PRESENTATION III. The Fraunhofer Model in Germany - closing the gap between science and industry

Transcription

1 PRESENTATION III The Fraunhofer Model in Germany - closing the gap between science and industry Raoul Klingner Director of International Business Development Fraunhofer-Gesellschaft

2 PRESENTATION III The Fraunhofer Model in Germany - closing the gap between science and industry Raoul Klingner Director of International Business Development Fraunhofer-Gesellschaft Abstract The Fraunhofer-Gesellschaft has been founded in 1949 and ever since experienced consistent growth. Today Fraunhofer employs over of staff in Germany, is internationally networked and reaches an R&D budget of over 1,8 Billion Euro per year. An important step for Fraunhofer towards being a decisive column in the German innovation system was the introduction of the so-called Fraunhofer model of financing - a performance-related system of financial management. The underlying model of allocating and distributing public funding to Fraunhofer and subsequently within Fraunhofer to specific research groups (Institutes) is one of the success factors of Fraunhofer. Another one is the decentralized organisational model. Today Fraunhofer means 60 Institutes in Germany working in different fields yet under one legal framework and strong brand: Fraunhofer. This comes along with the close alignment of every Fraunhofer Institute to one affiliated German University. This special relationship is reflected by the fact that every Institute's director at the same time holds a chair at the affiliated University Institute. It is the challenge of the headquarter organisation to balance the? to a certain extend - intended competition among individual Fraunhofer Institutes with scientific complementarity and cooperation among the Fraunhofer-Institutes, especially when coming from different knowledge domains. This cooperation results in a significant advantage: The unique

3 strengths of Fraunhofer to offer system solutions in a world with increasingly complex R&D challenges to be solved. While growing to become the largest organisation on Europe to focus on applied research it is the challenge to remain an agile organisation being flexible in organizational structures. Today Fraunhofer has reached a well-recognized position in the European innovation landscape. Recently it is often referred to by science 7) and governments 8)9) as a role model of innovation policy and key element of the latest success of the German economy, which recovered quicker and develops faster than most other economies in the western world. The paper seeks to explain the Fraunhofer as an organization and the underlying management model and elaborates on the above mentioned challenges in managing a research organization like Fraunhofer. The goal is to allow the reader to transfer the management model and philosophy of Fraunhofer to innovation systems with different framework conditions and challenges. Based on the description universal conclusion may be drawn, yet having in mind that changes in exciting structures and innovation systems cannot be implemented over night. The Fraunhofer-Gesellschaft Research of practical utility lies at the heart of all activities pursued by the Fraunhofer-Gesellschaft. Founded in 1949, the research organization undertakes applied research that drives economic development and serves the wider benefit of society. Its services are solicited by customers and contractual partners in industry, the service sector and public administration. 7) Fraunhofer is refered to as a global role model for driving innovation. As an example the Fraunhofer model is tought as a Business Case at the renown Harvard Business School (Diego Comin et al., Fraunhofer: Innovation in Germany, Harvard Business School 2011). 8) The Brazilian government launched an innovation initiative in 2011 which also includes the set-up of so-called Embrapii-Insitutes (Empresa Brasileira de Pesquisa e Inovacao Industrial). They are designed and implemented according to the Fraunhofer model. 9) Recent governmental initiatives around the world seek to strengthen the production sector in their economies and often refer to the success of Germany and the corresponding role of Fraunhofer, e.g. Richard A. McCormack, Obama Will Unveil $1-Billion National Manufacturing Innovation Network Initiative Based On Germany's Fraunhofer Institute, Manufacturing & Technology News

4 At present, the Fraunhofer-Gesellschaft maintains more than 80 research units in Germany, including 60 Fraunhofer Institutes. The majority of the more than 20,000 staff are qualified scientists and engineers, who work with an annual research budget of 1.8 billion. Of this sum, more than 1.5 billion is generated through contract research. More than 70 percent of the Fraunhofer-Gesellschaft s contract research revenue is derived from contracts with industry and from publicly financed research projects. Almost 30 percent is contributed by the German federal and Lander governments in the form of base funding, enabling the institutes to work ahead on solutions to problems that will not become acutely relevant to industry and society until five or ten years from now. Affiliated international research centers and representative offices provide contact with the regions of greatest importance to present and future scientific progress and economic development. With its clearly defined mission of application-oriented research and its focus on key technologies of relevance to the future, the Fraunhofer-Gesellschaft plays a prominent role in the German and European innovation process. Applied research has a knock-on effect that extends beyond the direct benefits perceived by the customer: Through their research and development work, the Fraunhofer Institutes help to reinforce the competitive strength of the economy in their local region, and throughout Germany and Europe. They do so by promoting innovation, strengthening the technological base, improving the acceptance of new technologies, and helping to train the urgently needed future generation of scientists and engineers. As an employer, the Fraunhofer-Gesellschaft offers its staff the opportunity to develop the professional and personal skills that will allow them to take up positions of responsibility within their institute, at universities, in industry and in society. Students who choose to work on projects at the Fraunhofer Institutes have excellent prospects of starting and developing a career in industry by virtue of the practical training and experience they have acquired. The Fraunhofer-Gesellschaft is a recognized non-profit organization that takes its name from Joseph von Fraunhofer (1787?1826), the illustrious Munich researcher, inventor and entrepreneur

5 Mission All strategies and operative activities of the Fraunhofer-Gesellschaft are derived out of a common understanding of its mission; its aims are shared by the staff, the management, its public sponsors, and last but not least its customers and the general public. The Fraunhofer mission: The Fraunhofer-Gesellschaft promotes and undertakes applied research in an international context, of direct utility to private and public enterprise and of wide benefit to society as a whole. By developing technological innovations and novel systems solutions for their customers, the Fraunhofer Institutes help to reinforce the competitive strength of the economy in their region, throughout Germany and in Europe. Their research activities are aimed at promoting the eco-nomic development of our industrial society, with particular regard for social welfare and environmental compatibility. As an employer, the Fraunhofer-Gesellschaft offers a platform that enables its staff to develop the necessary professional and personal skills that will enable them to assume positions of responsibility within their Institute, in industry and in other scientific domains. This mission statement can be summarized in three objectives: performing excellent research, transferring results efficiently into applications and training qualified researchers. Growth Fraunhofer has experienced substantial growth since 1977, largely as a result of its performance-related system of financial management. Three dates mark significant points in the expansion of the Fraunhofer-Gesellschaft: Following German unification in 1990, the organization took over ten research institutes in the former GDR, in 2000 integrated a large public research organization (GMD) with in total 8 institutes and in 2010 integrated another significant research organization (FGAN) with 3 institutes

6 But even without these singular events, the Fraunhofer-Gesellschaft has continued to grow in strength due to the remarkable success of its performance model which allows a flexible adaptation to market trends. Location The 60 Fraunhofer Institutes are located at over 80 different sites spread all over of Germany. In view of Germany s federal administrative structure, and the consequent division of responsibility for research funding between the central federal government (Bund) and the governments of the individual states (Lander), the presence of Fraunhofer Institutes in every state is a deliberately intended political necessity. Research Portfolio Research Portfolio The Fraunhofer R&D portfolio is very wide-ranging because it is the organization s mission to support industry with research services in the natural and engineering sciences. It covers all scientific and engineering disciplines of major importance to the German economy, ranging from materials science and production engineering to microelectronics, information technology, and the life sciences. Each of the 60 institutes is dedicated to a specific area of technology (e.g. laser technology, IT security, ceramics, etc.) rather than being oriented towards a single sector of industry (e.g. furniture, automotive, food, etc.). Certain functions are supported by Fraunhofer central headquarters, including public relations for issues of general relevance to the Fraunhofer-Gesellschaft, and the organization of joint Fraunhofer booths at trade fairs. One exceptional marketing element is the Fraunhofer Office in Brussels. Reporting directly to central headquarters, this office operates in the background to facilitate contacts between the institutes and the European institutions in Brussels. A similar role yet more focused on serving as a contact point for research cooperation is played by Fraunhofer Representative Offices in certain countries in Asia (Japan, Korea, China, India and Indonesia). Owing to the multiplicity of Fraunhofer Institutes, each with its own independent process for developing an R&D portfolio, it can sometimes happen that several institutes build up overlapping expertise in similar fields within the Fraunhofer-Gesellschaft. This can make it more difficult for customers to address their inquiries directly to one institute, because it is

7 not clear which is the best qualified to provide an answer. For this reason, in certain cases, the central headquarters may have to intervene as a coordinator, and if necessary put together a suitable consortium to deal with customer inquiries. Technology days are one way in which these consortia present their coordinated range of services to customers. It is also important, of course, to have a central hotline which enquirers from the business community can use to get in touch with the experts of the Fraunhofer-Gesellschaft. The search processes at companies must be minimized as far as possible. Technology Transfer The Fraunhofer mission cannot be fulfilled by excellent research alone, but has to be complemented by the transfer of this research into real-life applications - in other words: Innovations. Fraunhofer has various mechanisms for transferring knowledge to business and industry: Direct bilateral contract research: A Fraunhofer Institute is contracted to perform work for a company and invoices that work accordingly. The results to be delivered and the price are fixed in a contract. Negotiations on the use of intellectual property rights are often a critical step because for Fraunhofer it is essential to be allowed to use generated knowledge for further applications without compromising the interests of the original client. Fraunhofer takes care not to become dependent on a few individual companies for large portions of its contract work, so as not to be exposed to financial risk if and when such customers break off the relationship. Spin-offs: Companies founded by ex-members of Fraunhofer staff. They often retain close ties to Fraunhofer because their business is normally based on patented Fraunhofer inventions. In some cases, the Fraunhofer-Gesellschaft may take on the role of a minority shareholder of the spin-off company (about 5%), on condition that its shares are sold by the latest after 8 years (shareholder revenues are not yet a substantial funding source for Fraunhofer). Licenses: Certain Fraunhofer technologies or intellectual properties are licensed to customers without any further contract research

8 Transfer of skilled minds (see human resources policy): Each year, approximately 400 scientists leave the Fraunhofer Institutes in order to take up a position in industry. They are highly qualified and educated, and employ the know-how they gained at Fraunhofer in their new environment. Strategic cooperation with companies on their own premises or at a Fraunhofer laboratory: For companies requiring long-term cooperation and ongoing support, Fraunhofer establishes small project groups on the company s premises where researchers from both parties work together. An alternative option is for companies to lease laboratory space on the premises of a Fraunhofer Institute, where they can conduct their own R&D with the assistance of Fraunhofer researchers. Innovation clusters: Given the increasing complexity of new innovations, and the need to assemble teams composed of players in different specialist fields, the Fraunhofer-Gesellschaft has adopted the concept of innovation clusters. Different companies representing all links in the value chain are brought together in order to develop common standards and system solutions (for example the consortium of 18 partners formed to develop an intelligent home ), whereby Fraunhofer takes on the role of coordinator or prime contractor. Fraunhofer Academy: Fraunhofer has organized its activities in training and development as a separate business unit. As part of the process of lifelong learning, specialists and managers from business and industry can acquire additional skills at Fraunhofer. Knowledge from the research conducted by the various institutes is transferred directly to companies by way of seminars and complete courses of study provided in cooperation with major universities. Marketing of Research Results and Services Marketing activities are largely the responsibility of the institutes, rather than central management. Owing to the fact that about two thirds of an institute s budget have to be acquired from external sources, the effectiveness of its marketing efforts is of crucial importance. Each institute offers its services to a broad range of customers in different industrial sectors. This obliges the individual institutes to engage in intensive marketing activities to forge contacts with potential customers

9 II. GOVERNANCE AND STRATEGY Strategy Planning Fraunhofer s research planning takes place on three levels, linked by iterative procedures. Each of the 60 institutes plans its own strategy on the basis of its specific competencies and links to the market. At the Group level, where groups of institutes with a similar research focus work together, strategic projects and joint marketing activities are initiated. At the corporate level, encompassing the entire Fraunhofer-Gesellschaft, planning activities focus on major fields of innovation with the aim of developing competencies with an overcritical mass. All processes are consensual and cooperative, and involve intensive internal discussions and the input and review of external experts. Strategy Planning on the Institutes level The Fraunhofer Institutes are individually responsible for their financial situation and scientific profile. They therefore need to be allowed a high degree of autonomy in their strategic planning. Only the institutes are capable of judging the future needs of the market, through their direct ties with the rest of the scientific community and their daily contact with customers. Therefore the projective technology roadmap (how will technology change?) and product roadmaps (what kind of products will be developed?) have to be drawn up at institute level and not centrally. Nevertheless, this strategy planning process has to be quality-assured. A standardized process has therefore been developed to ensure that all Fraunhofer Institutes apply professional strategy planning techniques. One main element of this process is the separate planning of core competencies (e.g.: know how to.) and business fields (a group of clients with common requirements, not necessarily one branch of industry). This well-structured process enables the institutes to formulate a consistent strategy including their marketing plans. Finally the strategy plan is discussed with external experts, who offer their input and recommendations on the proposed measures. This audit is organized by the institute and is focused exclusively on future planning and does not fulfill the usual role of evaluating the past

10 Strategy Planning on the Groups level At the level of the Fraunhofer Groups? from a university point of view being comparable with faculties and usually consisting of 5-12 institutes with competencies in related fields - the individual institute strategies are compared and discussed with a view to harmonization. Fraunhofer Groups Microelectronics Materials and Components Production Light & Surfaces Life Sciences Information and Communication Technology Defense and Security The Fraunhofer Groups are separate from the actual corporate management structure, and have no official controlling functions. Their role is to serve as an informal platform for internal communication and cooperation, in the area of research as well as in marketing. Major nvestments are planned conjointly and harmonized interfaces between Fraunhofer and industry are defined for certain core areas of expertise, in order to facilitate contacts with industry. However the groups do not carry any specific financial responsibilities. Group strategy planning s based on the individual strategies of the institutes on the one hand and on the needs of the market and the priorities of the public research programs on the other hand. Strategy Planning on the Corporate level At the corporate level, a process has been established to identify the areas of research that represent the greatest innovation potential for Fraunhofer. These strategic topics are identified in a iterative process every 2-4 years with a combination of methods specifically adapted to the need of Fraunhofer - typically a combination of foresight methods and an analysis of specific Fraunhofer competencies. The strategic topics are selected and evaluated on the basis of three main criteria:

11 Is the field genuinely R&D-intensive? Are the results likely to lead to innovations (in terms of market success)? Does the Fraunhofer-Gesellschaft possess the appropriate resources to take the lead in that field? The strategic topics typically focus on specific challenges within the general R&D portfolio of Fraunhofer which is described by the following 6 research areas, e.g. Affordable healthcare with the research area Health and Nutrition. Fraunhofer R&D portfolio with specific strategic topics in each sector Horizontal Strategy Planning In addition to the planning of R&D content, a research organization also has to plan its own systemic evolution. In the short term, this means finding a response to general market and political factors, working on a time scale of 1-5 years. These factors include shifts in the emphasis of funding programs or the introduction of new legislation (e.g. European regulations on national R&D subsidies). Medium-term strategies (on a time scale of 5-10 years) are drawn up more in anticipation of social and political changes than as a technological outlook, dealing with issues such as

12 globalization in general and more particularly its local impact within Europe. Here there is a need to build up the necessary networks at an early stage. Strategic groups, too, take a certain amount of time to mature. Visions of a European Research and Innovation Area have to be developed at an early juncture and systematically followed through. Even the present funding model employed by the Fraunhofer-Gesellschaft needs to be safeguarded over the medium term, and must be repeatedly reassessed with respect to risks. A further example is the internal organizational structure of the raunhofer-gesellschaft with its controlling, communication and business processes; at times, these too need to be readapted to the size and spread of the organization. Over the long term (i.e. beyond the 10-year horizon), the Fraunhofer-Gesellschaft needs to protect the principle elements of the Fraunhofer model. These include obtaining assurances with regard to institutional funding, preserving autonomy in the allocation of resources, getting access to the next generation of researchers, and continuing to nurture close collaborative ties with universities. Incorporation of Existing Research Facilities Given the complexity of German research structures and the large number of research groups working throughout the country, there are a great many candidates aspiring to join the Fraunhofer-Gesellschaft. Applications are examined by the Executive Board on the basis of the following criteria: Congruence with the Fraunhofer-Gesellschaft s present R&D portfolio (overlaps/competition, possible areas of cooperation with existing Fraunhofer Institutes. Size of the respective present or potential contract research market Experience in the contract research market on the part of management (and/or staff) (current sources of third-party revenues) Funding: Exceptional funding by Bund and Lander during the establishment phase and assurance of medium-term institutional funding. Human Resources Development Fraunhofer human resources policy goes beyond the usual aim of developing the skills of employees for the employer s purposes only. The Fraunhofer mission also includes the

13 objective of preparing qualified personnel for the whole German innovation system (for research organizations, companies, politics, etc.), as well as for its own demand. In an attempt to make a virtue out of a necessity, the Fraunhofer-Gesellschaft has established the concept transfer through skilled minds. The most effective transfer of know-how to a company is not by giving them a result in the form of a printed report but by integrating a well-trained researcher into their staff. After such a transfer, Fraunhofer tries to maintain contact in the expectation that yesterday s employee will become tomorrow s customer. Alumni activities have been expanded over recent years to encourage the formation of lifelong bonds between former employees and Fraunhofer. There is a high turnover of scientific staff due to the large proportion of fixed-term contracts. Every new employee recruited by Fraunhofer is first offered a fixed-term contract with a durationof 3-5 years. After this period, the researcher has to leave Fraunhofer unless he or she manages to obtain an unlimited-duration contract. In total, about one third of the employees have short-term contracts. This enables institute management to adapt the size of the institute to the demands of the market and to grow or shrink in accordance with business results. The main advantage of having an institute director who simultaneously hold a professorship at a local university is that he or she has access to the student population and is able to supervise postgraduate diploma and thesis papers. The usual career path of a researcher at Fraunhofer is as follows: Students come into contact with an institute director through his or her lectures at the university. Undergraduates have the possibility of working part-time during their degree course at a Fraunhofer Institute (which is usually located near the university campus). The average timeframe is about 50 hours/month. In total about 3000 undergraduate students are employed at Fraunhofer. This human resource is absolutely essential to the institutes, because the students are highly motivated, well educated and (frankly speaking) cheap. They are involved in actual projects where they can work in contact with industry. They often write the final dissertation required to obtain an engineering diploma in

14 Germany (equivalent of a master s degree) at a Fraunhofer Institute. This generally involves spending about six months working on a short scientific/technical paper directly related to a current project at the institute. After completing their undergraduate studies, the best graduates are selected by Fraunhofer and offered a post to work at a Fraunhofer Institute while writing their doctoral thesis (usually a fixed-term contract for 3-5 years). But holding a PhD student post at Fraunhofer does not mean being able to devote all one s time to thesis work. Often the contrary is the case: all researchers (PhD students and senior researchers alike) are expected to work on actual projects, in accordance with the research strategy of the institute. The thesis has to be written on the side ; ongoing project work, funding applications, customer relations, fairs, events and other institute business take priority over the student s personal thesis work. Therefore it usually takes longer to complete a thesis at a Fraunhofer Institute than at a university, where the PhD student can work more or less exclusively on his or her chosen topic. But a student who finally obtains his or her doctorate while working at Fraunhofer is rated more highly by industry than someone who stayed on at university to do so. Recruitment managers in industry know that a Fraunhofer PhD student has been performing two jobs at once for 5 years: carrying out good research for their thesis and carrying out industrial projects for industry. After obtaining their doctorate, when the fixed-term contract expires, the decision has to be made whether the researcher will stay with Fraunhofer or move on elsewhere. It is dependent on certain conditions on the part of the employer and the employee, such as career opportunities outside Fraunhofer, vacant positions inside, etc. Often doctoral students who have been involved in industrial projects receive an offer to move to the customer s company, sometimes even before completing their thesis. In any case, whenever a member of staff leaves Fraunhofer, the institute tries to maintain the contact. Analyzing the main factors which contribute to employee satisfaction, it is interesting to note that the highest rating is not accorded to job security (the jobs are relatively secure under an unlimited-duration contract) but to the fact that the work is challenging and can be organized autonomously. Another interesting point is that Fraunhofer is rated highly

15 even though its salaries are limited to the public-service tariffs and therefore significantly lower than those offered by industry. They often write the final dissertation required to obtain an engineering diploma in Germany (equivalent of a master s degree) at a Fraunhofer Institute. This generally involves spending about six months working on a short scientific/technical paper directly related to a current project at the institute. After completing their undergraduate studies, the best graduates are selected by Fraunhofer and offered a post to work at a Fraunhofer Institute while writing their doctoral thesis (usually a fixed-term contract for 3-5 years). But holding a PhD student post at Fraunhofer does not mean being able to devote all one s time to thesis work. Often the contrary is the case: all researchers (PhD students and senior researchers alike) are expected to work on actual projects, in accordance with the research strategy of the institute. The thesis has to be written on the side ; ongoing project work, funding applications, customer relations, fairs, events and other institute business take priority over the student s personal thesis work. Therefore it usually takes longer to complete a thesis at a Fraunhofer Institute than at a university, where the PhD student can work more or less exclusively on his or her chosen topic. But a student who finally obtains his or her doctorate while working at Fraunhofer is rated more highly by industry than someone who stayed on at university to do so. Recruitment managers in industry know that a Fraunhofer PhD student has been performing two jobs at once for 5 years: carrying out good research for their thesis and carrying out industrial projects for industry. After obtaining their doctorate, when the fixed-term contract expires, the decision has to be made whether the researcher will stay with Fraunhofer or move on elsewhere. It is dependent on certain conditions on the part of the employer and the employee, such as career opportunities outside Fraunhofer, vacant positions inside, etc. Often doctoral students who have been involved in industrial projects receive an offer to move to the customer s company, sometimes even before completing their thesis. In any case, whenever a member of staff leaves Fraunhofer, the institute tries to maintain the contact. Analyzing the main factors which contribute to employee satisfaction, it is interesting to

16 note that the highest rating is not accorded to job security (the jobs are relatively secure under an unlimited-duration contract) but to the fact that the work is challenging and can be organized autonomously. Another interesting point is that Fraunhofer is rated highly even though its salaries are limited to the public-service tariffs and therefore significantly lower than those offered by industry. The training and development of staff has the aim of creating excellent researchers, creative inventors and entrepreneurial managers, and follows two approaches: There is, of course, the method of learning by doing. Every young researcher is assigned a senior researcher as a tutor who teaches them good scientific practice as well as project management and communication skills (e.g. how to present a project). Apart from this daily practice there are plenty of internal and external seminars available for training managerial and personal skills. All Fraunhofer researchers are required to follow a standardized internal qualification scheme. Staff destined for management functions at Fraunhofer are required to pass a fixed set of training modules before being given the responsibility for guiding people. Fraunhofer has implemented strict rules to ensure good scientific practice. Theses rules include important principles relating to the supervision of young scientists. Other rules are intended to minimize the risk of scientific fraud: they lay down procedures for the review of scientific publications and specify disciplinary measures to be taken to deal with cases of suspected scientific fraud. III. FUNDING AND CONTROLLING Funding The Fraunhofer-Gesellschaft is partially financed by public funds. There are two different types of public funding: basic funding and project funding. Basic or institutional funding is granted as a fixed lump sum to the research organization. The internal allocation of the resources is determined by the Fraunhofer management, implementing appropriate instruments. The organization can reasonably expect to be able to rely on a stable level of basic funding on a medium-term time scale. Major changes are unlikely, and all

17 modifications are negotiated between the respective ministries and the Fraunhofer Executive Board. Fraunhofer reports retrospectively to the federal and Lander governments on the impact of its activities on the German innovation system and the use of basic funding resources. The other public funding scheme is project funding. The federal and Lander ministries for research and technology launch R&D programs in order to fund projects in selected areas of technology. Research groups wishing to participate in these programs are required to submit project proposals. In this context, research organizations and companies stand in direct competition with one another. Efforts to obtain public project funding absorb a considerable amount of resources. If a proposal is accepted, the funds must be dedicated exclusively to the proposed project and the associated working plan? they cannot be reallocated to other research topics (e.g. as a consequence of new findings). There is therefore a need for additional sources of no-strings-attached money to finance fundamental and blue-sky research in areas of greater risk. The Fraunhofer-Gesellschaft is financed by three different sources: about 35% of the budget is covered by basic funding, 30% is received in the form of grants obtained under national and international R&D programs and 35% as direct revenue from industry. This represents a relatively well-balanced financial situation. Institutional funding allows the Fraunhofer-Gesellschaft to conduct its own future-oriented research; public project funding allows the organization to engage in pre-competitive research; and industrial revenues allow Fraunhofer to demonstrate its ability to transfer research findings to the market. Today Fraunhofer plays an active role in developing new technologies from their conception (basic research) to industrial applications (following the technology push approach). This means a commitment for 3-5 years of financial investment in personnel and other running costs. This lead time is the minimum for developing certain types of product, and can be even longer when developing new materials from scratch. When (or if, because certain types of research involve a high investment risk) a group succeeds, it will be able to offer contract research and services to the market based on a high level of know-how, competence, experience and hardware investments. But it is not possible for Fraunhofer to compensate for past investments in preliminary research by earning profits from subsequent contract research projects. Fraunhofer is not allowed to sell products in high volume to make profits (non-profit association). There is a big difference in methods

18 of calculation, as compared with commercial companies, whose R&D investments can be retroactively financed by a share of the proceeds of each product sold. Fraunhofer s tailor-made research contracts for customers? each a unique product - are normally remunerated on a real-cost basis, and rarely earn any profits. In the research world, it is not possible to recoup the costs of pre-competitive research if it starts at an early stage in the technological development process. Consequently, the development of new technologies outside the commercial environment does not generate enough revenue to cover investment costs, and therefore needs to be supported in the form of public funding. It might be possible to earn quick money through the provision of certification, testing and consulting services. But this development would distance Fraunhofer from the true scientific community and oblige the organization to shift the emphasis of its business into areas already dominated by private companies, who would not welcome this intrusion. A comparative benchmark study of other contract research organizations in Europe (TNO in the Netherlands, VTT in Finland, ARC in Austria and others) indicates that, in order to fulfill the kind of mission pursued by Fraunhofer, in terms of capacity to innovative, it is necessary for over half of the organization s budget to be financed by public sources (institutional and project funding). As already mentioned, the basic funding awarded to the Fraunhofer-Gesellschaft is not tied to any specific conditions, neither concerning the research fields nor concerning the nature of the expenditure (e.g. for projects, stipends, investments, etc.). Fraunhofer management is

19 entirely free to allocate the totality of these funds to the institutes as it deems necessary (in 2011 about 424 million euros). The following criteria are considered when distributing these funds: The distribution formula should be transparent to all institutes (but does not necessarily imply equal shares to every institute) The institutes should be able to rely on a certain volume of funding which they can expect in a medium-term timeframe (algorithm or long-term regulations) There should be a performance-related component and competition among the institutes to win the funding from management (without too much bureaucracy). Management should use part of the funding to promote defined corporate Fraunhofer strategies. In concrete terms, the allocation of basic funding is shared among the Fraunhofer Institutes as follows: 65% of the basic funds are distributed on the basis of a defined formula, whose parameters are the: - operating budget - revenues from industry - revenues from the European Commission. - The institutes can directly calculate their entitlement to basic funding out of their above-mentioned performance data

20 15% is spent on so-called internal programs : The institutes apply for funding in competition with other institutes via project proposals. These proposals are evaluated internally (there are specific evaluation criteria for the different programs). There are four such programs, aiming to stimulate internal or international cooperation and helping the institutes to initialize new research fields. High-risk research topics are deliberately included here. 10% is spent on strategic investments: it is used exclusively for the purchase of new or replacement equipment (machines, computers, laboratory instruments, etc.). The institutes submit twice-yearly applications for these investments; the management decision is taken on the basis of the strategy plans of the institutes. about 10% miscellaneous spending: different kind of financing are decided on by the Executive Board (e.g. revitalization of institutes with financial problems, assets for starting projects for new institute directors, special strategic projects, relocation of institutes, etc.). An institute s financial balance at the end of the fiscal year is carried over into the following year. Surpluses? which means that the institute has spent less institutional funding than it received? can be used in the following years. Deficits have to be paid back as well, which means less spending of institutional funding in the following year. The 5 institutes have different financing structures from year to year and are free to determine them at their own discretion. In one year, a larger proportion of pre-competitive, self-financed research may be carried out while in another year, research contracts (vertical axis) or EU projects (horizontal axis) may be dominant. For this reason, financing fluctuates within certain boundaries. It is important that the institute should not consume more institutional funding then it is entitled to under the internal algorithms so that it achieves a balanced budget. Ideally, the industrial portion is between % and the public portion is between 25-45% (gray segment of optimal revenue distribution). The costs for central headquarters are not taken directly from the basic funding but paid by the institutes. The whole amount of basic funding is distributed to the institutes, which in turn pay for headquarters services as a function of their size (for obligatory services) or on the basis of actual use of services (for facultative services)

21 Controlling and Performance Indicators There are several possible ways to control a contract research organization like the Fraunhofer-Gesellschaft and its constituent entities: Performance indicators and quantitative targets: For some (only a few) performance indicators, fixed targets for a certain period are set by management. In companies this indicator is often simply the profit, for some research organizations it is e.g. the citation index of scientific publications. These quantitative data are easy to control and transparent, but they are also relatively unspecific. Negotiated targets: Individual goals are set for each unit (person) which include quantitative and qualitative goals as well. Evaluation: A unit is evaluated by external experts with regard to its mission (because there are no clear performance indicators and the mission is multidimensional). Evaluation of the scientific performance of research organizations is often carried out by the public funding authorities. Fraunhofer applies all of these principles, establishing specific intermediate methods. And it is obvious that there should be no difference in the goals between the whole organization (Fraunhofer-Gesellschaft) and the single operating units (institutes). The Fraunhofer-Gesellschaft is required to report twice a year to its main funding authorities, the respective ministries in the federal and Lander governments. The government s perception of the organization s performance is based on a spectrum of activities, not on a single indicator. Apart from revenues from industry, there are many indicators which describe how well the Fraunhofer-Gesellschaft is fulfilling its mission, e.g. scientific awards, patents granted, spin-offs created, regional initiatives to attract industry, and activities to support small and medium-sized enterprises. A broad spectrum of instruments and activities need to be covered in order to adequately describe the complexity of the Fraunhofer-Gesellschaft s role in the innovation system. But the fact that certain indicators are used as a yardstick to measure the excellence of Fraunhofer research work does not imply, conversely, that Fraunhofer strategy focuses exclusively on the

22 optimization of these indicators. Such an approach would only lead to dangerously misleading conclusions. This can be demonstrated by way of two examples. First example: A useful and necessary indicator for an institute engaged in applied research is the number of patent applications. This data provides a certain idea of the volume of invention activities. But it would be nonsensical for all employees to try to aim for a high number of patents as their personal target without bearing in mind the usefulness of the patents for their business field and the cost of maintaining patents. Second example: Another indicator shows Fraunhofer publications, not scientific papers but articles in the media. For a contract research organization, this kind of marketing can be equally as important as scientific publications. This indicator is therefore used to show the intensity of communication with the public. It is obvious that this indicator is useful as a neutral means of showing Fraunhofer s competent position in the media, but it has to be realized that this indicator is not a useful goal-setting tool (because it can easily be raised artificially by deliberately provoking some controversial issue which is immediately picked up by the media). There is one dominant indicator for Fraunhofer as a unique selling point in comparison to other research organizations, and that is contract-research revenues from industry. The average proportion of revenues from industry in relation to the total Fraunhofer contract-research budget is about 40%. This indicator provides a quantitative measure of the interaction with customers, and can be interpreted in the sense that Fraunhofer offers attractive research and that this research is transferred into applications as well. But to be sure of this conclusion, additional elements and activities have to be taken into account (to prove that Fraunhofer earns its income from high-level research and not from low-level consulting). Apart from the indicator revenues from industry, there is another essential goal: the balance of the budget. Fraunhofer does not use the term profit due to the fact that more than half of the total budget is publicly funded. If an institute fails to balance its budget? in other words, if costs exceed the income from basic funding, project funding and contracts from industry? it is obliged to reduce its capacity. An early indication of this development can be detected by the internal central controlling instruments. If such a

23 case occurs, management intervenes in the strategy of the institute and asks other internal experts to take over certain operational responsibilities. Overall, there is one essential Fraunhofer management principle: to focus more on the implementation of enabling processes than on controlling the institutes via defined performanceindicators. Examples include: Development of internal cooperation: launching internal R&D programs Development of international cooperation: clarification of the political and financial parameters in various countries, studies of the international contract research market; expansion of foreign offices Spin-offs: support services and advice through a central venture group and a venture fund Technology foresight, new business fields: standardized strategic plan (procedural model); moderated, internal dialog platform on frontline themes The Fraunhofer mission is clear for all, but the institutes differ in the ways they fulfill that mission. This flexibility and freedom is one of the pillars of the Fraunhofer model IV. COOPERATION The rapid rate of technological progress and the growing demand for system solutions call for intensive networking within the scientific community. The Fraunhofer Institutes seek cooperation partners on different levels: Internal cooperation among the Fraunhofer Institutes Cooperation with other research institutes Cooperation with industrial R&D centers International cooperation

24 Internal Cooperation The stimulation of internal cooperation is essential to decentralized organizations like the Fraunhofer-Gesellschaft. But the physical distance between the institutes and their profit-center orientation mean that several obstacles need to be overcome. The Fraunhofer Executive Board has introduced a number of instruments designed to foster internal cooperation, with the aim of minimizing duplicated efforts, making efficient use of the existing infrastructure, and building consortia to develop system solutions and engage in joint marketing activities: Fraunhofer management provides funds for collaborative projects. Fraunhofer management encourages joint activities by Fraunhofer Groups. The central administration makes the first approach to major companies and sets up a common point of contact (as a preliminary stage in establishing a key account): see Strategic Marketing. The Executive Board uses about 15% of the institutional funding to promote projects within internal programs. It pursues a policy of creating an internal competition for the funds available and not just sharing them out among the various institutes. It is also ensured that the effort involved in applying for funding and the revenue received (project funding) are in balance, so that misdirected activity is avoided inside the organization. External Cooperation The most long-standing form of cooperation with external partners is with the universities. An outstanding feature of the Fraunhofer model is the common practice of nominating an institute director in consultation with a university (by preference a local university, if it can offer an appropriate chair), which simultaneously appoints the institute director to a professorship. Such close associations are of benefit to both parties, Fraunhofer and the university. While such cooperations offer a number of advantages, they can sometimes lead to difficulties over the choice of the appropriate candidate. Whereas Fraunhofer looks for a science-oriented manager with strong entrepreneurial skills, the university favors a brilliant academic scientist with relatively little experience in third-party projects. But when, in the

25 end, agreement is reached, the synergy effects of this dual function - as institute director and university professor - are of profound importance to the success of the Fraunhofer model (see also Human Resources ). Networking within the scientific community is mainly managed by the institutes. Each institute possesses a wealth of personal and institutional contacts with its respective community. From time to time, the Fraunhofer Executive Board signs a memorandum of understanding with other major research organizations in the interests of establishing an intensive bilateral cooperation agreement. But it is up to the institutes to breathe life into such declarations of intent, and it is they who need to be convinced of the need to take up such opportunities. It is the institutes that decide which partners they wish to cooperate with? a decision that cannot be imposed from the top down. International Cooperation International cooperation is a key element for Fraunhofer to continuously develop and improve its capability in research and development. Fraunhofer thereby seeks to cooperate with excellent research partners over the world to enhance its scientific know how. Europe lies at the heart of Fraunhofer international activity. Fraunhofer is also interested to gain knowledge about international markets outside Europe - e.g. the "BRIC States" - as well as specific regional challenges - e.g. water scarcity. Fraunhofer drives international cooperation trough a set of instruments such as: Individual project cooperation - especially in Asia in some cases supported by regional representative offices; Scientific cooperation programs with international Centers of Excellence Institutionalized, yet temporary, project cooperation located at universities abroad - so-called Fraunhofer Project Center; Fraunhofer Center abroad within the framework of Fraunhofer subsidiaries in Austria, Portugal, Italy, USA and recently Chile and UK Any international cooperation involves researcher mobility. This is supported by exchange programs

26 V. CHALLENGES A publicly funded research organization has to bear in mind the wider context of the sociopolitical framework within which it operates. Such an organization has to satisfy the varied expectations of different actors: Companies applied research that can be directly translated into innovative products (market pull) certain customers require complete system solutions, whereas others are only looking for short-term services to compensate for skills that are lacking (for the moment) in their own laboratories competitive prices exclusive exploitation of intellectual property rights ical Bodies, Public Funding Organizations Political Bodies, Public Funding Organizations wide dissemination of research findings technological initiatives (technology push) minimal funding requirements application of public-sector pay scales and administration schemes self-regulating mechanisms of resource allocation Society significant improvement to Germany s global competitive status (in terms of research excellence, training opportunities for young scientists and business executives) creation of jobs in industry through the introduction of innovative products/processes research contributing to sustainable development channel for publicizing the usefulness of the organization

27 Scientific Community: research excellence training opportunities for young scientists Employees: top-class equipment and motivating working conditions work-life balance secure jobs possibilities for career advancement The fact that Fraunhofer is granted resources to invest in new technologies raises the question of which technologies Fraunhofer should choose to invest in and at what point it should do so. If a new technology is taken up too soon, this summons up the risk of running out of resources before commercial maturity can be reached. On the other hand, starting too late involves the risk of being delegated to the role of follower instead of being a leader. Technologies such as laser technology for materials processing in the 1980s, biotechnology for personalized medicine (biochips) in the 1990s or nanotubes for new materials today need to be analyzed very carefully with regard to their anticipated roadmaps and the appropriate timing of a serious engagement. Technology developments often follow a course of initial hype, succeeded by a phase of disillusionment before finally making a real market breakthrough. In order to fulfill its role and position in Germany, the Fraunhofer-Gesellschaft furthermore has to develop a kind of dual personality with respect to certain demands: The Fraunhofer-Gesellschaft is one independent organization with a unique corporate identity (not a holding company); but it nevertheless consists of 60 individual institutes, each with its own culture. Fraunhofer aims to offer interdisciplinary system solutions and strategic partnerships; but the institutes act autonomously in terms of strategic planning. Contract research is treated as a homogenous service and standardized profession; in reality it is a very diverse sector in which Fraunhofer has to market more than 250 different business fields and to communicate more than 400 different core competencies

28 Fraunhofer aims to produce excellent research; but basic research is limited by the availability of financial resources and a strong orientation towards applications. Fraunhofer is financially supported by public funding; but it has to compete to acquire about two thirds of its budget from third-party sources. Fraunhofer has to act as a commercial undertaking; but its internal business processes and administration are bound by the rules applicable to public-service organizations. Fraunhofer stimulates the transfer of skilled minds to industry; but by doing so it constantly loses its best researchers. These inconsistencies have to be overcome ore even more so changed into an unique strength, finding an appropriate and flexible balance between the two extremes. In addition to the sometimes conflicting expectations from private customers, public authorities, scientific partners or the German society in the whole there are global trends to which the Fraunhofer-Gesellschaft is expected to respond to by: organizing its processes to adapt to the fast pace of technological change and short innovation cycles coping with the increasing complexity and interdisciplinary nature of research and innovation recognizing the need for global networking and being aware of the transparency of the contract research market vis-a-vis the customer. The Fraunhofer-Gesellschaft has developed quite successfully over the last three decades as the result of a flexible and performance-oriented model of internal communication and management. Nevertheless, the Fraunhofer model will have to be constantly adapted to the needs of the markets and to social and political developments. Future challenges facing the Fraunhofer-Gesellschaft include the globalization of companies and the building of an integrated European Research and Innovation Area. At a time when innovation cycles are getting shorter and shorter, it is also very important to develop suitable tools for matching the R&D portfolio effectively and efficiently to future needs

29 The Fraunhofer Model in Germany closing the gap between science and industry Dr. Raoul Klingner Director International Business Development 2012 STEPI International Symposium Adapting Public Research Institutes to New Dynamics of Innovation May 4, 2012 Seoul Palace Hotel, Seoul, Korea Fraunhofer

30 Fraunhofer s position in der German Innovation System Societal challenge as future markets - being ready for global competition Universities perform excellent scientific research Research cycle RTOs bridge the innovation gap with technological R&D Innovation cycle Innovative companies create new products Intensive exchange with society fundamental research challenge of efficient light emitting diodes innovation of luminescence-converter by Fraunhofer: absorbs blue light and converts it in yellow light -> combination of blue and yellow appears white successful commercialization of white light LED in lighting, car lighting etc by OSRAM Fraunhofer

31 From a small association to the leading organization for applied research in Europe Fraunhofer

32 Financial Structure of the Fraunhofer-Gesellschaft ( , in million) Fraunhofer

33 Contract Research ( , in million) Fraunhofer

34 Modes governing funding awards Plan for 2012: 472 million (excluding headquarters) 64% Regular basic funding standard algorithm for all Institutes with three performancebased parameters: Size of the operating budget Share of the business revenues relative to expenses Share of EU revenues relative to expenses In the annual post-calculation, the corresponding amount is allocated to the Institute 29% Internal funding measures For the pursuit of specific internal strategies (e.g. internal cooperation among the Institutes, inter-nationalization, promotion of women) Strategic investments by the Institutes Small building projects 7% Individual-case decisions by the Executive Board upon application Appointment approvals Special developments in the Institutes (moves, severance plans, debt relief,...) 300 million 138million 34million Fraunhofer

35 Allocation of Institutional Funding Target Figures in 2012: million Allocation criteria for institutional funding Basic funding for a Fraunhofer Institute 10% Basic 1: Fixed amount Basic 2: Size of the operating budget basic 4 = 15% of EU revenues 10% 40% basic 3 = 10% respectively 40% of industry revenues basic 3: Share of industry revenues basic 4: Share of EU revenues basic 2 = 12% of budget basic 1 = fixed amount 0,6 million % Rho Wi Rho EU Fraunhofer

36 Strategy planning at Fraunhofer Fraunhofer-Gesellschaft top-down 1 Corporate Strategy Group 1 Group 2 Group... 7 Group Strategies Institute bottomup 60 Institute Strategies Fraunhofer

37 Headquarters support the institutes with processes and strategic R&D-fields Two ways of "subsidiary" approaches at the corporate strategy level Processes developed at corporate-level and suggested for use at Institute-level: strategic planning process marketing processes like customer satisfaction best practice identification and redistribution among the institutes Models for international cooperation Models for e.g. national innovation cluster Strategic R&D fields developed at corporate-level and funding projects at Institute-level: "future topics" (based on customized "foresight" methodology, every 3 years) system approaches, e.g. electro-mobility (>20 Institutes involved in public programme) Fraunhofer

38 Fraunhofer institutes network with others: - Innovation Clusters, Close cooperation between Governments of German Länder, Universities, Industry and Fraunhofer (external network) MultiMaT Adaptronics Turbine Production Technologies - TurPro Digital Commercial Vehicle Technology Automotive Quality Saar AQS KITe hylite, "Technologies for hybrid lightweight construction Future Security BW Digital Production Secure Identity Maintenance, Repair and Overhaul in Energie und Verkehr (MRO) Virtual Development, Engineering and Training (VIDET) Polymer Technologies Nano for Production Mechatronic Machine Systems Optical Technolgies (JOIN) Personal Health Fraunhofer

39 Structured Processes Help to Identify Future Topics Perspectives for Future Markets Analysis of Foresightstudies Fraunhofer Future Topics Global Megatrends 1. Survey: Fh-executives 170 themes Markets of Tomorrow Grand societal challenges Technological Problem Solving Workshop with >50 Experts 2. survey: Ranking of themes Expert interviews: 25 Focus-themes Mapping with Fhcompetencies Fraunhoferinternal call 50 Technologytrends Perspectives Future Topics Future Markets Fraunhofer

40 Challenges The Markets Beyond Tomorrow Health and nutrition Affordable healthcare Safety and security Disaster prediction and management Mobility and transportation Low-emission, reliable mobility in urban areas Images Fraunhofer Information and communication Energy and living Low-loss generation, distribution and use of electricity Production and environment Life-cycle production Fraunhofer

41 Fraunhofer Cooperation with Industry Joint research within public funding programs (e.g. EU, BMBF) Direct contract research Fraunhofer spin outs (e.g. Concentrix) Technology licensing (e.g. MP3) Fraunhofer

42 KPI»Fraunhofer institutes networks«- 1st level - network along related subject areas: 7 Fraunhofer Groups ICT institute institute institute institute institute Life Sciences Microelectronics Light & Surfaces Production Materials and Components Defense and Security Fraunhofer

43 KPI»Fraunhofer institutes networks«- 2nd level - network along interdisciplinary fields of research: 19 Fraunhofer Alliances ICT Life Sciences Microelectronics Light & Surfaces Production Materials and Components Defense and Security Building... Energy... Vision etc. Fraunhofer

44 Cooperation with Universities Institutional integration by dual appointment: Fraunhofer Institute director = University professor (chair) Fraunhofer Institute access to basic research recruitment of junior scientists recruitment of students (interns, undergraduates) opportunities for employees to gain scientific qualification (doctorate, professorship, contributing to the university s curriculum) University Chair cooperation in industry-oriented projects; opportunities for interns, under-graduates and graduates to gain practical experience integration of practical applications into the curriculum access to cost-intensive equipment Fraunhofer

45 Fourth place for Fraunhofer in the ranking of employers Universum Survey of Students 2011 first place second place third place fourth place Quelle: Universum Communications, Stand Mai 2011 fifth place Fraunhofer

46 Internationalization along Fraunhofer-internal networks Leveraging the networks International Cooperation with the best National Networks Scientific excellence in specific knowledge domains Time Fraunhofer

47 Fraunhofer is a competitive player in the European Framework Programme Fraunhofer is the most successful participant in European Framework Programmes within Germany Fraunhofer ranks 2nd in Europe behind CNRS from France In 2011 Fraunhofer won >70 Mio. of funding from Brussels Germany Europe Source: published in 2011; Ranking criteria: Funding & Projects, Diversity, Networking Fraunhofer

48 Fraunhofer Worldwide Gothenburg San José London, ON East Lansing Plymouth Boston Cambridg Newark e Maryland Brussel Wrocław s Paris Vienna Budapest Bolzano Graz Porto Thessaloniki Cairo Dubai Beijing Seoul Tokyo Bangalore Selangor Singapore Jakarta Santiago de Chile Sydney Subsidiary Representative Office Center Senior Advisor Project Center / Strategic Cooperation Fraunhofer

49 Fraunhofer in a Nutshell professional R&D services to industry demand driven research combined with scientific excellence strong integration with academia autonomy of institutes combined with simple corporate rules and strong brand Fraunhofer

50 Fraunhofer Working for the future.