Free Market R&D

World Class R&D moves industry away from a command and control economy and toward free market thinking and approaches. The hypothesis is that this will provide greater connections and incentives for individuals to direct very high levels of creativity toward market-facing products and services. Researchers come to realize that freedom to explore the creative space is provided by funding from the market. There is no big daddy.

We view research transactions as analogous to economic transactions. We trade the results of studies, evidence, in exchange for decisions. Researchers sell evidence. This evidence is typically purchased by surrogates (managers) for the Funding Agent+. Evidence becomes the currency in-kind. We discuss conditions needed to make the research transaction efficient (i.e., not the normal World Class R&D focus on effectiveness).

A convention manager shows up in Moscow to finalize hotel accommodations for the expected conference attendees and is told he can only have half the number of rooms originally promised. The hotel manager has found a better deal for these rooms. ‘But we have a contract’ ‘Then sue me’  Munger, Mike (2010). Munger on Many Things (EconTalk) (question #6 at timestamp 35:12)

This anecdote illustrates the challenges facing our quest to improve research transactions. If I need to sue you to enforce a contract then my transaction costs become much higher than usual. I build these extra costs into my calculations before executing a transaction and many fewer transactions take place. Prior to executing a trade I spend inordinate amounts of effort investigating my potential trading partner, lining up stakeholders, performing additional CYA+ studies, etc.

In World Class R&D research transactions we need a high level of confidence in the rules of the trade: we need assurances they will be followed. We follow the rules, the transaction is executed, and each party is satisfied with the performance of the other. For example, we request a go, no-go decision to commercialize a R&D prototype+ fully aware of the kinds of evidence needed for such a decision, and in full agreement with the procedural mechanisms to make the decision. The decision is made and both parties are satisfied with the mechanism, regardless of the direction of the outcome.

Autonomous structures increase reliability of outcomes thereby increase the volume of research transactions. There are no side-deals, no lobbying, no meetings to define the agenda of the upcoming meeting. There are no advisory committees. Autonomous structures are a proven way of making transactions happen smoothly (most of the time). There are few surprises. Efforts typically expended in positioning the evidence are instead spent on strengthening the evidence.

Autonomous structures are run by intermediaries that stand between the buyer and the seller. These structures exclude the personalities of those involved in executing the transactions, mainly because they have no interest in the outcome for either the buyer or seller. They instead have an interest in the satisfaction of the buyer and seller after the execution of the transaction. The Russian hotel owner can still renege on his deal with the convention manager, but in doing so would exclude his hotel from any future business going through the intermediary. And the intermediary would step in and provide less costly remedies for the convention manager than having to execute a lawsuit in a Russian court of law.

Autonomous structures are not free. We use them only in R&D transactions having significant consequences: the major decision-points in pre-game+, mid-game+, end-game+ and commercialization+. The beauty of this arrangement is that all the other lesser transactions self-adjust to the needs of these major transactions. The consequences of interim transactions converge on the consequences of the single large mediated transaction.

In the dictator game, the sociologist/economist places $100 on a table (in bills of small denomination) and provides the following instructions to two players. One player is named the dictator and is given the task of splitting the $100 between the two players. The dictator splits the money and makes the offer to the second player, the subject. If the subject accepts the offer, then both walk away with their split. If rejected, neither player receives any money. There’s only one round to the game. Play this game in countries with free market systems and the offer is very often a split in the 60-40 to 50-50 range, and is very often accepted. Everybody wins. In countries with command-and-control or paternalistic economies, the offer is very typically 98-2 or 99-1, with the idea that even $1 for the subject is better than nothing. These offers are very often rejected and everyone loses. If I allow you $98 then the next time one of these games comes along you’ll have a leg up and I’ll fall even further behind. Munger, Mike (2010)

We’re attempting to move players from a command-and-control economy, today’s R&D economy, to the free market economy of World Class R&D. Today, funding agents look for a split of 98-2 and everyone loses. Find a blockbuster+ product and there will be few winners (e.g., money, bragging rights, recognition) and most individuals remain unchanged (i.e., they get to keep their job). So most individuals seek satisficing behaviors: they throttle their efforts so to meet but not exceed, expectations. We get no blockbusters and no one’s to blame since all expectations have been met. The $100 is simply used up. No one gets too far ahead of anyone else; there is rarely a windfall+ of money or influence to be divvied up amongst the players.

In World Class R&D we instead rely on autonomous decision mechanisms: the Ebay’s of the R&D world. These mechanisms stand between the purveyor of evidence and the purchaser (i.e., the funding agent or surrogate). These mechanisms de-personalize R&D transactions. They make them much more predictable. They make them much more numerous.

Further Reading