Wondering where the next hot food ... hit toy ... big band ... miracle drug will come from? Chances are, from entrepreneurs just like you who are furiously creating new products for the country's biggest corporations. Are small companies America's new R
Innovation: Part III
If you've shopped for a golf bag lately, you've no doubt checked out Callaway. After all, the leading golf-club maker ought to sell a good, sturdy bag to lug around those Big Berthas. What you couldn't have seen when you hoisted that Callaway bag to your shoulder was the label "Ogio Engineered" hidden inside a pocket. Today about 90% of Callaway golf bags, in fact, carry the Ogio moniker -- a quiet testament to the little Bluffdale, Utah, company that sold the big company on its innovative ways.
Partnering with leaders like Callaway is a crucial part of the game plan at Ogio, which grew nearly 500% from 1997 to 2001. Although the company also sells its own branded products (sports-gear bags), Ogio has found a lucrative niche helping big companies enhance theirs. The "Ogio Engineered" division has helped fuel the company's stellar rise in sales. Five years ago Ogio took in just $8 million, but by last year sales had skyrocketed to $47 million. The Engineered division kicked in 25% of the company's revenues in 2001. "We're innovating for ourselves, but in order to keep Callaway happy we're innovating for them, too," says David Wunderli, Ogio's president.
Now, Callaway doesn't seem like a company that needs much help being innovative. It was almost a dozen years ago that Callaway's unconventional driver with the big sweet spot took the golf world by surprise. Callaway continues to delight duffers with its deviously inventive designs, but even the $800-million juggernaut can't stay abreast of every technical wrinkle in every product line.
Enter Ogio. The company targets commodity or "sleeper" product categories it can "ogioize" -- a term coined by Michael Pratt, the company's inveterate-tinkerer founder and CEO -- by applying its multipatented gear-bag technology. And then it finds market leaders to partner with. Or the large-company partner finds Ogio, as Callaway did four years ago. For the golf bags that Ogio designs and manufactures for Callaway, for example, the Utah company holds no less than half a dozen patents -- patents for how the bag's sling sits on your back and how the balls pop out of the dispenser when you pinch the neoprene sleeve. "We basically innovate what no one thought was worth innovating," says Wunderli.
Companies like Ogio are the Ginger Rogers to the big company's Fred Astaire. Ogio makes Callaway look better. The smaller company shares its technology with Callaway and even develops patents specifically for Callaway's use in certain products while retaining ownership of the patents for its own future application.
For entrepreneurs who pride themselves on their ability to innovate over and over again, the partnering model is compelling: Do what you do best, and let the big company handle the rest. Ogio has learned that its partners crave freshness and will pay for it, even if they already employ teams of new-product developers. "We're a little irreverent," says Wunderli. "That's what caught Callaway's eye. The big companies are valuing authenticity."
Some of the greatest research-and-development powerhouses of our times (think Procter & Gamble) regularly harvest big ideas from innovators outside their own walls. A range of small companies -- from invention labs and industrial-design firms to all kinds of entrepreneurs, from independent record labels to consumer-goods manufacturers -- are behind corporate America's newest products. And not just in industries you'd expect, like trend-dependent toys and R&D-intensive pharmaceuticals. It's a phenomenon happening everywhere, from high tech to hip-hop.
In many ways, Gregg Latterman, 34, is the prototypical entrepreneur, a guy so passionate about new music that he started his own independent record label. He never intended to become a de facto R&D lab of a major record label. It just turned out to make sense.
In 1993, Latterman, then a Boston accountant, shucked his secure job, took out a $10,000 bank loan, and founded Aware Records, producing from his apartment a compilation album featuring new rock musicians. Over the years, Aware has built a brand by releasing nine compilation albums, popular with sophisticated music aficionados who buy the CDs directly from the company's Web site. But in addition to being that rarity -- a successful independent record label -- Latterman's seven-person company is the little-known engine behind Columbia Music's gold- and platinum-selling artists Train, Five for Fighting, and John Mayer, among others. In an arrangement still unusual in the pop-music business (though common in hip-hop), Columbia funds Aware's overhead and shares its profits with the small company.
It's a win-win joint venture born out of mutual frustration. After several years of running Aware part-time, Latterman was growing the company and picking up fans for its bands. He had proved to have not just a good ear -- he featured Hootie & the Blowfish on an early Aware compilation -- but also a knack for nurturing young bands through their adolescence. But as Aware's success grew, so did Latterman's sense of hitting a wall. Just when a band caught on, its musicians wanted a major record deal. And Aware was no Sony or MCA. "I was losing the bands that I was involved with. I couldn't be part of their lives past a certain point because I didn't have the money," he says.
Big hits grow from little discoveries. Large companies don't have the time, talent, and patience to nurture seed-stage inventions.
One day in 1997, Latterman was commiserating with Will Botwin, then executive vice-president of Columbia Records (a division of Sony Music), about the ups and downs of the business. Latterman recalls, "He was saying to me that a very frustrating part of his job was that Columbia was great at taking a band that's already doing well and making them bigger, but horrible at finding bands and building a base." Those deficiencies were precisely Aware's strengths. "We started talking about how I could become part of Columbia's system and be a farm team or an incubator -- sign bands that they could never sign, build them, and do something with them," he says.
The two men signed a joint-venture agreement that gives Columbia first dibs on all Aware's new artists. Since then Aware has continued to find and develop unsigned bands, put them on tour, and launch them -- no longer risky ventures but safe bets -- into the world of big music. The two companies treat each new artist differently, but typically Aware debuts a band on a compilation album and puts it on local tours. Aware often also produces its own album independently -- the company released its own John Mayer CD in June 2001, for instance. Once the partners feel that the artist is ready to go to the next level, Columbia steps in wholeheartedly. In September 2001, after Aware had sold 20,000 copies of the Mayer album, the two companies released a new cobranded album and pulled the Aware-only CD off the market. Aware shares in the profits from the new CD; Columbia foots the bill for worldwide tours, promotions, music videos, and the like.
If it all seems like common sense -- and sounds easy to pull off -- it's not. Most music-industry joint ventures ultimately fail, says Botwin, who became Columbia's president in January. He says those failures occur because many independent labels are artist driven and therefore don't bring much business savvy to their partnerships. Aware, on the other hand, "is an entrepreneur-driven label," he says. "This is the flagship joint-venture relationship in the music industry."
Indeed, there's such synergy between the mammoth New York record label and the $2-million Chicago indie that, says Latterman, "I feel that when I'm in the hallways, I'm part of that company."
What's going on here? Why are huge household-name corporations turning more frequently to small companies to help them develop their hits? It's all economics. Big companies need big hits; at places like Procter & Gamble that means a product capable of pulling in at least $100 million in global sales. But most new ideas fail in the marketplace (about 80% of packaged goods, for instance). Big hits grow from little discoveries, and large companies generally don't have the time, talent, and patience to nurture seed-stage inventions.
But small companies do. And the smart ones are trying to make it pay by going after royalties or licensing fees.
Tony Koselka's Personal Robotics Inc., a two-year-old start-up in San Diego, is one of those young companies that are banking on the outsourcing trend. Koselka's company, which has developed robotics software for use in household products, has received a cozy reception from more than a few appliance giants. Several have shown interest in codeveloping a robotic lawn mower. "We were surprised how eager they were for innovation. That's improved in the last few years," says Koselka. But it makes sense: Personal Robotics targets low-tech industries with its highbrow software. "These companies don't know software or robotics. We're not competing with their in-house people," he says.
Koselka's list of potential partners is long, since the software that Personal Robotics has developed is easily customized. "Robotics can go anyplace," he says. "We want to clean the whole house."
Koselka can clean -- but don't ask him to manufacture anything, although he could. A serial entrepreneur, he enjoys bringing a new idea from paper to prototype. He hates making and selling stuff. So when he started Personal Robotics, he decided not to bother. "I've worked for a manufacturing company. Setting up a factory is torturous," he says. "Trying to displace someone on a store shelf is very hard. The big company has the name, the money, the distribution."
Still, Koselka does more than deliver prototypes, collect an advance, and move on to the next opportunity. He also helps the big company's marketing department select product features -- an activity that, he says, is essential. Koselka, who expects to finalize his first big deal by year-end, intends to rely solely on royalty arrangements for the company's revenues. His plan is to grant his partners exclusive use of his technology in their industry, within specific geographic markets.
Many large corporations need companies like Ogio, Aware, and Personal Robotics in order to maintain their market leadership. Others need outsiders because they have shrunk their own R&D staffs. Filling the void are all sorts of innovators for hire, from product-development shops to invention farms to industrial designers.
The primary ingredient at Nancy Rodriguez's $5-million product-development firm, Food Marketing Support Services, is depth of talent. Rodriguez is a veteran of Swift & Co., the meat company, which in its 1960s heyday employed more than 350 people in R&D alone. Then came a decade of downsizing. She left in 1985 to start Food Marketing, which she sees as an extension of the R&D departments of her big-food-company clients. They, like Swift, have scaled back their R&D labs. Her clients come up with rough new-product concepts; Food Marketing then fully develops those ideas, creates prototypes, and scales up a final version for production. "We never really work apart," she says.
"We're sensitive to the market, but that doesn't stop us from dreaming the impossible."
Rodriguez brings to her large clients what many of them are missing: years of experience. Her 20 staffers understand virtually every aspect of food science, saving her clients time and money in the crucial trial-and-error stage of developing a new concept. For instance, seven people on her tasting panel have been together for 30 years, sampling everything from roast-beef drippings to cotton candy to garlic juice. Although "sensory support" is a key ingredient in new-product development, many big food companies don't have a dedicated tasting team anymore. Food Marketing does.
That's one reason why American Pop Corn, in Sioux City, Iowa, which makes Jolly Time Pop Corn, allocated 100% of its new-product-development dollars to Food Marketing Support Services. Among the hits that Rodriguez's company has created for American Pop Corn: "Blast O Butter." The theater-style microwave popcorn quickly became the large company's number one seller, increasing revenues about 28% the first year. "Before we introduced Blast O Butter, our sales had plateaued and our market share was 3.5%," says Tom Elsen, vice-president of marketing at the 160-person company. "Now our market share for microwave popcorn is 10% and growing. Based on that success we're believers. We really rely on Nancy and her team. They are our R&D arm."
Now, imagine trying to invent the next gourmet popcorn, a novel talking doll, and a new way to remove paint -- all at the same time -- and you have a good idea what invention farms do. There's almost nothing these innovators for hire won't try. And that's why large companies actively seek them out for assignments. Despite the humorous name, invention farms are serious business. "Great ideas come from a lot of strange places," says Jeff Dufresne, managing director of a product consulting shop called BrandStorm, in Cincinnati. He should know. In his 18 years of working at Procter & Gamble, he saw a number of outside inventions turn into major hits for P&G.
One invention farm, Invent Resources, in Lexington, Mass., has increased its sales 30% to 40% a year since its founding in 1991, says president Richard Pavelle. The four-person company, which spun out of MIT, accepts assignments from companies large and small. And sometimes it creates new products out of the ether. Recent work for Bath & Body Works, part of the Limited Brands empire, began with a casual visit from the R&D director. "He asked, 'What do you have?" Pavelle recalls. That conversation eventually led Invent Resources to formulate and patent a sunscreen product for Bath & Body Works that will debut on its store shelves next year, says Pavelle. (Limited Brands once maintained its own central R&D lab for personal-care products, called Gryphon, but its wings were clipped a couple years ago, when the retail company decided to close it down.) Invent spent a year developing the sunscreen in exchange for consulting fees. Those fees generally range from $4,000 to $10,000 or more a month depending on the project.
The new twist is that Invent no longer works for fees alone. "We now benefit from a royalty stream. We're at the beginning of several royalty arrangements that should last 20 years," says Pavelle. Typically, Invent sells an invention to one client exclusively. Recently, for instance, it built a hand drier for one customer; that product is on the market now. And the company is in the midst of developing a tornado-warning system for another client. "The science is the same whether it's a toy or a big machine," says Pavelle. "It's all physics." (For more on Invent Resources, see " If You Come ... They Will Build It," November 1999.)
The job of an invention farm usually ends with the delivery of a working prototype. The farms typically don't take their own products to market. And for that reason they often toil in obscurity. (See "Almost Famous: the Dynamic Bra and Other Woes," below.) But maybe that's why they can continually conjure up crazy new concepts. "We're sensitive to the realities of the market, but that doesn't stop us from dreaming the impossible," says Invent vice-president Ze'ev Hed.
"We want to stay independent. We're having too much fun."
Invention farms are not the only consultants being asked to envision new products. So too are industrial-design firms, which historically have been confined to creating the look of already conceived products. Dennis Boyle is a senior engineer at the noted Palo Alto design consulting firm Ideo. He says, "We are getting more and more requests to do what we sometimes refer to as 'phase zero' or 'before the brief' explorations to come up with new products and services." Boyle says the $60-million company has recently entered innovation partnerships with longtime clients Steelcase, Eli Lilly and Co., PepsiCo, McDonald's, and Procter & Gamble. "The express goal is to bring innovations to targeted business areas," he says.
In that way, design firms are beginning to act more like invention farms. Herbst LaZar Bell, an 80-person Chicago-based product-design and -development firm, has its own invention laboratory, called the Vision Projects. Founder and chairman Walter Herbst says the firm runs the lab to keep its designers challenged. "We just want our people to go play," he says. But their Brave New World-ish inventions have led to paying work. For instance, Herbst says that Nike called on the firm to create a new product, still under wraps, after it glimpsed a Vision Project called Gooru. The colorful award-winning invention is a futuristic education gadget for kids that consists of two parts: a communications device called a GooBall and a high-tech backpack with a flexible LCD screen. (For more on how the design world is changing, see "Driven by Design," on page 58.)
It's no coincidence that all the companies in this story hone their innovation skills by making time for blue-sky inventing. For instance, Ogio's Michael Pratt has devoted himself full-time to what the company calls simply "the lab." Why? In part to capture any and all zany ideas. "Blue sky is the first thing that gets cut usually at other companies, but for us it's the first thing we're spending money on," says president Wunderli. "Because we're privately held, we have the luxury of lowering earnings to continue to innovate." Two full-time designers work with Pratt in the lab, which is equipped "with all the mad-scientist tools they need," says Wunderli.
He expects that about 70% of the innovations that come out of the lab will strengthen Ogio's gear-bag line for itself and its big-company partners. The other 30%? Who knows. Wunderli imagines a variety of outdoor and lifestyle products that will depart entirely from bags. One really far-out idea in development is a "NASCAR-looking" chair for kids. And Wunderli foresees new patentable features and products for Callaway. Other big companies, including $2-billion-plus toolmaker Snap-on, have already expressed interest in what comes out of the lab.
In the end, these entrepreneurs-slash-inventors get to do what they love -- dream up ideas all day long and turn some of them into gold. They're having such a good time, they don't want it to end. Gregg Latterman could develop new bands forever. "My thing is, you take the time to make it perfect, as good a record as you can," he says. "I've always been long-term. I wanted to work with people I like, make great records, and sell a lot."
Cashing out may be the eventual goal, but there's no hurry. Ogio, for its part, has no plans to sell to Callaway or anyone else. "We want to stay independent," says Wunderli. "We're having too much fun."
Almost Famous: The Dynamic Bra and Other Woes
Consider the predicament of Michael W. Boehm. No one believes he's the man behind the best-selling George Foreman Grill. After all, Boehm's invention-on-demand company, called Intellection, is tiny -- just Boehm and his daughter working in a cramped office in Batavia, Ill. And then there's the fact that Boehm hardly resembles the beefy boxer whose mug adorns every box of the 14 million grills sold by Salton. When Boehm takes credit for the grill in meetings with potential corporate customers, they chuckle. "They don't believe I invented it," he says. Then he pulls out the patent papers.
As it turns out, Boehm not only created the grill familiar to late-night infomercial watchers but also coengineered the prototype and developed a business plan for how to sell it. Salton bought the grill in 1995 after Boehm won Foreman's endorsement.
Then there are the troubles of Invent Resources Inc., in Lexington, Mass., another invention firm for hire. For all of its four partners' advanced degrees and breakthrough commercial successes, they still must rely on champions within large companies to ensure that the new products they develop actually see the light of day.
The partners tick off some of their almost-famous ideas. There was the Dynamic Bra (don't ask), which they explored for Victoria's Secret only to see the concept go, well, bust. The fate of their Silent Pencil Sharpener is an equally sad tale. After spending six months developing a prototype for Hunt Corp. that was so quiet, it made regular electric pencil sharpeners sound like thunder, Invent's partners got bad news. "A new marketing manager decided the company didn't need a silent pencil sharpener," says Invent vice-president Ze'ev Hed, who personally holds 42 patents. "That happens a lot."
What do you do then? Well, you can always shop for another sugar daddy. Boehm is developing an improved version of the old Foreman grill. Only this time, he says, Salton isn't interested. Ostensibly, the follow-on could hurt sales of the original. "People in corporate situations, perhaps not wrongly, want to keep risk low and profits high," Boehm says. So he will likely take his new product to another large company. And so goes another day in the life of the innovator for hire. --Susan Greco
Go to www.inc.com/keyword/relationship to learn how to manage an R&D relationship with a large corporation. To see the previous two installments of Inc's three-part series "The Innovation Factor," go to www.inc.com/keyword/innovationfactor.
August: Innovation and Organizations
In Part I, we focus on continually inventing organizations, companies designed to churn out ideas. We feature the "Innovation 50," a list of companies that have filed at least 30 patents in recent years.
September: Innovation and Leadership
Part II looks at innovation through the eyes of CEOs. What sort of people deserve to be called "innovators"? How do they operate? Where do they get their ideas? Do you have what it takes to be part of the club?
The Innovation Factor: Part III
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