional 'make or buy' decision," says Ronald S. Jonash, vice president and director of the technology and innovation management group at Arthur D. Little in Boston. "It is make, collaborate, or buy." The decision whether and how to outsource hinges on a technology's strategic relevance and where it's best practiced. Key technologies are guarded in-house while supporting, complementary, or supplementary ones can be accessed outside.

Although outsourcing can save on infrastructure, personnel, or other costs, Jonash warns that "R&D outsourcing should not be, and in general is not, done to save money or reduce costs." However, companies that have downsized may be the most aggressive in outsourcing and partnering. Managers at these firms may be using outsourcing, he says, to create more"' virtual' R&D, innovation, or technology management organizations that are less the ivory-tower central R&D labs."

"Outsourcing and collaboration give companies a more active window on what's going on and can stimulate more internal innovation," says Jonash. "Some of the more traditional chemical companies have become more inward focused and certain innovations have passed them by." Other benefits include geographic reach; the flexibility to respond rapidly to changes in technology or resource needs; and the ability to access expertise, multiple or new technologies, and specialized or costly equipment and facilities.

Companies approach R&D outsourcing and relationships with outsiders differently. Some relationships may be very explicit formal arrangements for technology transfer, whereas others are more implicit exchanges of information through joint ventures or with customers and suppliers. Even competitors - among them DuPont and Monsanto - collaborate or are involved in consortia for noncompetitive research, especially in areas of industrywide interest such as environmental technology.

Partnerships between companies have become more readily viewed as a means of technology transfer. Several joint ventures created in the past year - particularly ones between Carbide and Exxon Chemical or Dow Chemical and DuPont in the polymers area - display a clear technology intent as the basis for building a new business. Likewise, looking to rejuvenate their businesses, major pharmaceutical firms are putting billions of dollars into alliances with small drug discovery companies.

In January 1995 at Ashland Chemical, Donald S. Mueller, vice president for R&D, created the position of senior technology analyst to look hard at external technology as an avenue for growth. "We do a good job in the business context in terms of acquisition, but we have not looked at the acquisition of technology unless it comes with a business," he says. "It may be a much better avenue to get us quickly into a market than to develop internally."

Ashland's R&D effort is very customer focused. Mueller calls close interaction with customers one of its "core competencies." The company's technical budget, like many chemical producers, is split roughly 50-50 between work done in the business units - generally shorter range technical support and some product development - and in corporate R&D.

Business units typically initiate two types of outside relationships, say R&D managers: those with customers or suppliers and those that contract for services. "Many of our business units have established and are expanding agreements with other corporations for development programs that are focused and targeted," says Francis A. Via, director of contract research at Akzo Nobel.

In the specialty chemicals and custom manufacturing sectors, there are many clear examples of supplier-customer relationships designed to be, or that evolve into, joint R&D activities (C&EN, Feb. 3, page 38). When interacting closely with a major customer to understand its needs or develop new products and processes, Eastman Chemical often will "enter into working agreements," explains James Casey, Eastman Chemical's director of external research.

Associations with contract research firms or other technical service providers generally are well-delineated contractual agreements used to fulfill very specific needs. "The more practical business units have specific problems that they need solved," says David M. Golden, senior vice president for the chemicals, energy, and materials division at SRI International. Such business units decide whether to outsource based largely on cost-effectiveness.

SRI, headquartered in Palo Alto, Calif., and Battelle, both with laboratories worldwide, are two of the oldest and largest contract R&D providers. In addition to offering specific facilities or expertise, these firms increasingly emphasize their breadth of experience, rapid product development capabilities, and consulting services in their marketing efforts.

"Our largest client is still the government," says Golden, "but I believe there is a bigger market for us, particularly in the chemical industry." The industry is beginning to make its technology development needs known, says Golden, who cites the Vision 2020 report - which brought together leaders from industry, academe, and government to develop a 25-year vision for the chemical industry - as an example. "And we're certainly planning to consolidate our marketing activities in the chemical industry in a way that focuses more on issues [being raised]."

The closest competitors for the contract research organizations are universities and government laboratories. In contrast to them, says Golden, "we have a whole apparatus for keeping confidential information confidential and we don't need to publish." However, SRI does license and commercialize technology - even spin off small start-up companies - and therefore may want to retain some intellectual property rights.

Getting exclusive intellectual property rights is a deciding factor for Union Carbide in setting up any relationship. Two of the greatest concerns for chemical companies in external relationships are control of intellectual property and avoiding excessive exposure of proprietary information. Technology-transfer legislation enacted in the 1980s has addressed some intellectual property issues and made the process of working with universities and government labs easier, but hasn't solved the cultural conflicts that still arise.

"Academia and the government labs, more than ever before, are desirous of working with the chemical industry," says Mueller. They, too, are cost-driven because of the uncertainty in funding. "[They] have a better understanding now of chemical industry needs than in years gone by. They understand and appreciate the profit motive and what that means and how programs have to have finite timetables and be managed properly. I think the timing is right and the need is there."

But Via refers to the current situation as a "mixed blessing" in which the increased willingness of academic scientists who work with industry is balanced by the motivating factors of the technology-transfer office. In the recent past, he explains, companies had to convince academic researchers that industry is indeed interested in directed discovery and basic research, and not looking to extend product development work to the university.

Now, pressures relative to operating costs have built great expectations on the part of universities for generating income from licensing technologies. "Currently, we see a disproportionate focus in establishing cooperative agreements on licensing issues rather than technology issues," says Via.

For technology independently developed at a university, pharmaceutical and specialty chemical products may support royalty arrangements on the order of 2 to 10% of sales, Via explains. On the other hand, a 2% royalty may, for example, kill a new catalyst development for an industrial chemical that has a modest margin (the difference between production costs and selling price). At times, Via says, this differential has caused some delays and difficulties in completing licensing agreements.

Over the past eight years, Akzo Nobel has entered into more than 100 research agreements with universities - an approach that has proven valuable to the company's discovery research activities, says Via. In each agreement, compromise has been achieved on intellectual property rights." Flexibility is a key factor," he notes.

Company managers say they will avoid schools where an "appropriate" agreement cannot be reached. According to one manager, companies can be discriminating since there are "plenty of outstanding schools that [don't pose] a problem with these issues." Attitudes do differ from university to university, emphasize managers, who will point to many successful relationships with university partners.

"There is no one right deal," says Randy Guschl, director of corporate technology transfer at DuPont, "but clearly we've got to get out of a relationship what we're putting into it. And if we're putting a large amount of money and know-how into it, we've got to have the intellectual property rights to exercise." Most companies foresee their having to invest in several more years of internal development and possibly commercialization work before there are any resulting products from a university collaboration.

Battelle offers specialized facilities such as this crystalline-film- growing chamber.

In evaluating its programs with universities, says Joseph A. Miller, DuPont's senior vice president for research and chief technology officer (CTO), DuPont found that "the work that was not as successful was that which was loosely defined. It really represented almost a grant-in-aid to conduct research without connection to what DuPont needed from the standpoint of new knowledge. The work that was successful was very focused and served a science or technology need within the company."

Many chemical companies, although still having some philanthropic leanings and wishing to interact with potential new employees, clearly are backing away from unstructured, open-ended funding relationships with universities. Technology managers are judging academic collaborations by how good the match is between the company's technology needs and the strengths of a given university or researcher.

Although the relationships have become more structured, university collaborations still tend to be used by companies as a source of more basic, longer term, or higher risk scientific work, often only to expand a company's knowledge base. DuPont, Akzo Nobel, Monsanto, and Hoechst are among chemical companies known for their many successful interactions with academia.

"DuPont tends to go toward the basic area of research," says Guschl. "We don't like to ask people to do something they wouldn't naturally be doing in an academic setting." And, he notes, there aren't as many intellectual property issues when funding basic, versus applied, research.

Intellectual property, exclusivity, and public disclosure issues can arise in working with government laboratories. Company technology managers used to bemoan the bureaucracy involved in completing an agreement. But these issues seem to have paled in light of more fundamental concerns about the uncertainty in federal funding and the future of the labs and other technology programs.

Managers are reluctant to speculate about the long-term prospects for and willingness to commit to continued work with government labs. A significant hurdle involves questions surrounding how projects are to be funded by each side. Collaborative agreements, such as Department of Energy cooperative R&D agreements (CRADAs), in which costs were" shared" through equivalent contributions of people, time, and facilities, were very attractive to industry. Now managers suggest that the national labs would like more industry-supported contract work.

The government laboratories possess an "extraordinary national resource that can address many of the technology issues of interest to different industries, particularly the chemical industry," says Via, who served on one of the committees putting together Vision 2020.

Akzo Nobel, he says, has had a number of successful projects with the national labs, some resulting in technology now practiced in the company's plants. Similarly, DuPont at one time had more than 30 active CRADAs, some of which are running out and others that have not been renewed. Dow, W.R. Grace, Carbide, and Rohm and Haas also were active in CRADAs in the early 1990s.

Eastman Chemical has had a very close working relationship with the national labs. In 1996, the company participated in an IRI program in which a senior manager from one of the national labs is placed in industry for a year. With nondisclosure agreements in place, says Casey, a manager from Los Alamos spent time with employees to understand company needs and possibly match up potential sources of technology.

"Through that effort, we've identified a number of projects that have potential," says Casey. "At this point, we've got one or two that are already approved and running and several additional ones that I believe may be approved in early 1997." Despite all the uncertainty surrounding government labs, Casey says, he still "finds a fairly strong desire from their industrial liaison offices to work with industry in selected projects."

Most government labs and universities, as well as many chemical firms, have technology-transfer officers or managers. Within companies, technology management staff has been given responsibility for interfacing with businesses and corporate R&D efforts to understand their capabilities and needs and then trying to connect those organizations with appropriate external research. One concern or challenge, say R&D managers, is having the mechanisms in place to ensure that external R&D is integrated back into company operations.

About three-quarters of all companies see technology and innovation as "mission critical," but still are in transition, says Jonash. "They want to manage technology and innovation strategically, but they have not yet put in place the management teams, the organization, the processes, to deliver on that promise because it is all very new."

Jonash therefore is a strong advocate of the emerging role of CTOs. A CTO's office can best drive strategic technology decisions, he explains, determining what technologies should be kept in-house as well as having an overview of the relative costs, benefits, and risks of outsourcing. Among leading companies, including those in chemicals, at least half have what they call a CTO, he says.

However, Jonash believes that "only a quarter of the companies have an effectively functioning CTO." Many have "given someone the title of CTO or senior vice president for technology without providing the tools or the clout or anything else to effectively manage," he comments. Rather than serving just as a technology adviser to management or the board, "a CTO's role should be absolutely critical to investment decisions of the company in technology and innovation."

CTOs should be "held accountable as much for their external technology sourcing and partnering as they are for the effectiveness and productivity of internal R&D," he explains. "So they aren't rewarded necessarily for building a huge organization. They are rewarded for how well they get value from technology innovation for the company, how rapidly they get it rolled out into manufacturing, and how rapidly they commercialize it."

Consultants and analysts, even the research management community, are toying with the idea of "virtual" R&D organizations that combine internal and external R&D. "My definition of a virtual R&D organization is one that never goes to sleep," says DuPont's Miller. "To me that means a much more globalized research organization and one that has access to information and data as they're created in real time."

Traditionally conservative, technology-based chemical companies have become more open and less secretive than in the past, says one R&D manager, but dependence on an entirely virtual R&D effort is considered unlikely. Strategic technologies must reside within companies, say chemical company technology managers, to be the basis for future innovation, growth, and competitive advantage.

Rensselaer's Morone argues that it is" not the case that technology in the chemical industry or any industry works through the traditional pipeline of basic research to applied research to development. Many, many big hits come from the identification of a major opportunity first, so that you have a clear target in mind and then try to develop the technology to achieve that target. And you may go to a variety of places to get that done."

An early finding in an ongoing Rensselaer and IRI study of innovation at 22 companies, more than half of which are from the chemical industry, is that "the big hits don't come out of thin air. They grow out of the internally generated activities - sometimes stimulated by interactions with others - but the core of the technical activity for these ambitious efforts tends to come from within the company," says Morone. "There are some exceptions, but it's usually driven from long-standing experience in a marketplace, coupled with long-standing experience in an area of technology."




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