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Skunk works: When corporations innovate in incubators, everybody comes out smelling sweet

by Corinne Colbert

April 2008

Most incubator clients are start-up or early-stage companies founded by entrepreneurs eager to make their mark in the world (or at least earn a living from their own business). But not all clients fit that mold.

Sometimes large, well-established companies will set up a separate, independent department to develop a new product or service. The idea is that by freeing a team from normal company bureaucracy, it can innovate better. Such operations are known as “skunk works” (see “Why do they call it ‘skunk works’?”).

Skunk works should not be confused with corporate spin-outs, which are completely separate legal and business entities. Skunk works are intended to return to the home company when their product or service is completed. In some cases, though, a skunk works may turn into a corporate spin-out. Or it may be an advance operation for a corporation that wants to expand into a new market.

Landing a skunk works often depends on the depth and breadth of an incubator manager’s network. When she was chief operating officer of the Southwest Michigan Innovation Center in Kalamazoo, Mich., Sandra Cochrane hosted four skunk works projects from three different companies. “They were all people I had known and built relationships with,” says Cochrane, now a technology business consultant with the Michigan Small Business and Technology Development Center in Grand Rapids.

Hosting a skunk works can be as close to easy money as an incubator manager can get, say those who have worked with them. Because those operations can rely on their home company for accounting, human resources and other services, they don’t require as much assistance from the incubator. “Skunk works often require fewer [incubator] services,” Cochrane says. “I don’t have to teach them what to do.”

Instead of basic business help, skunk works look to incubation programs for professional, ready-to-occupy office space; a collegial, entrepreneurial atmosphere; and connections to community leaders and organizations.

When a major automotive components manufacturer wanted to create a new division in Indiana, it had its choice of locations. It picked the Northeast Indiana Innovation Center in Fort Wayne for the professionalism and security of its building, as well as its ties to Indiana University-Purdue University Fort Wayne and regional economic development organizations. “They knew they would have great opportunities to connect and collaborate with people in different areas of expertise,” says Karl LaPan, the center’s president & CEO. (NIIC also hosts a skunk works from a defense contractor developing communications equipment for the U.S. Army.)

Community connections also were a plus for Metals and Materials Engineers, an Atlanta-based engineering firm, when it wanted to break into the automotive industry. It looked to the Bessemer Business Incubator in Bessemer, Ala., which is close to three major automotive plants. Director Devron Veasley introduced the company to architects who could build its permanent facility, as well as to local funders. He also was the company’s ambassador to the Alabama automotive industry, helping it diversify its original single-plant customer base.

Willingness to host skunk works is a good way for an incubation program to build support with local economic development agencies and other stakeholders. “Community leaders like that we have a more inclusive mission,” LaPan says. “We’re not just helping start-up companies, but also helping other companies to be more successful and more innovative. It’s important to [stakeholders] that we’re a good citizen for the betterment of the community.”

Having a skunk works from a high-profile company also can build and enhance your program’s credibility. The Maryland Technology Development Center in Rockville, Md., hosted a skunk works for SAIC, a large government contractor and a major employer in the area. “People would come in the building for a tour and say, ‘SAIC is here?’” says Ruth Semple, business development specialist with the Montgomery County Department of Economic Development, which operates MTDC.

On the other hand, hardly anyone knew that a world-famous imaging company had opened a skunk works at MTDC to get into the life science market. “It was intentionally low-key,” Semple says. But Semple did introduce the company’s R&D team to some MTDC clients working on similar technologies, giving those clients a priceless contact.

Connections to other incubator clients may be the most valuable aspect of hosting skunk works. While some may lead to contracts, skunk works more often serve as role models and advisors to other clients. For example, MME Labs has advised other Bessemer clients on just-in-time inventory strategies and other aspects of manufacturing. “I made a pretty strong point that I would expect that,” Veasley says.

While skunk works can be a great boon to an incubation program, they do require some special considerations, managers say.

Be as choosy about skunk works as you are about regular clients

“You have to make sure it’s a good fit and that it really will benefit your community,” LaPan says. All of the skunk works projects discussed in this article meshed with the incubator’s mission and/or its industry niche.

Modify your lease as needed

“Most incubators may not have the type of space to satisfy the needs of skunk works projects,” Veasley says. In his case, MME needed to turn office space into labs. He negotiated a deal to share the cost of the renovations, with MME paying 85 percent and the local Industrial Development Board (which sponsors the incubator) paying 15 percent. If MME leaves Bessemer, it must reimburse the IDB for that 15 percent.

Similarly, Cochrane’s agreements with skunk works located at SMIC included higher rent. “If they’re part of a company that has resources, they don’t get a rental break,” she says.

Be clear about expectations – on both sides

“Sometimes large companies have their own view of what reality should look like, so they don’t appreciate what an incubator does,” LaPan says. Make sure they understand what your program has to offer and that you expect them to take advantage of your services.

For example, Cochrane had quarterly meetings with her skunk works projects, just as for any other client. The difference, she says, was depth and focus. Instead of getting into the details of the company’s progress, “it was more, ‘How is your research going? Is there anything we can do to help you with that? Any connections we can help you make? Any questions you need answered?’” she says.

Communicate often with key leaders in the originating corporation

Corporations often have high turnover in key positions; if you don’t know who all the players are, you could find yourself losing a valued client and contacts. “You’ve got to make sure that if there’s a change in leadership it won’t result in a change of direction for the company in the incubator,” LaPan says.

LaPan was in frequent contact with the leadership of the automotive parts manufacturer that located its skunk works in NIIC, not only keeping its pulse but also reinforcing its decision. “Check in [with the corporation] even if there are no problems,” he says. “Let them know you value them and appreciate them, and that you will do what it takes to make them successful.”

Why do they call it ‘skunk works’?

In the 1940s, the popular Li’l Abner comic strip featured a backwoods still called the Skonk Works, where “inside man” Big Barnsmell fermented “kickapoo joy juice” from ground-up dead skunks and old shoes.

When the U.S. Army Air Force asked Lockheed Martin to design and build a jet fighter in 1943, the aerospace company set up a secret, independent research and development arm. The team’s offices were located next to a plastics factory, whose foul emissions were a running source of black humor among the Lockheed Martin workers.

One day, a Lockheed Martin engineer named Irving Culver answered his phone at the facility by saying, “Skonk Works, inside man Culver.” The name stuck and eventually became the department’s official name, although Lockheed Martin changed it to Skunk Works to avoid copyright problems with Li’l Abner. The department developed the P-80 Shooting Star, the United States’ first working jet fighter, as well as the U-2 spy plane and the SR-71 Blackbird, among other aircraft. It is still in operation today near a U.S. Air Force aerospace facility in California. (You can read more about the history of the Skunk Works at www.lockheedmartin.com/aeronautics/skunkworks/.)

Lockheed Martin owns a trademark on the name Skunk Works, along with the skunk logo created for it. But skunk works has entered the vernacular as a term for a large company’s independent R&D operations, particularly if that operation is working on an advanced, secret or fundamentally different product. (If the operation is unauthorized by corporate management, it’s called “bootlegging.”—CC

FEATURED SOURCES

Sandra Cochrane, technology business consultant, Michigan Small Business and Technology Development Center, Grand Rapids, Mich.

Karl LaPan, president & CEO, Northeast Indiana Innovation Center, Fort Wayne, Ind.

Ruth Semple, business development specialist, Montgomery County Department of Economic Development, Rockville, Md.

Devron Veasley, director, Bessemer Business Incubation System, Bessemer, Ala.

Keywords: effective communication, funding sources/fundraising, marketing and promotion, partnerships -- organizational/corporate, sponsor, stakeholder development, stakeholder relationship management

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