Procter & Gamble is famous for being innovative, but the hard truth is that it had better be. The company spends 3.4 percent of its revenue on R&D, more than twice the average of 1.6 percent in the consumer packaged goods industry. But big spending on R&D does not guarantee success: A study by consultancy Booz Allen Hamilton found no correlation between dollars spent on R&D and profitability. What matters is the productivity of that spend — the "hit rate" of ideas that lead to products.
The company behind Swiffer and Crest toothpaste assesses its hit rate at about 80 percent — pretty good, considering that the overall industry success rate is just 30 percent, according to ACNielsen. But in consumer products, the real blockbusters — products that aren't merely new variations or tweaks of existing products — are few. According to research company ProductScan, of 10,649 new product introductions across the industry in 2005, just 484 were truly innovative — meaning they added significant new benefits in areas such as formulation or technology. And the creativity of the big consumer goods players is waning: A study by McKinsey found the top seven companies, including P&G and competitor Unilever (whose products include Surf detergent), accounted for just 5 percent of all the patents filed for laundry and home-care products between 2000 and 2005.
Lafley claims that outsiders are involved in developing 35 percent of new products, and P&G's spending on internal R&D has decreased 30 percent in seven years
No wonder then, that the 170-year-old manufacturer has been driving hard to improve its R&D productivity since CEO A G Lafley took the reins in 2000. Lafley's proclamation at the time, that by the end of the decade P&G would get at least half its new product ideas from external sources, was hailed as visionary. But really it was a response to the reality that the days of "not invented here" are over. Today, Lafley claims that outsiders are involved in developing 35 percent of new products, and P&G's spending on internal R&D has decreased 30 percent in seven years.
But P&G needed to do more than bring more cooks into the kitchen. It needed to change a perfectionist mentality in its research culture. "The front-end ideation process took time," says Steve David, who retired from a 34-year career at P&G in 2005, the last five years of which he spent as CIO. The company began rewarding researchers for speeding up experiments. "The goal was to encourage people to fail early and often and if the idea isn't working, either kill it or move it into another organization and let them work on it," recalls David, who is now a senior adviser to The Boston Consulting Group.
However, increasing the size and speed of the idea pipeline increased the complexity of managing the R&D process. Besides its own R&D organization of 8000 scientists spread across 28 sites globally, P&G has outsourced portions of its R&D processes, such as routine chemical lab experiments, to lower-cost countries. The company has also begun collaborating more with outside technology companies, who pump new product ideas into P&G, collaborate with P&G scientists or simply develop products themselves with P&G's guidance and investment. In addition, the company uses its internal network and the Internet to connect with loose networks of research scientists who help solve vexing problems that are getting in the way of new products — a chemical formulation, for example. Coordinating work and screening new ideas are critical to keeping the pipeline moving. "We need to run our global R&D organization as though we're in a single building," says Keith Caserta, associate director and head of health care R&D information and decision solutions with P&G.
This is where IT comes in. It takes an army to manage all these constituencies, making coordination and collaboration critical. "Opening up the idea process introduces more fragmentation and friction," says Navi Radjou, a vice president for research company Forrester. If IT is going to reduce the complexity of managing innovation in a company as widely distributed and diverse as P&G, it has to meet some difficult requirements.
First is flexibility. "We need IT that is flexible enough to meet a broad range of business needs, because we do chemically based products, biologically based products and assembled products," says Caserta. Next is scalability. "Technology has to stand up to thousands of users in a global installation, and that's been challenging in some cases," he says. Finally, the solution should promote cross-functional integration and collaboration.
In an attempt to address all of these requirements, P&G is experimenting with product lifecycle management (PLM) software (which is traditionally applied to the product development phase of R&D for assembled products like diapers and razors) in the experimental research portion of all R&D processes, assembled products, and chemical, biological and mixture-based products. PLM is like ERP for the product development process: a big, feature-rich software platform that companies typically try to standardize across the entire enterprise. P&G has a pilot with vendor UGS using PLM as a backbone for storing and sharing its researchers' "lab notebooks" — the records of their experiments that are almost always created on paper. If the system becomes a reality, the lab notebook will become an electronic talisman that links internal P&G researchers across P&G's many global labs, as well as those of its contractors. The project is a reflection of the larger push within P&G to create a more connected, global innovation process.
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