Innovate to accumulate

Many innovative and successful companies are discovering how to co-create new value with consumers, suppliers and customers. Yet there are fundamental differences in culture, skills and the approach to intellectual property when innovating with others.

Open innovation was first written about in 2003 by Henry Chesbrough, a professor at the Haas School of Business, and defined as: ‘A paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.’ In practical terms, this means innovating in partnership with those outside your company by sharing the risks and sharing the rewards.

WHY SHARE RISKS AND REWARDS?

Innovation is a long-odds game and typically fewer than one in 100 new technologies or ideas that are invested ever make any significant money back. Innovation is also an expensive process. It can account for up to 15% of a firm’s turnover. This expense, and the odds against success, are the reasons why sharing risk is a good idea. You can shorten the odds by adopting a part-developed product or releasing intellectual property for others to develop. Your collaborators will often be funding product development, saving you money, time, or both.

While sharing risk is self-evidently a good thing, many firms are more reluctant to share the rewards of successful innovation. Those that do are persuaded for two main reasons.

First, the offer of a prize, business contract or other reward will get them better-quality ideas from more experienced contributors. Open innovation is often deployed for hard-to-crack problems where opening up a brief will provide fresh insight and input.

Second, innovative outsiders usually have lots of other good ideas that could be traded in the future, so it’s best to develop and keep a network of potential contributors that can respond to future challenges. Sharing rewards makes this more likely to happen by showing commitment to the process and creating a business-like framework. The possible different business models are examined below – there are many ways for both parties to make money within various ownership structures.

‘Open innovation’ is making the transition from being the latest business concept to the mainstream of business practice. David Simoes-Brown describes how it promises to provide a short-cut to growth, offering a cost-effective method of sourcing new products and services.

 HOW DOES OPEN INNOVATION ACCELRATE GROWTH?

It is axiomatic that innovation drives growth. Apple, Twitter and Facebook are Fast Company’s top three innovative companies of 2011 and are each performing strongly. For those organisations with more traditional and entrenched business models, innovation is tough, slow and expensive.

Firms spend billions of pounds on innovation – between 7% and 8% of turnover in traditional industries and 12% to 15% in high-tech sectors. But this tends to be seen as a cost not an investment. A sobering fact from a 2007 Boston Consulting Group (BCG) survey shows that most companies measure their innovativeness simply by recording expenditure and that only 37% of company executives are satisfied with this approach.

It is pretty crude in comparison to the sophisticated way in which marketers prove and measure the value they create. Compared with investment in capital, overheads or marketing communications, innovation can seem more like an act of faith than a business process. In this context, open innovation has three clear benefits.

Open innovation makes three promises to large firms. Done well, it will bring them better innovations and it will often do this quicker than using the usual internal stage-gate process and at lower cost than funding it with in-house R&D.

Apart from improving the efficiency of the innovation process as described above, open innovation can also free up growth by allowing companies greater flexibility in the way they cooperate with outsiders. Open innovation allows a whole range of mutually advantageous business models that encompass many working arrangements and new opportunities to make money. These broaden from traditional closed innovation via in-house R&D through short-term cooperative models to longer-term collaborations and ultimately more intimate relationships based on co-creation.

One tends to think of innovation as starting at the beginning, with an invention or ‘eureka!’ moment. To make open innovation a success it is critical that we think in reverse and start at the end. Nowhere is this more important than in clearly understanding the new business relationships for which we are aiming.

Open innovation is more successful if everyone who participates can appreciate upfront who will make money and if they have a clear idea of who will share what risks. Communicating what sort of collaborative business model you want is crucial to getting more realistic and serious proposals, and it positions your firm as open and committed.

 HOW DOES OPEN INNOVATION WORK IN PRACTICE?

Open innovation can either be competitive or more collaborative in nature. The competitions start with a firm publishing a challenge, need or brief to the outside world. It sets out to ‘discover’ existing new ideas or technologies. Collaborations start by establishing relationships with relevant networks and then co-creating new ideas to a wider and less proscriptive brief. These ideas are produced and developed in Jam workshop sessions, which are day-long workshops that correspond to the phases of innovation: explore, extract, exploit.

The Orange Services Call and Reward (OSCR) project is an example of a discover process and V-Jam is a representative of the Jam style. Interestingly the different processes tend to lead to different business models with discover projects leading to collaborations that are more transactional and Jams leading to co-creations, joint ventures and deliver partnerships.

In addition to the type of engagement, there is another degree of freedom for open innovation programmes. Open innovation is generally thought of as taking place between a large organisation and smaller suppliers or entrepreneurs. However, there are increasing examples that involve a firm’s consumers or, at the other end of the scale, other large firms as partners.

 INSIDE OUT AND IN

Chesbrough changed the concept of the innovation funnel – which is a visual metaphor that illustrates a filtering process in which many ideas are narrowed down to a few that make it to market. He showed that technology could come from external partners at any stage of the process (outside in). Or, ideas can exit the firm to third parties before they are full developed or launched (inside out). The graphic above that depicts the innovation funnel, opened out and made porous.

There is a one final observation about the process of open innovation that is key and illustrated by turning the funnel around 180 degrees. In this state it represents a loud hailer or megaphone. One of the most overlooked aspects of open innovation is communication.

Clear communication of innovation needs directed at relevant communities can avoid the twin evils of too few or too many ideas being submitted. Firms can avoid a ‘build it and they will come’ mentality if they actively reach out and recruit relevant networks.

They can avoid being swamped by irrelevant ideas when they proactively issue challenges rather than try to make sense of large numbers of unsolicited approaches.

STEPS FOR SUCCESS

These guidelines are some lessons learned from live projects and illustrate some of the important cultural principles behind successful open innovation.

1 Trust the community to do the heavy lifting. The customer co-creation programme with E.ON was almost a victim of its own success with hundreds of ideas being submitted into an already crowded pipeline. The technique was to enable members of the community to filter and develop the ideas and trust them to prioritise and vote for the best. In this way the cream rises to the top and the need for expensive and time-consuming concept testing is reduced.

2 Find your top 1%. The Virgin Atlantic project (see panel, left) deliberately targeted lead users. In innovation communities and online crowds it is becoming clear that for every 100 members there is one active and creative contributor, nine who comment and build and 90 ‘lurkers’ who mainly observe. The frequent flyers that made this initiative so successful were both knowledgeable and motivated to help, and they enjoyed the process.

3 Ask interesting questions. Open questions have to be interesting to your audience both for its intellect and its business. Less obviously they need to be interesting to your company too. One of the main points for open innovation is making an external technology or product land successfully within the business. This is easier if the business is a) expecting it and b) it addresses a strategic challenge rather than a nice-to-have. Challenges that you issue to the outside world must also be in language it understands. The OSCR project is a case in point (see panel ‘Orange’, left). The process really took off when we changed the question ‘Can you work with Orange to deliver service innovations to grow its audience?’ to ‘Help us find the new Orange Wednesdays’.

 4 Communicate ambitious targets. Set clear and significant financial targets, within the framework of a clear timing plan, to act as a motivating statement of intent. P&G’s quest for $100m opportunities showed that it had faith in the process and was serious in its ambition. This level of clarity also identifies weaker and smaller submissions, making the process more efficient in terms of time spent on it.

5 Develop your peripheral vision. Part of the rationale for open innovation is for large and inflexible organisations to react quicker to the fast-changing world in which we live. A firm’s next big competitive threat is as likely to come from a precocious start-up in an adjacent sector appearing from leftfield. Use of open innovation, and especially engaging with wide and disparate networks, can help develop the peripheral vision needed not only to avoid a threat but to embrace a new opportunity to collaborate. No one predicted that NATS would find value in McLaren technology (see panel ‘Partnerships’, right). Creating a climate of managed serendipity among a disparate network helped discover the potential value that was there all along.

 WHOSE RESPONSIBILTY IS OPEN INNOVATION ANYWAY?

Many sales and marketing directors will see product innovation as someone else’s job. However, as Bill Joy, founder of Sun Microsystems, says: ‘Not all the smart people work for you.’ How can a company tap into great ideas or great people wherever they may be – internal or external – and whose responsibility is it to engage them and innovate with them? It is becoming apparent that the responsibility is shifting rapidly as innovation opens its doors to the outside world.

The advent of social networks (in addition to intranet/email) allows firms to link up and harness the creative potential of all employees, no matter in which department they work.

Innovation is increasingly being seen as a contact sport. Companies such as Oracle, Siemens and Orange are implementing innovation platform technologies that harness the potential and perspective of their colleagues.

A new vision for an innovative company structure is being hammered out. Innovativeness seldom results from a top-down strategic initiative. It resides in how people behave and communicate. While leadership from design, R&D or innovation departments is important, the best results come from obtaining buy-in and engagement from right across the business, from HR and customer service to marketing communications, supply chain and mergers and acquisitions. Today, innovation is more networked than ever and the responsibility for it must be more distributed too.

This includes marketers, who have a vital role to play in the way an organisation innovates, from tapping into insights from customers to creating two-way relationships with consumers who have so much more to give than their cash.

David Simoes-Brown is strategy partner and co-founder of 100%Open. Email [email protected] or visit www.100open.com

The innovation funnel illustrates a filtering process in which many ideas are narrowed down to a few that make it to market