As companies outsource and offshore their manufacturing processes and services, it is only natural to expect them to also reach out to their suppliers for innovation. While concerns exist, outsourcing innovation is becoming more common because innovation is key to revenue generation. The issue for supply management professionals then becomes how to effectively establish, manage and monitor innovation outsourcing.

From a strategic standpoint, deciding whether to outsource innovation is similar to the make-versus-buy decision that companies have wrestled with since the advent of the industrial revolution. However, because innovation carries with it concerns about knowledge management and intellectual property, supply management must approach innovation outsourcing differently than other outsourcing decisions. In most cases, the innovation outsourcing decision will fall somewhere between two extreme options for innovation. On one end is keeping all innovation, R&D and new product development inside the organization itself, which involves long-term strategies to enable the development of capabilities to continuously innovate. On the other end is the concept of acquiring or licensing innovation, which involves a one-time expenditure to another company for an innovation project. This option requires that, at some point, the organization will have to purchase the innovation from the developing company and also determine ownership parameters.

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