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I have some bad news for you so I hope you're sitting down the bad news is is no matter what sector you're in whether it's business academia government nonprofit whatever most of the really smart people and most of the really good ideas are outside of your organization now I didn't make up this maximum it's a principle known as Joy's law of management and it may be the reason why these days there is so much chatter about the importance of external innovation in a time when the idea that could transform the entire platform of your industry might be developing in someone's basement or dorm room bringing in ideas from outside your company may be the only way to succeed it makes sense in theory but is it really true so I leave the research and product development topic for a large consulting firm so I think about innovation a lot and I talk about it a lot these things do not make me the most fun at parties but they do mean I have a perspective on the subject and I'm here to tell you there's just one problem with all the hype external innovation doesn't work and it doesn't work because we're doing it wrong let me show you some data the examples I'll use our pharmaceutical companies because that's the industry I focus on now if this is not your industry please do not take this as a cue to now glaze over for the rest of the talk I promised you the principles apply across industries now external innovation is not a goal in and of itself it's just a means to an end of getting the most bang for your buck out of Rd what we call R&D productivity and if that doesn't sound grandiose you what it means is for a given amount of R&D in pharma more on better medicines and technology more in better applications and consumer goods more and better designs you get the idea so it's the right objective function to measure so we can plot on the vertical axis here Rd productivity the value created per dollar of R&D spend and on the horizontal axis we can plot each company's usage of external innovation essentially the share of their R&D dollars that go externally rather than internally and when we look at the relationship between these two there is no relationship now I can see a couple of you right now squinting and tilting your head trying to form a pattern here somehow you are the creative people in the audience statistically the r-squared here is about 1% there is no correlation and if you're not into statistics you can think of this like you know eating Donuts and running triathlons the two just are not connected now maybe there's something else going on here maybe there's a particular kind of external innovation that matters well here's a whole grab bag of different types whether we look at licensing or acquisition or open innovation any of these none of them correlate with R&D productivity in fact they're all about as close to zero as you could possibly get so what's going on here why does external evasion have absolutely no effect so to answer that first we have to understand what it is that really drives R&D productivity the vertical axis I just showed you and my team and I have done a ton of work on this we've spent late nights we've done all these calculations and after all this work we have finally come up with the answer this took us millions of dollars of consulting spent ok you may have seen this before and thought it was a joke it's not a joke in fact sadly it is the central thesis of my talk today which is what drives rnd productivity is the success rate just like wall-e here says and we were able to show in the 2013 paper that what drives Rd success is just two things it's having access to great scientific information and then it's actually listening to that information when you make decisions so what does this mean for external innovation well we know these are the two things that drive R&D productivity so we can look at these two factors and see how external innovation stacks up against them so first on the science side we run right back into Joy's law most smart people are outside your organization even the largest pharmaceutical company might have a thousand biologists internally but there are more than a million PhD biologists in the world that is well under 1% even in the largest companies internally to illustrate that here's a map of all the publications in one disease area rheumatoid arthritis each dot is a publication each line is a shared co-authorship and the footprint of one large pharmaceutical company is shown in green it's a pretty significant single contribution but you would be nuts to think all the good sciences in that little green circle now the flip side of Joy's law is unfortunately what I'm gonna call Joy's corollary which is most bad ideas are also outside your organization and it can be pretty hard to tell the difference between the two and so companies rely on their internal experts to make sense of these external ideas to sort through all the muck and also to know how to marry them with their internal ideas and capabilities which brings me to the second of our two items driving R&D productivity decision-making because even once you have access to all the right signs of information you still have to listen to that information when you make decisions which could not sound more obvious but it's not in fact it's the crux of where the breakdown happens between external innovation and R&D productivity as I mentioned companies rely on their internal scientists to evaluate the external ideas but sometimes those external ideas are meant to replace the internal ones it is kind of like asking your current spouse to evaluate options for your next marriage and yet companies are absolutely oblivious to this dynamic in of how they treat their internal experts usually internal experts can become absolute heroes by developing their own innovation they they are just a cog in the machine of evaluating external ideas so where do you think they want to spend their time what gets them emotionally and intellectually excited even worse sometimes external evasion is seen not just as a time waster but is outright competition I know examples where the internal experts were reluctant to bring in external ideas because it meant they would have to kill their own internal one that was similar but inferior they only got credit for the internal one so you can imagine how they reacted how any of us would react in these situations often the experts do the right thing regardless of these issues but is a bad idea to set up company incentives in such a way that it create these issues and make it hard for people to do the right thing so if we want to get the benefits of external innovation we have to think of it not at the company level but at the level of the individual is responsible for doing the collaboration with the outside world and set up the incentives in such a way that it's in their own personal interest to want to take part so I want to show you this chart again that dot is Janssen they're the pharmaceutical arm of Johnson & Johnson they make among other things Remicade which is for rheumatoid arthritis the disease we looked at earlier Janssen is not an extreme outlier I don't have an extreme outlier to show you because no one has yet successfully used externalization to drive tremendous value but they're on the right track they're already in the top third of both external innovation and R&D productivity and they're doing the right kinds of things the first thing you see when you go to Jansen's website is a great big slogan we collaborate with the world but their approach doesn't end with a slogan they work hard to address the issues on both the science and decision-making sides on science that connect with entrepreneurs actually buy housing a facility that hosts 150 of them with all the equipment they need to get started and on decision making they give full credit to their internal scientists regardless of where the idea originated Janssen has not figured it all out but they're a great example of the kinds of things that companies need to be doing you need to be figuring out ways to access the science you need to set the incentives in such a way that the individuals involved personally benefit by collaborating only then can the internal and external halves come together to form a more effective whole and only then will we actually see a benefit of external innovation thank you [Applause]