Innovation is a necessity in today’s competitive environment, yet it remains difficult to do. Acquiring good ideas is not necessarily the problem. But adequately screening and testing ideas can be both costly and uncertain. One way to avoid these problems is to source innovation from outside the firm.
Outsourcing of innovation is a growing trend, and it provides numerous advantages, particularly in being able to resource R&D on an ad-hoc basis depending upon immediate need. Acquisition of innovation goes a step farther, and involves merger or acquisition of a firm that has the desired expertise, or acquiring a product or service outright from its developer. This has special advantages and an impact that can go well beyond outsourcing. Acquiring a start up provides both a tested product and expertise in a desired area. But it can be expensive, and there are often problems in integrating the acquisition into the other business of the firm.
Acquisition of innovation through M&A has gone in and out of favor, with a great deal of activity in the 1990s and early 2000s. Recently, it is on the upswing as companies that have cash seek to acquire assets that are suffering in the current recession. It has been the preferred growth path of a number of firms, particularly in the high tech sector, with examples including Cisco, IBM, and Microsoft. The start up company undertakes the risks of vetting the idea, developing the product, testing it and bringing it to market. The larger company pays a higher cost, but avoids the costs of development and the costs of acquiring essential expertise. Unlike in-house development, too, the cost is predictable, which can be all-important.
Acquisition provides immediate access to new thinking and to innovative new employees, but the M&A can create a range of problems. Complexity and uncertainty are introduced that can create significant issues if they are not addressed throughout the acquisition process. Acquisition never provides new technology alone. It introduces a range of effects that may impact other products, branding, and internal innovation processes.
The best results are likely to be found if the acquisition process is carefully managed. Acquisitions should be purchased early enough that they are not too expensive, but late enough that their technology and markets have been demonstrated. Then there must be a clear plan for integration of the target company. Personnel issues need to be carefully considered, as well as the numerous areas in which the acquisition might affect ongoing business.
In today’s business environment, opportunistic mergers and acquisitions are inevitable. But, what appears superficially to be a good idea, might well bring along too much unwanted baggage. Acquisition may, indeed, provide a good route for innovation, but it must be carefully done.
This is the subject of a recent Executive Update that I wrote for Cutter Consortium. It can be found at http://cutter.com.
