Open Innovation Thoughts

A feature I wrote for The Financial Times, 11/17,10, taking the pulse of Open Innovation

Open innovation is one of those terms that is harder to explain the more you try. At first, it seems obvious: the phrase suggests the antithesis of buttoned-up research and development units or the “not invented here” mentality of big corporations.

It resonates with the barrierless world of internet-based communication and information sharing. For some, it im plies Wikipedia and Linux, the open-source software platform, vast bodies of knowledge assembled by armies of distributed innovators and creators – all driven by their own particular set of incentives.

Henry Chesbrough, the Haas Business School professor who coined the term in 2003, is more specific. He says open innovation is a process that starts with looking outside the organisation as you think about things to do inside. It is about “using other people’s wheels” to get you moving. Or, to quote Bill Joy, co-founder of Sun Microsystems, it is a way of dealing with the fact that “not all the smart people in the world work for you”.

Seven years after he came up with the idea, Prof Chesbrough says open innovation has gone through three significant phases. The first was the simplest, and involved bringing external ideas into a company’s own innovation process. This has become fairly widespread. Examples include Apple’s App Store, which allows developers to work on the iPhone and iPad platforms and thereby increase their value to users.

Last year, Netflix of fered $1m to anyone who could im prove the quality of its film recommendations to users. The X Prize Foundation is running similar contests to stimulate advances in genomics, private space travel and alternative energy. Both contests try to draw the best minds in the world to problems they might otherwise ignore.

During the past decade, Procter & Gamble has involved and acquired innovative products and processes from outside the company. It boasts that it has moved from “not invented here” defensiveness to an enthusiasm for “proudly found elsewhere”.

The most glaring challenge to the open innovation model has been the development of Boeing’s Dreamliner 787 passenger aircraft. To cut costs, Boeing syndicated much of the design to outside companies, whose R&D spending would be recoup ed as they became subcontractors to Boeing.

Unfortunately, Prof Chesbrough says, “there were a lot of technical risks in the plane. When they put it all together, the plane didn’t fly. It wasn’t just a matter of control but of complexity.” Trying to be too open with such a complex project led to unforeseen integration problems.

The second phase in open innovation involved companies making their unused ideas and technologies available to others. John Willbanks, who runs the Science Commons project at Creative Commons, a non-profit group that aims to make it easier to share and build on other people’s work, consistent with copyright laws, says: “In traditional innovation systems, big university departments or industrial R&D units generate research, then there is a systematic process to assess what to do with it.”

But what happens in the majority of cases where the research fails to lead to commercialisation or even publication?

“Big companies have so many worthwhile products that don’t go forward because they don’t move the needle financially,” he says. And moving these products out to a broader audience often seems more effort than it is worth as it involves lawyers, confidentiality and even the unpicking of patent law.

Sage Bionetworks, a Seattle-based non-profit outfit, was spun out of Merck to try to do just this. Merck had spent years and hundreds of millions of dollars running data-driven models on disease and drug responses. When it realised no single company could either generate or make sense of all the data, it created Sage to take advantage of the best of open innovation.

Sage in vited groups of biologists to share its data in order to speed up the discovery process and produce more accurate forecasts. Companies can commission research from Sage but on condition that the results of that research go into the public domain after a year.

The idea is that you take an area as rule-bound and difficult as pharmaceuticals research and speed it up by allowing people to share their research in the hope of one day maximising its financial and social return.

Nike is pursuing a similar strategy with GreenXChange, which shares some of its technological innovations with others who might find uses for it. If Nike comes up with a marvellous new rubber for shoes, for example, it wants them to use it to make other life-enhancing products, without the usual contractual and IP hurdles.

Hannah Jones, vice-president of sustainable innovation at Nike, says open innovation makes sense for the company as it tries to “solve complex issues that go way beyond our footprint”.

Ten years ago, Nike found that some solvents used in making its shoes were toxic enough to require factory workers to wear protective gear. But not all did. To guarantee their safety, Nike could either in crease monitoring or make a harmless solvent. It did the latter and shared the recipe for the new solvent across its industry. “We’ve found there is a huge benefit to collaboration around clear, systemic issues,” she says. “We can compete in different ways. There has been a shift in the architecture of where we compete and where we collaborate.”

Ms Jones admits that managing open innovation remains a work in pro gress, a balancing act between the rigour required in any big corporation and the looseness inherent in open innovation.

How do you ignite mash-ups and swarms around particular problems, and then make sense of the results? How do you decide where to invest when innovations are popping up everywhere?

“All this is nascent,” says Ms Jones. “We shall embrace the failures and experiment wholeheartedly.”

Gerald Barnett, director of the research technology enterprise initiative at the University of Washington, says managing open innovation is like “the Zen thing of holding fast or letting go. It is easy to hold on with white knuckles to your own process, and it’s also easy to just chuck it all over the fence to see what others can do with your work. But it’s in between that you have to use your judgment, and find out how you build a community of practitioners that finds value in what you have done and will give back.”

Nike, he says, is “putting in play inventions it doesn’t have to”, in the hope that people can improve on them and that, one day, the company may reap some benefit, tangible or intangible. This, he adds, is exactly the right attitude.

The final phase in open innovation, according to Prof Chesbrough, is new business models arising from opening up the process. He cites Bharti Airtel, the Indian mobile operator, which rather than building its own network of communication towers, shares those of its rivals. This model allowed it to build a bigger network with lower fixed-cost investment.

Threadless is an American T-shirt company that invites people to design their own shirts and allows visitors to its website to vote on their favourites, which are then made and sold. Prof Chesbrough says investors have put a $100m valuation on the business. This model of customer communities driving a business is an example of what happens to business models when you open up innovation.

Imagine the kinds of business that would emerge, says Mr Willbanks, if everyone had access to accurate data on biotech research around the world – or, say, energy consumption? If we could gather all the data on just the loss of energy in transmission lines, then make it freely available, hundreds of small service companies could enter the market providing energy-efficient solutions. It would create thousands of jobs and transform an industry.

It is at this point that open innovation will become a truly revolutionary force.


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