The upside of losing innovative employees to competitors

Aside from offering benefits, they often rely on non-competes, trade secret protection and other legal means to avoid losing important talent and letting knowledge get into the hands of competitors. But our research suggests that companies might actually benefit from certain employees going to work for others in the same space.In a recent study we found that these employees act as “bridges” and facilitate more collaborations between their past and present employers. This facilitation can be useful, because even though partnerships create value for both companies, negotiating them can be tricky – both sides have incomplete information and differing technological capabilities, goals, and expectations. It’s not uncommon for talks to break down, at the cost of lost resources and opportunities.

But having people familiar with both sides can facilitate decision-making and lead to better partnerships. And we also find that collaborations tend to be more productive (in terms of producing more patents) with these employees at the center, making the gains of collaborating outweigh the costs of losing talent.

We studied this in the context of R&D collaborations in pharmaceuticals. Drug companies often form strategic partnerships with competitors, especially when it comes to big innovation projects, because it helps diffuse the burden of increasingly costly drug development. For example, in February Merck (Darmstadt), a leading science and technology company with a strong footprint in pharmaceuticals, and GSK, a global healthcare company, announced a strategic alliance to jointly develop and commercialize a novel cancer drug called Bintrafusp alfa. According to the press release, “The partnership would allow Merck to bring the treatment to market “faster and further” thanks to GSK’s complementary capabilities, global commercial footprint, and increased focus on oncology.”

Our research involved conducting in-depth interviews with 15 high-ranking pharmaceutical executives. They were based in the U.S., the UK, Germany, and France, and were responsible for R&D and business development activities at large and mid-sized companies. We asked about their motivations to create alliances, their barriers in identifying, selecting and negotiating with potential partners, and the role of R&D scientists in the process.

We also assembled a large dataset on strategic alliances formed among the 55 largest pharmaceutical firms, responsible for more than 80% of global sales in the industry, from 1990 to 2005. (These alliances were contractual agreements where firms commit to share resources – money, intellectual property rights, R&D staff – for drug development and commercialization. They were not M&A deals.) Our data included publicly available patent data and information on more than 130,000 scientists employed by these companies. We were able to identify all scientists that moved between the firms in our sample and to determine whether movement increased the odds that the firms involved would form an alliance.

Our results show that it is quite common for scientists to move between competing pharma companies. More than 8,200 scientists moved, individually or in small teams, from one firm to another over the 16 years we tracked. We also saw that, on average, the odds of forming an R&D alliance are 33% higher when a scientist moved between the two firms within the last five years.

When we dug deeper into the data, we found that these mobile scientists not only led to more frequent alliances but also to more fruitful ones. The number of patents filed within three years, a common indicator of innovation performance, was nearly twice as high when compared to alliances not involving mobile scientists. And the odds that both firms collaborate again in the next three years was 25% higher compared to other alliances.

Our empirical analyses suggest that when scientists moved between competing firms, it increased the chances of those firms forming an R&D alliance. Based on our interviews, we believe that they did so by acting as bridges between former and current employer in two key ways: by identifying opportunities for collaboration and by facilitating the negotiation process of forming the alliance.

Finding a suitable partner for a collaboration is a notoriously challenging and time-consuming task. It requires companies to constantly monitor emerging technological trends and to identify partners with capabilities that match their needs. Mobile scientists can be a valuable asset in this search, as they know the technological skills and needs of both their former and their new employer. If they see a match, they can speed up the process of initiating discussions.

Mobile scientists can also help firms assess the capabilities of their competitors. This is one reason why companies are afraid of knowledge misappropriation and resort to contractual agreements or legal threats to limit employee mobility. But this overly cautious approach can prevent firms from taking advantage of opportunities. It can be beneficial for competitors to know what capabilities you have.

As one executive we interviewed stated, “If an employee who created twenty patents for you moves on to a competitor, he can’t take those patents with him anyway. To the contrary, the protected knowledge that he transfers might even increase your chances to find a future partner for research alliances.” In other words, departing employees can still help you find new sources of value, for example by finding partners who can leverage your inventions in new ways or who can help commercialize them.

When it comes to assembling these alliances, mobile employees can facilitate the process. The decision to collaborate is determined by executives, scientists, and business development personnel, who need a shared understanding of the scientific challenge within drug development and the organizational structure needed to solve it. An employee familiar with both parties can share much needed information about the companies’ corporate culture and decision-making routines. As one executive stated, “[this employee] not only facilitates and speeds up the process of alliance formation but also leads to more stable alliances as the expectations of both alliance partners are much better aligned [. . .] and more detailed information is exchanged early on.”

Our analysis also showed that the employee’s background matters: scientists who collaborated with more colleagues at their former employer were more effective in building bridges as they had a deeper understanding of their old firm. Having collaborated (on a patented invention) with an additional five colleagues at the former company increases the likelihood of alliance formation by an additional 20%. These alliances also led to higher innovation performance.

And we found that alliances formed for joint development and commercialization of new technologies benefit most from mobile employees. Our interviews suggest that these alliances are harder to forge than those to secure a licensing deal or to transfer technology, which makes sense if you think about it. Development is risky and it can be hard to reach agreement on the direction of joint R&D work, making mobile inventors more valuable in helping both sides communicate interests and information.

Losing highly skilled employees is certainly not a reason to celebrate, but bemoaning them is not a sensible approach either. While the nature of our large-scale data does not allow us to do a detailed monetary cost-benefit analysis, our interviews highlight that executives value mobile inventors for how they improve the speed and stability of forming alliances with competitor firms.

Managers of the hiring firms can reap the benefits of mobile employees by actively involving them in strategic decisions that would benefit from their unique experience and information about competitors. For instance, some firms connect employees hired from a potential partner with the team responsible for carrying the due diligence preceding alliance formation.

Our insights don’t just apply to R&D alliances but to many other inter-organizational collaborations as well, from negotiations of outsourcing contracts to formal joint ventures and M&A decision making. Having mobile employees on board often pays off.

This article was originally published by Harvard Business Review.