Innovation is key to enabling future success. But development costs can quickly eat up the benefits of the growth in sales and profit generated. This is one reason why more companies are reshuffling their internal capabilities to rely on a cadre of well-chosen partners—especially suppliers—to pursue profitable, value-building growth.

If managed successfully, collaborative supplier innovation can produce profitable growth via improved differentiation and speed, and lower costs (see figure 1). Suppliers provide ideas, reduce development costs and time, reduce COGS, and pave the way to a price premium.

While working with suppliers to generate value can have a considerable payoff, realizing the payoff requires a significant shift in a company's internal workings and in managing the supplier network. From the start, it's important to consider:
- Potential confusion about the role of internal R&D resources
- New and more complex responsibilities for the company's procurement organization
- Alignment of suppliers' objectives and approaches to support those of the company

Findings in our latest Best Innovator study indicate that best practice firms address these challenges by actively and consistently integrating external partners into their innovation activities while following three overarching guidelines.