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A Survey of Leading Private and Public Organizations

Best Practices in
R&D Operating Models
a survey of leading private and public organizations

Executive Summary
In the competitive race to develop and commer- the paper focuses on organization-specific practices
cialize new products and services, leading-edge tied to both industry environment and corporate
companies have discovered that research and devel- strategy.
opment (R&D) operations can be optimized to yield
The following key points emerged from this
a key lever for achieving sustainable competitive
study of R&D models and best practices:
advantage.
■ Any chosen R&D model should be tailored to
In both private and public sectors, the costs of
the organization’s unique corporate strategy,
R&D are increasing, while the output, in terms of
industry environment, risk profi le, and culture.
new successful technologies and products, often lags.
The increasing pressure is driving organizations to ■ The R&D model should be built on a foundation
treat R&D as a core business process. of widely recognized best practices, which fall
into four general areas:
To understand the ingredients needed for highly
effective R&D operations, PRTM analyzed the R&D – Partnerships
operating models of 16 organizations across different – Investment Balancing
research-intensive commercial and nonprofit organi-
– Decision Management
zations, and across federal research and development
programs. We set out to answer a key strategic ques- – Risk Management
tion for senior business leaders: How can I design and ■ Companies should focus on one or two R&D
implement an R&D model based on best practices from best practices, as they cannot all be pursued
other organizations? simultaneously.
This paper briefly notes three broad consensus
themes in best practices—strategic planning, gated
reviews, and corroborating tools. But the majority of

Research Methodology

PRTM analyzed the R&D operating models of 16 organizations. The analysis drew on more than
120 sources, including both first-person interviews and documentary research. Many of the organi-
zations selected were those that develop biopharmaceuticals. These firms experience particularly
rigorous demands in managing cutting-edge science and product development, subject to intense
regulatory scrutiny, and the intense pressure in recent years for innovative R&D models. The study
also included technology firms, government agencies, and nonprofit firms.

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B E S T P R A C T I C E S I N R & D O P ER AT I N G M O D EL S

Introduction
Managing R&D without a well-designed model ■ Gated management reviews. A rigorous process
can lead to highly inefficient and costly operations, not is used to ensure a technology’s relevance and
to mention sparse pipelines of candidates or delays in feasibility and to enlist product-line commitment.
timely product introductions. Yet despite its critical At each gated review, managers ensure that certain
strategic importance, R&D was one of the last business criteria are met before projects can move forward.
functions to make the transition from ad hoc manage- ■ Corroborating tools. Three key sets of tools have
ment to a rationally designed organizational process. emerged.
Today, many R&D-driven organizations are finding – Technology transition agreements are formal docu-
innovative ways to maximize output from their invest- ments that identify the specific cost, schedule,
ments and achieve sustainable competitive advantage. and performance metrics to meet before transi-
These companies find that a well-constructed R&D oper- tions.
ating model provides the foundation for timely, quality
– Relationship managers address transition issues
product development that yields increased revenues.
within the product-line teams.
An R&D model consists of the plans, processes,
– Metrics gauge project progress, as well as process
measurement techniques, governance structures, and
effectiveness.
related elements used to operate and manage the R&D
effort. In a defined model, these elements are docu- Alongside these universal themes, specific prac-
mented and understood throughout the organization. tices are emerging to fit an organization’s particular
Benchmarking studies confirm that companies with business strategy, industry environment, and operating
more mature and well-designed R&D models enjoy a model. In the course of our study, strategic environ-
substantial advantage in earnings growth over those mental factors were evaluated for each organization
with less mature processes. and associated model, including market characteristics
and needs, level of technology challenge/risk, position
Certain themes regarding best practices have become
on and span of the development chain, and partnering
nearly universal among top-performing organizations:
environment.
■ Strategic planning. Strategic planning precedes
technology or product development. Managers
gauge market (or mission) needs, conduct portfolio
analyses, match projects in major thrust areas to
the market needs, and prioritize resources.

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a survey of leading private and public organizations

Best Practices in Leading R&D Models


Each of the 16 organizations studied has imple- sector is leading a transition away from vertically inte-
mented various best practices. These practices fall into grated R&D models toward more open models such as
four key categories: partnerships, investment balancing, Fully Integrated Pharmaceutical Networks (FIPNet).
decision management, and risk management. The Pharmaceutical companies source services, research
placement of an organization in one category does innovations, and product candidates wherever they can
not exclude it from other categories, as some compa- best be obtained, developing networks knit together by
nies exhibit leading-edge practices in more than one codevelopment agreements. The extreme endpoint is the
category. These best practices are generally applicable “virtual” pharmaceutical company, with very little hard
across all industries, but we have chosen to cite a few assets of its own, pursuing drug-development projects
industry-specific examples from our survey pool. as an investor, IP owner, and integrator of partners.
Millennium Pharmaceuticals exemplifies many
Partnership Practices
aspects of the FIPNet concept. Originally a developer
R&D organizations are expanding partnerships, of drugs for others, Millennium itself has developed
in many cases well beyond the outsourcing of routine one of the most aggressively outsourced R&D models
services. R&D organizations can adapt and utilize among for-profit companies. Millennium sources
several emerging practices to optimize their operating Chemistry, Manufacturing, and Controls (CMC)
models. development and clinical trials from Contract Research
Organizations (CROs) and drug manufacturing from
Open innovation networks
Contract Manufacturing Organizations (CMOs).
Under intense pressure to improve R&D produc- Millennium’s 20 strategic alliances are managed via
tivity and return on investment, the biopharmaceutical Joint Service Agreements (JSAs) that explicitly define

Partnerships
Organization Core R&D Practice Key Aspects
Millennium Strong emphasis on 1. Premium on rigorous partner selection and relationship management
Pharmaceuticals partnerships
2. Joint Service Agreements (JSAs) establish the bounds of the partner-
ship, whereby if something falls outside of its tolerance range then
intervention is required
Bill & Melinda Gates Virtual pharma model 1. PDPs represent an effective delegation mechanism for leverage of
Foundation based on disease area scarce management resources across a disaggregated value chain
Product Development
2. Tracking project details is challenging—tools and standards more
Partnerships
important
Defense Advanced High risk tolerance and 1. Conducts all of its research through contracts with external partners
Research Projects aggressive pursuit of
2. Highly empowered and personally invested program managers initiate
Agency (DARPA) radical innovation
and champion innovative programs
Exxon Mobil Shared risks through 1. Very few projects are go-it-alone ventures; spread risk, aggregate
joint ventures complementary capabilities, and combine resources by entering joint
venture or consortium relationships
2. Joint ventures must be carefully designed to ensure the
alignment of incentives for the various partners

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B E S T P R A C T I C E S I N R & D O P ER AT I N G M O D EL S

activities, outcomes, performance criteria, metrics, Precompetitive joint ventures and consortia
timelines, and data to be shared. Millennium main-
In industries where the costs or difficulty of
tains ownership of intellectual property.
uncovering and exploiting development opportunities
Product Development Partnerships (PDPs) are high, consortia and joint ventures are much more
common. Oil and gas companies such as Exxon Mobil,
PDPs are alliances of providers, brokered and
whose natural resource deposits are analogous to R&D
contracted by the central development organization,
candidates, have been leaders in such models, and
to undertake the full range of R&D tasks related to a
their experience provides valuable insight. Exxon Mobil
project development effort. Standardization of end-
uses joint ventures for most major oil and gas explora-
to-end processes across PDPs is important to ensure
tion and development efforts to spread risk, provide
project progression.
access to more capital, mobilize a larger set of technical
The Bill & Melinda Gates Foundation is one of capabilities, or ensure the enfranchisement of a host
PDPs’ most visible champions. The Foundation, with nation or other entity critical to the project.
no intramural R&D capabilities, utilizes PDPs to
In drug development, similar mechanisms are now
manage complete efforts for different product areas
proliferating for precompetitive research. Experience
(such as antimalarial drugs). These PDPs enable the
shows that a joint venture must ensure the alignment
Foundation to delegate most responsibilities and risks
of incentives, especially when several private firms are
to its partners and provide the Foundation with access
teamed with governmental or nonprofit partners.
to new or disruptive technology that can be applied
across its multiple portfolios.
Investment Balancing Practices
The potential benefits to top-level operational
metrics are clear, but the practice has risks. Overseeing Building the optimal R&D investment portfolio is a
multiple PDPs in different product areas can place a persistent challenge. Specific issues include balancing
great integration burden on the core organization, and near-term with long-term projects, identifying the right
therefore communication with partners is critical. candidate technologies to develop, and ensuring align-
ment of the R&D portfolio with business goals.
The most innovative government R&D agencies
have used similar concepts for some time. Serving as Platform development as a strategic differentiator
the “skunk works” for the U.S. Department of Defense Many organizations struggle to balance spending
(DoD), the Defense Advanced Research Projects Agency on targeted R&D versus longer-term investments in
(DARPA) provides funding for innovative research new platform, dual-use, or broad-spectrum technolo-
conducted by private sector, academic, and other gies. The development of a platform technology, such as
nonprofit organizations as well as through govern- a new protein expression technology for biologic drug
ment labs. With no intramural research facilities of its production, does not guarantee a successful subsequent
own, DARPA is considered the gold standard of high- product licensure. Merck, for example, eschews funding
performing federal R&D agencies. DARPA’s research for platform development as a unique activity. Under the
model uses highly empowered and personally invested Merck model, platform opportunities are conceived as
program managers to champion innovative programs. emerging organically out of targeted R&D efforts. Before
As with the Gates Foundation, DARPA performer investing, the company assesses whether one successful
teams are expected to be largely self-managing, with the product works on a unique platform, weighs the risks of
resulting technologies or products transitioning to the navigating that platform through regulatory processes,
government. and decides if the platform applies to other products.

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a survey of leading private and public organizations

Investment Balancing
Organization Core R&D Practice Key Aspects
Merck & Co. Aggressive scouting 1. No large, systematic effort on platform technology discovery or
practice modeled on development
business development/
2. Deploys regional scouts to seek out promising product candidates
due diligence firms
Crucell N.V. Technology platform- 1. R&D pipeline unconstrained by therapeutic areas—flexibility to go
centric model where the platform goes
2. Risk of platform becoming obsolete as new technologies are developed
In-Q-Tel Emulation of private 1. Offers the opportunity to deal with a wide range of cutting-edge firms
sector venture capital and permits the federal sponsor to access new technology as rapidly
structure as it can be developed by the private sector
2. Inability to cancel projects or investments once an investment deal
has closed
Google In-house innovation 1. Flexibility to explore new technologies and serendipitously arrive at
combined with external novel ideas
technology sourcing 2. Technology scouting and acquisitions

On the other end of the biopharmaceutical spec- private venture capital firm, allowing it access to a wide
trum is Crucell, whose platform technologies play range of early-stage technologies. Investment returns
a central strategic role. The company was built on a allow the R&D effort to be practically self-funding.
unique platform technology and obtained a revenue Because shares in private technology firms are illiquid
stream, licensing its platform technology before before acquisition or IPO, investments (and the related
licensing new products. Crucell has duplicated this technologies) that fare poorly cannot be terminated.
process with other platforms. Crucell does note,
Campaign Approach
however, that a company’s drug development efforts
might be limited by the capability of its platforms. Funding large programs composed of related R&D
efforts at different positions on the R&D value chain
New project development approaches as levers for
is difficult, especially with federal programs. A unique
innovation
solution developed within the U.S. Department of Ener-
Many organizations have determined that innova- gy’s (DOE) national laboratories is the “campaign” model
tive investment structures and contract vehicles can used by nuclear weapons programs, which bundles
boost R&D productivity. DARPA, for example, has funding for activities ranging from basic science investi-
embraced unique vehicles such as open prize competi- gations to advanced development and parts manufacture.
tions and novel Advanced Concept Technology Demon- A single, top-level line item allows significant flexibility
stration contracts that accelerate technology transition for program managers, as well as robust connection
to military forces. Other organizations in the study between R&D efforts and business use.
have developed equally novel practices.
Open Portfolio Approach
Venture Capital Approach
When development costs are low, unique invest-
In-Q-Tel, the innovation arm of the U.S. Intel- ment structures are possible. A prime example is in the
ligence Community, models its practices on that of a Internet technology market, where Google allows its

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B E S T P R A C T I C E S I N R & D O P ER AT I N G M O D EL S

employees to spend 20 percent of their time prototyping The U.S. Department of Defense (DoD) process
new software ideas. Product managers pitch for funding mandates a uniform set of phases and phase gates for all
at internal competitions. There is little top-down struc- acquisition programs. The approval to pass a major devel-
ture or strategic balancing due to the “crowdsourcing” opment milestone rests with a senior leader (designated
nature of the process. Judging results in a numerical as the Milestone Decision Authority), who chairs a review
ranking for all ideas, with the top ideas funded. team of scientists, engineers, and logistical experts.
NASA follows a different, yet similar, formal-
Decision-Management Practices
ized methodology to govern transitions—from basic
Decision-management practices are key to deter- research to applied research to systems integration and
mining which candidates are chosen and which testing—toward space-rated maturity. NASA imple-
succeed. The processes can be significantly different ments Preliminary Design Reviews (PDRs) and Critical
for science-based and engineering-based products in Design Reviews (CDRs) conducted by panels of internal
different industries, but best practices can apply across and external experts. To address cost and schedule over-
multiple industries. The key difference is that science runs, NASA has instituted Key Decision Points (KDPs)
cannot be changed and enforces rigid parameters to determine whether the technical maturity has evolved
around product development, while new engineering or whether the stakeholder expectations have changed.
approaches can be tried during product development. 3M implements a phase-gate system with metrics
Tailored approaches to phase-gate decision making and tools to measure and define the level of resources
in engineering at input to the value of the output. 3M’s Design for Six
Sigma (DFSS) capabilities supports the “Two Times/
Structured phase gates and decision events with
Three Times” (2x/3x) process to organic growth. The
rigorous “go/no go” criteria have emerged as key
goal of the 2x/3x process is to “double the number of
best practices. However, consistently applying “go/
new ideas entering the commercialization process and
no go” criteria throughout the development cycle has
triple the impact of products going to launch."
remained elusive. In the drive for rigor, the R&D-
driven federal programs are leaders.

Decision Management
Organization Core R&D Practice Key Aspects
U.S. Department of Formalism in an R&D 1. DoD 5000 process that integrates financial planning, contractual
Defense (DoD) model steps, and milestones with R&D phases, including down selections
2. Cross-functional review teams
National Aeronautics Balancing technology 1. Critical Design Reviews (CDRs), conducted by a panel of internal and
and Space development with external experts, assist in down-selecting R&D work
Administration product development
2. Key Decision Point (KDP) decision gates incorporate program-oriented
(NASA)
progress and outcomes metrics tied to the business plan, as well as
technical outcomes
3M Extracting maximum 1. Stage-gate system with metrics and tools to measure and
value out of each define the level of resources at input to the value of the output
innovation
2. “Two Times/Three Times” (2x/3x) process uses movement through its
stage-gate system as points of assessment

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a survey of leading private and public organizations

Techniques for science-based assessment by attempting to acquire lower-risk candidates. Gilead


implementation Sciences, for instance, targets development of small-
molecule drugs across few therapeutic areas. When
Science-based portfolio decisions require special-
entering a new therapeutic area, Gilead has acquired
ized implementations of the phase-gate concept. Eli
companies with candidates already in development,
Lilly’s Chorus (an autonomous, early-phase drug
bypassing risks with early research and discovery.
development group) establishes Proof of Concept
(PoC) for new drug candidates as early in development Nonprofit organizations are often creative in
as possible. A quantitative, numerical scoring tool, managing risks. The Institute of One World Health
designed to consider a wide range of relevant factors, (iOWH) is a leading example. One of iOWH’s strategies
decides which candidates move forward. This process is to buy rights to an existing drug, test it for additional
is termed “truth seeking,” a concept specifically tuned indications, such as malaria, and then optimize manu-
to the realities of science-based product decisions. facturing processes for the new indication. Therefore,
Many biopharmaceutical companies in the study iOWH eliminates a significant portion of the risks in
exhibit variations of this truth-seeking approach. advanced development. iOWH bought rights to libraries
of candidates to test efficacy against diarrheal diseases,
One challenge to effective phase-gate decisions is
allowing the organization to bypass many years of
that product managers can become persuasive product
discovery research. iOWH engages partners in the
champions. An effective counterbalance, embedded in
developing world, the subsequent beneficiaries, to assist
the models of science-based firms such as Eli Lilly, is
in clinical trials, pharmaceutical manufacturing, and
an external, objective subject-matter panel of experts.
distribution of new medicines for neglected diseases.
Risk-Management Practices Managing risk within the R&D pipeline
Risk-management considerations are filling the Risk management within the R&D pipeline
pipeline, minimizing risk for candidates within the focuses on successful transitions through phase
portfolio, and establishing metrics. gates and minimizing excessive variances in cost and
schedule. Resource limitations and science-based fail-
Approaches to filling the R&D pipeline
ures inevitably impose a high level of attrition.
To produce an adequate influx of new candidates in
Chorus’ model imposes early PoC tests to help
the pipeline, two R&D models offer unique practices.
inherently weak candidates “fail early.” This saves
The Google “crowdsourcing” approach to innovation
resources and time on process development for clinical
accepts ideas from anyone in the Google community
trial material manufacturing and on long-term animal
but also looks outside. Deal making captures attractive
studies until risk of failure has been reduced. Thus,
candidates developed at small startups. Google CEO
Chorus’ later-stage pipeline is populated by candidates
Eric Schmidt aims to do one deal a month.
that have a higher probability of successful licensure
In the more costly biopharmaceutical sphere, (and lower risk of failure). Failure of product candi-
Merck engages regional technology scouts, typically dates is expected and rewarded, and key experiments
scientists rather than business development personnel, are valued according to their impact in determining
who source licensing opportunities. Historically, this probability of licensure.
between 20 and 30 percent of Merck’s sales have come
Another broadly applicable way to reduce risk is
from externally licensed products.
to involve the prospective business unit in the R&D
In contrast to large pharmaceutical companies, small management process. General Electric provides a
pharmaceutical and biotechnology companies reduce risk leading example. The GE Global Research Center is

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Risk Management
Organization Core R&D Practice Key Aspects
Eli Lilly (Chorus) “Truth-seeking” 1. Expensive and lengthy large-scale manufacturing and long-term animal
through outsourced studies put on hold until Proof of Concept (PoC) is demonstrated
analysis drives objec-
2. Rapid, adaptive decisions; data driven; candidate failure tolerated,
tive decision making
rewarded
Gilead Sciences Focused, hands-on 1. Targeted development of small-molecule drugs that demonstrate
approach by senior preliminary efficacy across few therapeutic areas
leadership
2. Senior management is intimately involved with day-to-day activities
Institute of One High risk/reward 1. Focused strategy to address unmet needs in developing countries
World Health (iOWH) approach driven by op-
2. Develop currently approved drugs for new indications, thus bypassing
portunistic mentality
much of the discovery and development costs
General Electric- Product-oriented busi- 1. Obtain external funding from sources such as U.S. government
Global Research ness units with a cen-
2. Monitor and review project progress toward meeting objectives
Center (GE-GRC) tral R&D organization
U.S. Department of Entirely outsourced 1. Establishes accountability for timely R&D outcomes
Energy (DOE) model
2. Implements metrics to identify and address weaknesses in processes

funded in large part by voluntary allotments from GE mission or overall return on investment, especially
business units. This forces the R&D center to involve for early-stage R&D, remains elusive. Even so, metrics
the business units and advocate for the utility of its provide a gauge of an organization’s performance,
technologies. If the business units decide that risks especially weaknesses that need to be addressed to
are too high, they can reduce their budget allocations, prevent potential risks from coming to fruition.
providing an elegant tool for risk reduction.
For example, the U.S. Department of Energy
Choosing metrics to measure success (DOE), owner of the National Laboratory system, has
developed a Performance-Based Measurement System
The relative assessment of R&D models is diffi-
(PBMS), where metrics constitute a key part of evalu-
cult. However, using industry averages and/or best-
ation. As with many other large U.S. government
in-class benchmarks (e.g., cycle times, development
organizations, DOE is required to report against the
costs), R&D organizations can compare performance to
Office of Management and Budget’s (OMB) Program
competitors. Benchmarks can also be used to estab-
Assessment Rating Tool (PART).
lish internal metrics. While first-order measurements
such as number of patents or publications generated
are widespread, the ability to quantify impact to the

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a survey of leading private and public organizations

Choosing an R&D Model and Best Practices


No organization can implement all the best Best practices from various models can be incor-
practices described in this paper. R&D companies porated to develop a new strategy or refine an existing
(especially pharmaceutical fi rms) are often laggards one. Implementing one or more aspects of another
because they try to implement too many best prac- operating model may require a cultural change within
tices, looking for a silver bullet. The key is imple- the organization. However, careful integration and
menting one or two best practices that align with tailoring of strategic and operational elements from
an organization’s overall vision, strategic objectives, these models can yield an R&D model that will drive
strengths, and core competencies. progress toward best-in-class operations, leading to
The best R&D organizations have a well-defined revenue growth and competitive advantage. Bench-
set of business practices that make up an R&D model. marking studies confirm that companies with more
In a defined model, these elements are documented mature and well-designed R&D models enjoy a
and understood throughout the organization. Estab- substantial advantage in earnings growth over those
lishing a defined R&D model is critical to building with less mature processes.
success in any product development organization and
driving operational strategy. Identifying key internal
competencies shapes the strategy by distinguishing
where resources need to be allocated. The company’s
competitive landscape also influences the strategy.
Lastly, current industry trends may necessitate a
strategy adjustment or refinement.

For more information, please contact:


Chandresh Harjivan, PRTM Director
charjivan@prtm.com, +1 202.756.1700
George Dougherty, PRTM Manager
gdougherty@prtm.com, +1 202.756.1700
Wes Kim, PRTM Associate
wkim@prtm.com, +1 202.756.1700

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