How important is physical collocation to product development success?

How important is physical collocation to product development success?

Farshad Rafii

Researchers, consultants and corporate executives alike have long agreed: Collocation is one of the critical factors in the successful management of new product development. Tom Allen’s 1977 seminal study of communication patterns in R&D labs inaugurated a now universal view that physical proximity is beneficial to the outcome of development projects. As challenges by agile global competitors have intensified the pressure to improve the speed and efficiency of the product development process, the importance of collocation has received renewed attention.

However, recent experiences in successful product development by globally distributed teams suggest that the value of collocation may be greatly exaggerated, possibly leading practitioners to overlook other underlying factors that are more critical to project success. Examples of successful geographically dispersed development projects abound. One of the most successful disk-drive development projects in Digital Equipment Corporation’s history, the highly sophisticated RA-90, involved the participation of groups located in seven different sites in Massachusetts, Colorado, Arizona, Germany, and the Far East. Logitech, the highly successful supplier of the ubiquitous personal computer mouse, is headquartered in Switzerland, but its engineering arm is in the Silicon Valley and its manufacturing operations are in the Far East.

This article argues that collocation is increasingly becoming less feasible. Its purported benefits often do not materialize, and other less costly communication mechanisms and managerial processes can provide adequate coordination and integration when the development partners are geographically dispersed.

The managerial implications of these experiences are twofold. First, project managers should seriously consider alternative means of communication and integration before going through the expense and trouble of collocating project team members. Second, if any subset of project team members is already collocated, project managers should not take for granted that appropriate levels of communication and coordination will indeed take place. Even in a collocated environment it is necessary to promote norms of behavior and managerial processes that facilitate and encourage cross-functional integration.


Although a commonly used definition of collocation does not exist, it can be defined simply as the physical proximity of the various individuals, teams, functional areas, and organizational subunits involved in the development of a particular product or process. For the purposes of this article, “physical proximity” is defined further to mean “within walking distance”–next door, next floor, or nearby buildings. Collocation can be temporary, limited to the duration of a particular project with the subsequent return of participants to their original home. Alternatively, entire functional or organizational units such as marketing, engineering, manufacturing, or customer service may be collocated more permanently. Ideas presented here apply to either form. It is also important to point out that project participants can be, and increasingly are, from external organizations such as joint venture partners, suppliers, and even customers. This will be further discussed at a later point.


Tom Allen’s study documented the increased frequency of informal contact among team members whose work spaces were located close together. The benefits of collocation in product development derive from the conviction that this increased interaction and the ease of informal communication will reduce project completion time, improve the efficiency of resource use, and optimize ultimate design trade-offs.

Project speed is presumably enhanced by shorter communication lines and quick feedback cycles. Furthermore, close proximity may lead to greater team cohesion, reducing the chances of wasteful conflicts and enabling the more rapid identification and resolution of those conflicts that do arise. Collocating engineering, design, and manufacturing also enhances the ability of management to promote the concurrent development of products and production processes, thus leading to a reduction in the number of disruptive engineering change orders (ECOs) and ultimately reducing the overall development cycle time.

For the same reasons, collocation may also conserve project resources, especially manpower. Furthermore, the job of the project manager could be greatly simplified. According to Stalk and Hout (1990), the program manager for a project that is geographically distributed even over a few buildings might put in an average of two to 11 miles of walking per week, amounting to as much as 25 percent of his or her time. The manager might spend another 25 percent in coordinating meetings, most of which were probably necessitated because of the inability of team members to coordinate their activities informally. Resource efficiency presumably would also be enhanced because support functions such as quality control, drafting, model shops, and pilot shops could be pooled and shared by multiple projects.

The familiarity and trust collocation may engender can facilitate handling complex design trade-off decisions that invariably arise from the normal biases of functional areas toward their own domains. Engineering’s concerns for an elegant solution could better and more quickly be balanced with marketing’s focus on serving the customer’s immediate needs, manufacturing’s predilection over issues of manufacturability and production efficiency, customer service’s concerns over reliability and serviceability, and so on.


Despite the real and purported benefits of collocation, its impact on achieving cross-functional integration is limited. Prominent trends such as globalization of R&D, rising complexity of products, and reliance on outsourcing and alliances increase the cost of collocation and reduce its feasibility. Even when project partners are already collocated or can be relocated at a reasonable cost and with minimum disruption, many of the presumed benefits of collocation often are not realized. Moreover, improvement in the technology and sophistication of electronic communications and the increasing facility of people to use electronic systems enables the achievement of some of the attributes of collocation, promoting the creation of a “virtually collocated” environment.

Collocation Is Often Not Feasible

Globalization of the development process is an outgrowth of the spread of transnational enterprises. Companies seek to gain competitive advantage by leveraging the inputs of centers of technological excellence that are developing in far-flung areas around the globe and by customizing “global products” for local markets. Both factors argue against having centralized, collocated product development. For example, proximity to the Silicon Valley may be indispensable to anyone wishing to compete in the semiconductor industry, yet a product developed there might benefit tremendously from the input from centers of excellence located elsewhere. Industrial design could be located perhaps in Italy, and concurrent input could be needed from process engineers located in the company’s low-cost plant in, say, Singapore, where the product will eventually be manufactured.

Clearly, marketing and customer service input regarding diverse national or regional needs is essential to the development of a successful product line. The emergence of standardized “global brands” does not reduce the importance of soliciting input into the product design from key overseas markets. Widespread shortening of product life cycles is also putting a premium on the simultaneous launch and ramp-up of new products in multiple markets, further proliferating the number of entities involved. Clearly, collocation of all these parties would be difficult.

Increasing reliance on component suppliers and technology alliances to participate in the development process further diminishes the feasibility of collocation. The benefits of strong relationships with component suppliers have gained prominence in recent years as companies have realized the competitive value of focusing internally on those core competencies necessary for the design of a limited number of proprietary components. The growing importance of technology alliances has also been fueled by the mounting complexity and capital requirements of many high-tech products, leaving their development outside the reach of a single company. For example, Quantum Corporation has prospered by conceiving the idea of a “hard-disk-on-a-card” for personal computers. It has focused on a few critical components while leaving the design and manufacture of other components to its suppliers and the development of the sophisticated manufacturing process for assembling the final product to a unit of Matsushita.

Suppliers of key components and development allies have, of course, always been involved in the development process to some extent. The growing reliance on them, however, has been accompanied by widespread calls for greater integration of these entities into the development process in recognition of the tremendous gains to be gleaned from “concurrent engineering” (Port et al. 1990). Likewise, given the critical importance of potential lead users to the development of certain classes of products, customer involvement in the development process has also been strongly advocated by some researchers, such as Eric von Hippel (1988).

Even when all the entities involved in the development process belong to the same company, the growing complexity and sophistication of many products would rule out the physical proximity of the many engineering and design subgroups whose inputs must be effectively integrated into a complete system. The original Tom Allen study showed that an increase to a mere 10 meters between parties caused a 70 percent reduction in the probability of informal contact among R&D personnel. The number of people working on large projects makes effective collocation an impossibility. Many computer hardware and software systems fall into this category. As such, integration between teams may be even more important than integration within teams.

Collocation may be infeasible because of the strictures of local content laws, which are gaining increasing popularity as a tool to deal with global trade disputes. Once confined mostly to manufacturing value added and practiced by less-developed countries to promote the development of their national skill base, local content requirements have recently been enacted by the European Community as part of its plans to create an integrated market. This code has forced many U.S. and Japanese transnational corporations to relocate into Europe parts of the development process that had previously been centralized. Especially in many high-tech industries, where manufacturing value added is very limited, local engineering activities become necessary to satisfy these requirements.

Expected Gains May Be Illusory

Although close physical proximity of project partners does make sense and is easy to achieve, one must guard against the seductive conclusion that collocation will enable the contact, interaction, and close communication that contribute to project success. For several reasons, many of the presumed benefits of collocation are in reality often not gained. First, even Tom Allen’s data on the probability of interaction as a function of physical distance show a very steep dropoff over very short distances. This means that beyond a few hundred feet, informal communication drops to such an extent that, for all practical purposes, distance becomes immaterial and parties may as well have been separated by hundreds of miles! Muzyka and Rafii’s extensive observations of two sister software departments in one firm (1991) support this conclusion. Located on different floors of the same building complex over a four-year period, the two departments experienced very little interaction or transfer of learning and process tools.

The walls that separate functional areas and the associated sequential hand-off of new product designs are just as ubiquitous in single-location organizations as in geographically distributed ones. And these cross-functional barriers are not solely the province of the business world. In the great majority of American business schools, a profound gulf separates academic departments, despite often intimate physical proximity. Widespread efforts in progress on many business school campuses to improve cross-functional coordination have to address fundamental differences in outlook, beliefs, and goals. These differences are reinforced by a highly functional organization controlled by strong departmental heads and a performance evaluation system that encourages “stove-piped” behavior.

Unless organizational, attitudinal, and strategic differences between separate functional areas or organizational units are recognized and dealt with, collocation by itself offers minor value. Moreover, in the absence of these contributing factors, collocation can be downright counterproductive. Interviews conducted by this author with several experienced executives highlight several potential risks. One problem involves equating frequent informal contact with transfer of value-adding information. Unless well-planned and reasonably structured, such contact can simply be time-consuming and distracting, as Hauptman (1990) has shown in a study of the software development process. Reliance on oral communication may also promote sloppiness in record keeping, which can lead to extremely costly errors–particularly when large numbers of individuals and teams are involved. Some executives warn of the danger of a general erosion in disciplined communication when, confident of easy access to other team members located next door, people are tempted to pass along an incomplete or inadequately debugged design with the attitude that “we can fix it later.”

By collocating project team members away from the rest of the firm, so-called “skunk works” intentionally try to foster the development of attitudes and norms that may be at variance with the rest of the organization. Although there are some noted successes from this practice, such extended collocation also carries with it the risk of developing an insulated and inbred culture that can hamper a team’s ability to reintegrate into the main stream or, more important, to transfer their learning and advances to others in the organization. Again, especially in fast-paced environments, organizational learning must be quickly and efficiently shared across the company. The original team that created Apple’s Macintosh under the inspirational leadership of Steve Jobs, in fact, became so isolated in its own ivory tower that it nearly tore apart the fabric of Apple’s organization. The skunk works’ isolation may also cause it to miss critical information residing in the rest of the organization. This seems to have happened at Lockheed, where the skunk works idea first originated, when the design team for a new generation of planes badly misjudged market requirements and missed Lockheed’s strategic objectives. Judging by perennial product development delays experienced by IBM, one has to conclude that the learnings from the celebrated 1981 Boca Raton skunk works effort that created the IBM PC in nine months did not significantly influence established development processes within the firm.

To the extent that collocating a cross-functional team involves separation from functional disciplines, it also carries with it the risk of slowing down the development of functional skills and competencies, with serious ramifications for long-term projects. As Allen (1986) has pointed out, falling behind the state of the art in fast-moving technologies can be especially costly. Clearly, there is a trade-off between the value of cross-functional integration potentially inherent in collocated teams and the value of keeping up with one’s functional discipline. This trade-off needs to be managed carefully, especially in development projects that rely heavily on leading-edge technologies.


Dealing with the underlying causes of cross-functional disharmony–lack of trust, absence of shared goals, lack of empathy, and ignorance about the concerns of other functional areas–requires more than just putting everyone under the same roof. Although collocation can potentially be a useful ingredient in managing the product development process, the tendency to single it out as the sine qua non of cross-functional integration is both short-sighted and potentially dangerous. At its worst, collocation may represent integration in body but not in spirit, masking these underlying causes and contributing to their persistence. At its best, collocation is but one factor in an array of approaches that can help achieve effective integration.

Ben Shapiro (1987) has produced a useful classification of means by which cross-functional integration may be attained:

* Information technology and electronic communication systems;

* Unified, holistic strategy;

* Organizational structure and management hierarchy;

* Management processes and systems;

* The informal social system;

* Appropriate skills, experiences, and attitudes.

These approaches are evident, explicitly or implicitly, in every organization, and though managers may tend to emphasize the use of some more than others, a balanced mix of all six is essential for achieving cross-functional integration of divisions or departments. Although collocation can facilitate the development and nurturing of one of these approaches—the informal social system–and thus of the experiences and attitudes shaped by that system, it has little bearing on, and cannot replace, the other approaches. Indeed, the opposite may be true: Some of the other means of integration can obviate the need for or benefits of physical proximity. The remainder of this article illustrates how relying on these alternative means of integration will reduce the perceived need for collocation.

Information Technology and Electronic Communication Systems

Probably the biggest impact on reducing the need for physical collocation has been achieved by recent advances in electronic communication technologies: electronic mail, fax, groupware, electronic bulletin boards, computer and video conferencing, CAD/CAM systems, and shared data bases. The success of Digital Equipment Corporation’s RA90 distributed development team was attributed to judicious use of a variety of electronic communication tools (Schweizer 1991). As the sophistication and “ease of use” of these technologies increase and people rapidly become more conversant and comfortable with them, companies can attain “virtual collocation” without moving a single person.

Some of these technologies provide capabilities and advantages that physical collocation does not. For example, shared design data bases that are part of integrated CAD/CAM systems make information about engineering changes available almost instantaneously around the globe. Differences in time zones can also be used to effectively extend the length of the work day. Moreover, virtual collocation will not be confined by the limiting physical geography that renders physical collocation essentially ineffective beyond 10 to 20 meters, or 20 to 30 people. Project teams of hundreds of individuals scattered across the globe will be able to communicate more effectively than if they were housed in the same large office building.

The cost of various electronic communication tools has been dropping steeply. Still, they are not free, and extensive training and experience are often needed prior to their widespread use. So their use needs to be well planned. Communication efficiency should also be improved by better upfront planning for teleconference meetings, including establishment of a clear agenda and meticulous recording and distribution of minutes. Techniques embodied in various TQM, Six Sigma, and QFD (Quality Function Deployment) approaches for managing face-to-face meetings become even more indispensable for meetings across the network.

Unified, Holistic Strategy

Communication of a unified strategy can do much to overcome one of the most insidious causes of cross-functional discord: pursuit of suboptimal functional goals at the expense of satisfying true customer requirements. Collocation of project staff who are pursuing individual functional goals in the absence of a unified strategy would probably create more conflict than it would alleviate. Though top-down communication of a detailed strategy may not be feasible, especially in fast-paced environments, even the articulation of a direction or target can do much to align the attention of far-flung units. Witness the legendary examples of how Komatsu used the rallying cry of “Circle the CAT” to mobilize the entire company in its competitive battle with Caterpillar, and how Honda nearly annihilated Yamaha by identifying it clearly as the enemy.

Persistently focusing attention on what the customer really values can do much to get functional areas to set aside their differences and identify and pursue shared goals. According to Clark and Fujimoto (1990):

What seems important is the diffusion of a shared sense of responsibility and customer orientation down to the working level. Communication is nothing more than the consequences of such a cultural change. Without it, a top-down campaign for better product-process communication may yield only a proliferation of unfocused meetings that deprive engineers of creative time and lower their productivity.

Organizational Structure and Management Hierarchy

Appropriate organizational structures, more than collocation, are critical to fostering cross-functional communication. The right organizational design can knock down the walls between functions, enabling collocation to mobilize, penetrate, and claim the new terrain. The key to designing “integration-friendly” organizations seems to be enabling project members to make decisions and resolve conflicts at an organizational level that is well below chief functional heads. To achieve this, product-based development groups under empowered and skilled project managers are being increasingly pursued in preference to traditional functional organizations. The so-called “heavyweight” project manger, with authority over selection, assignment, and evaluation of team members, can do much to transcend geographical barriers. As Clark and Fujimoto have shown, much of the success of the Japanese automotive firms in reducing the development cycle and resource costs has been facilitated by the project-based structure. Some companies, such as John Deere, have gone as far as consolidating product and process engineering under a single engineering chief.

Management Processes and Systems

Managerial processes and systems can play a major integrative role. Convergence toward shared goals can be encouraged by implementing performance evaluation and reward systems that cut across myopic functional measures. Instead of measuring design engineers purely on the innovativeness of their design, manufacturing people on the manufacturability of the product and efficiency of the production process, and marketing people on the proliferation of features and variety, a unified measure based on customer satisfaction and ultimate success of the product would be more effective. As an example, Hewlett-Packard has had much success with the concept of time-to-profitability as an overall measure of product development success. Such measures can do much to engender cross-functional unison and cooperation, even over long distances.

Another element of the managerial system that can reduce the need for collocation is the presence of a disciplined and structured development process. While such a process risks becoming overly bureaucratic, a widely shared process complete with lists of activities, responsibilities, and milestones can help avoid excessive need for coordination and communication. Contrary to the perception in many high-tech companies, a disciplined process need not hamper or obstruct creativity. By alleviating some of the strain and energy consumed by unnecessary project administration, an appropriate system can allow product development people more time to concentrate on the design project itself. The effectiveness of structured development processes can be enhanced by bringing together key individuals or subteams for an initial face-to-face socializing and planning meeting before the product development project is formally launched. This will engender familiarity and trust and will help clarify assumptions and avoid future conflict.

Appropriate Skills, Experiences and Attitudes

Ultimately, however, the qualities of the people who populate the various functions and organizational units may have the greatest bearing on the success of cross-functional integration. Collocating functional “gurus” who have little respect or understanding for the problems and contributions of other functions will not yield as much effective collaboration as electronically linking two individuals located halfway around the world who have developed such understanding through cross-functional experience or training.

Individual views regarding the importance of collaboration are part of the culture of the organization that can be influenced and shaped by top management. Valuing project management as a worthwhile career goal and identifying and developing effective project managers are indispensable tools to bridging organizational and geographical distances. Communication, problem solving, and conflict resolution are skills that can be developed, and judicious job rotation across functional and organizational boundaries can further encourage goodwill throughout an organization. Rather than relying solely on the achievement of functional excellence, compensation and promotion decisions that incorporate the consideration of these “soft skill” qualities can promote their adoption, practice, and growth. Such investments in people tend to have a longer-lasting influence on the ability of an organization to learn how to achieve sustainable cross-functional integration than funds expended to create collocated workplaces.

The principal point is that all of these elements combined, rather than any single element, will determine how effectively an organization will cut across functional differences. According to Shapiro (1987):

No single aspect or approach to interfunctional coordination is as important as the total system. If top management makes interfunctional coordination a major priority, it can become a part of the strategy, culture, and the tone, and will be supported by the organizational structure, formal management processes and information systems, informal social systems, and the choice of people. All this, however, must be managed continuously.

Because of its contribution to facilitating interpersonal interactions, collocation has acquired an aura as an effective means of achieving cross-functional integration. Overreliance on this approach, however, is suspect for many reasons. As economic competition and corporations become more global, collocation is increasingly infeasible and insufficient. Companies must distribute elements of their product development organizations around the globe to understand and anticipate the needs of diverse global customers and to take advantage of international centers of excellence. An overemphasis on collocation constrains the ability of global organizations to maintain an optimal flow of global information.

The overemphasis can also lead to a diminished perspective on the value of other means for achieving cross-functional integration. If aligned with other management approaches and systems, physical proximity can play an important role in encouraging increased informal contacts, promoting desired social norms, and fostering a spirit of close teamwork. Absent those other facilitating conditions, however, collocation can achieve little by itself and can even exacerbate problematic situations by masking other underlying causes of cross-functional disharmony. Only by recognizing the importance of all the factors that facilitate the achievement of shared goals can companies achieve cross-functional integration on a sustainable basis.


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Farshad Rafii is an associate professor of management at Babson College, Wellesley, Massachusetts.

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