Here is an excerpt from an article co-authored by Anna Pettersson and August Vlak for strategy+business magazine, published by Booz & Company. To read the complete article, check out other resources, and obtain subscription information, please click here.

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When the pipeline of technological breakthroughs has stalled, especially in industries like pharmaceuticals, midlevel managers may hold the key to R&D productivity.

Despite continuous growth in R&D spending, many senior leaders remain deeply concerned about their organization’s ability to innovate. For example, the pharmaceutical industry has more than doubled its spending on research and development during the last 10 years, but its success rate in finding new drugs has been disappointing. Yet new research by Booz & Company points to an unexpected and unheralded source of potential productivity: midlevel managers in the R&D function. Companies can significantly raise their R&D productivity by recognizing and activating the unique impact of leaders in the middle of the organization’s hierarchy.

Our research with pharmaceutical companies reveals that leaders in the middle of the hierarchy have a singular ability to identify the company’s most creative bench scientists — and to help them cultivate new scientific insights and connect with the most promising external sources of innovation. These midlevel managers are an underused asset. They can nurture and navigate promising ideas through complex organizational decision making, reinforce an environment of top-quality science, and keep the brightest minds engaged day in and day out. Better use of the midlevel cohort can be a critical factor leading to breakthroughs in innovation effectiveness — not just in the pharma industry, but in sectors such as chemicals, energy, and aerospace and defense.

Bigger Companies, Less Success

By nearly all measures, new drug discovery and development has been declining for more than a decade — even as R&D spending by the largest companies has more than doubled. Why?

A wave of consolidation in the pharmaceutical industry over the past two decades has created larger companies with bigger product portfolios. But almost across the board, that wave has saddled R&D units with diseconomies of scale and too much bureaucracy to be effective. As a result, the capacity to generate new insights and make shrewd investment decisions has not grown proportionally, and has even declined. The rate of new drug discovery over the past 10 years has been so poor that the head of one big pharmaceutical company has dubbed it the “lost decade.”

In an attempt to reverse this trend and increase productivity, innovative R&D organizations have deployed a range of different management, technology, process, and structural solutions:

• Earlier commercial involvement in project decision making, in an effort to enhance focus on commercially relevant compounds

• More rigorous procedures for portfolio management and more stringent criteria for the adoption of new projects

• Clearer guidelines for the handover from discovery to development, and for the integration of basic laboratory research with clinical trials and other applied research

• More sophisticated and comprehensive incentive and reward structures

• New structures that enable more external partnerships for discovery and the outsourcing of “non-core” activities

Some large R&D organizations have begun to create smaller, more accountable units, but that alone has proven insufficient. In 2008, GlaxoSmithKline PLC, as reported by the Wall Street Journal on July 1, 2010, divided its research and development function into small groups of up to 80 scientists in an attempt to create the innovative atmosphere and close working relationships of a biotech startup.

Although these approaches have contributed to more efficient research and thus deserve attention, they have not been able to promote and nurture the new insights that can lead to more effective drug discovery. In most R&D efforts, breakthrough insights come from the work of individual scientists who connect their own deep expertise in one domain with ideas from another discipline. Most notably, in a speech delivered in 1922, “How I Created the Theory of Relativity,” Albert Einstein credited his insight to his discussions with Swiss/Italian engineer Michele Besso, with whom he did “battle against that problem.” The most creative scientists will propose new ideas based on their expertise and input from other disciplines, recombining facts and ideas into new insights. (See “How Aha! Really Happens,” by William Duggan, s+b, Winter 2010.)

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To read the complete article, please click here.

Anna Pettersson is a principal at Booz & Company based in New York. She is a member of the firm’s global health practice and has 10 years of experience working with life-science companies on R&D strategy and related issues.

August Vlak is a senior executive advisor at Booz & Company in New York. He is a member of the firm’s global health practice and its Katzenbach Center.