# R+D orgs lie on a spectrum between externalized and internalized execution and benefits Externalized research is done by giving grants or contracts to external organizations. Internalized research is done on equipment owned by the organization by employees of that organization. In reality, most organizations do a combination of both. DARPA is on the extreme externalization end. [[DARPA does not do any research in house]]. [[DOE National Labs]] are probably near the middle - doing a lot of work but then collaborating heavily with university labs. Corporate R&D are more towards the right end of the spectrum. The benefits of the work can be captured externally or internally as well. This creates a nice 2x2: * Internal execution, internal benefit: most companies and R&D labs * Internal execution, external benefit: contractors * External execution, internal benefit: a company hiring contractors * External execution, external benefit: a coordinating org like DARPA Internalization involves hiring people you want to work with, while externalization involves contracting or issuing grants. This dichotomy is one way you could conceivably measure degrees of externalization vs internalization - money spent outside vs inside an org. It almost smells like balance of trade calculations for countries. ### Ways organizations externalize research 1. Rent time on equipment along with skilled operators 2. Get specific things done by cloud labs like [[Emerald Cloud Lab]] 3. Hire contractors to do things like build software, electronics 4. Hire contractors to do larger parts of a project like “figure out how to do X” 5. ‘Collaborate’ with other organizations (which in reality usually means co-applying for a grant and dividing up the work) 6. Give out grants to do entire research projects 7. Prizes - everything from the [[X-Prize]] to platforms like [[Innocentive]] Most of these externalization methods work through a price mechanism (1,2,3,~4,~6,7) and some of them do not (5.) Looking at these methods raises another aspect of externalization - the degree to which you’re externalizing conception ([[Conception is the imaginative design of a heuretic]] ) and/or implementation ([[Implementation is the actualization of the heuretic in the real world]].) Roughly, the amount of externalized conception increases with the method number - renting time on equipment involves zero conceiving of new ideas while giving out a prize means you don’t even know what the idea is until you see it in action. ### Advantage of externalization * [[There are many pieces of equipment or tacit knowledge that only exist in one or two places in the world]] * You don’t have to make long term commitments to someone * You don’t need to buy equipment you might need for only one project * Externalization minimizes politics, which allows you to do things like pursue parallel approaches to the same thing. * You don’t risk having people with specialized skills around who need to be retrained or let go * [[Alex Rider]] pointed out that this happens at [[SRI International]] quite a bit ### Advantages of internalization * Internalization can reduce [[Transaction costs]]. [[Robert Coase]] goes into more detail but you don’t need to haggle over the price of every piece of work, it’s easier to coordinate because you are in the same building (or at least you were before coronavirus), and you presumably all have an incentive to see the project succeed as a whole instead of just your little part. * Its easier to change direction quickly. * You don’t have to specify interfaces as clearly. * Tacit knowledge/[[Process Knowledge]] created during the project stays with the organization. * If you need to maintain something, you keep the people who can do it around. (More [[Process Knowledge]].) * Nominally people have more buy-in to an organization, so they are more likely to go above and beyond the call of duty * Taxes? * People you’re working with become more known quantities - you need to do less vetting. * This becomes more important the smaller the units of work become. * You’re effectively playing repeated games with people so there is less incentive for them to screw you over. * It’s easier to capture value from the research * You can immediately start commercializing * You don’t need to police an external entity to see whether they’ve created something valuable * External entities may want to own IP * If the value of the research is spread over several organizations it may be difficult to coordinate them. Each one individually may think their contribution is more valuable than an equitable division of value could handle. * IP is usually coupled to tacit knowledge * One upshot from this is [[It is especially hard to capture value from externalized research]] ### Examples * A famous example of startups doing externalized research [[Genentech was started by bringing together several pieces of existing research and subcontracting to university labs]]. * Did this only work because the founders of Genentech * [[Microsoft Research]] * [[Bell Labs didn’t have a unique model]] was primarily internalized but researchers would collaborate with academics and hire them. * [[Xerox PARC]] was almost entirely internalized - they would hire people away from ## Questions * [[When is externalized research better than internalized research and vice versa?]] ## Related * [[It’s easy to set out to build a DARPA but end up building a Skunkworks]] * [[The Nature of the Firm]] * [[Designed Serendipity]] * [[The dominant paradigm of R&D is for it to be internalized]] * [[The higher a TRL the more internalized research should be]] * [[What is the role of organizational boundaries?]] ## References [[Sam Moleneux Conversation 31/10/2019]] [[Mark McGranaghan]] <!-- #evergreen --> [Web URL for this note](http://notes.benjaminreinhardt.com/R+D+orgs+lie+on+a+spectrum+between+externalized+and+internalized+execution+and+benefits) [Comment on this note](http://via.hypothes.is/http://notes.benjaminreinhardt.com/R+D+orgs+lie+on+a+spectrum+between+externalized+and+internalized+execution+and+benefits)