Open Innovation for Small Companies

By: Jeffrey Baumgartner

Open innovation may seem to be the preserve of big business. After all, it is often associated with long established monstrosities like Proctor and Gamble and IBM. But it is an approach that can be used by all companies, especially start-ups and small businesses, explains Jeffrey Baumgartner.

Open innovation may seem to be the preserve of big business. After all, it is often associated with long established monstrosities like Proctor and Gamble and IBM. But it is an approach that can be used by all companies, especially start-ups and small businesses. After all, when a business comprises just the owner-operator or a handful of partners or employees, it lacks diversity of mind. Yet, diversity feeds creativity and innovation.

As you doubtless know, open innovation is the action of involving in your innovation process people from outside your company. It may be as simple as inviting a trusted supplier to help you develop ideas or as elaborate as launching a web site to collect innovative proposals from the public. For the most part, however, open innovation focuses on the fuzzy front end of innovation: that is idea generation and development.

Initial considerations

Before you get started on your open innovation actions, you need to consider a number of issues that will help you determine the best approach as well as prevent you from making disastrous mistakes.

How much are you willing to share?

Open innovation means sharing information that most senior managers prefer to keep secret. It may mean sharing confidential information about how your product is manufactured, it may mean letting people know your marketing strategy for the near future, it may reveal certain problems or weaknesses about your company. That can be hard to do.

By the same token, if you invite the public to share ideas on an open platform, your competitors can also read those ideas and act upon them!

So, one of the first decisions you have to make is how much and what information you are willing to share with whom. You need not share everything with everyone. You may simply decide to involve your suppliers more directly with your product conception and design process. That would make them privy to confidential information, but your lawyer can draw up non-disclosure agreements that would ensure anything you share remains secret. In any event, most suppliers are aware that giving away their customers’ trade secrets is a sure route to a destroyed reputation.

Intellectual property

Before you even hint to an outsider that you want to involve her in your innovation process, you need to consider intellectual property issues. If an outsider suggests an idea to you, that does not make it yours. Indeed, you could develop such an idea into a highly successful product only to be sued inside out by the idea contributor if she can prove ownership of the idea – such as a patent.

The easiest solution is to have a legal expert draw up a disclaimer that grants your company all rights to any ideas generated in any open innovation initiative that you launch and have participants sign the agreement before getting their ideas. If you are capturing ideas from the public via an on-line tool, this disclaimer is normally an on-line agreement the user accepts by clicking a clearly labelled button acknowledging that acceptance.

Disclaimers are used by nearly every organisation running an open innovation innitiative. The downside to them is that some people may be reluctant to share their incredible ideas with you only to let you profit from them. So your initiative will need some kind of reward system. But we will get back to that in a moment.

You may also run into the scenario that a patented concept is shared with you. In this case, the patent owner is almost certainly not going to grant you free rights to exploit her idea – that’s why she patented it. In such a scenario, you will have to license from her the right to use the idea.

Incidentally, intellectual property is not normally an issue with internal innovation. The employment contracts you have with your employees should make it clear than anything developed on company time is company property. If this is not the case, or you have no employment contract, you need to do something about this immediately!

Rewards

Your customers, of course, will always be happy to share with you ideas about how to make your product better – at least in their minds – and will generally share those ideas with no expectation of reward, beyond a better product. But such ideas are inevitably incremental improvements on existing products and not breakthrough innovations that will propel your company into the international limelight and make you and your shareholders filthy rich. For the latter sort of ideas, you need to offer some kind of compensation or reward for ideas and their development.

The kind of rewards you offer depend on the open innovation initiative you intend to launch and who will be participating. Rewards may be favoured supplier status or exclusivity deals with suppliers who contribute ideas that you decide to implement. For instance, a well known pharmaceutical company runs open innovation initiatives with suppliers. Those suppliers whose ideas are implemented are required to share ideas with other suppliers, but they get favoured status status enabling them to do more business with the pharmaceutical company.

When working with the public or customers, however, rewards will usually need to be money or products. For instance, if you run a competition, you will normally need to offer a cash prize for the idea or ideas implemented. Alternatively, if you invite outsiders to participate in a day long brainstorming event, you will probably be expected to pay them for their time. Such payment could be in cash or it could be in kind: such as products your company makes.

Actions

There are number of open innovation actions you can launch. These can invite all the world and their grandmothers to participate or can focus on a select group or can be restricted to people whom you invite. Each action has its advantages and disadvantages.

Suggestion websites

One of the most visible open innovation actions these days are suggestion web sites that invite customers and the general public to submit ideas on how to improve a company’s products and services. No rewards are offered and some of these site boast 1,000s and 10,000s of ideas. This may seem awfully seductive: you just make a web site and wait for your customers to submit gazillions of ideas.

Open suggestion web sites are an administrative disaster!

Don’t. Open suggestion web sites are an administrative disaster! They give no direction on the kinds of ideas wanted.. They simply ask for ideas. As a result, very few of the ideas received are in any way relevant to your business. Worse, you will see many idea submissions repeated again and again – after all, who is going to review 10,000 ideas to see if someone else has submitted the same suggestion? And a lot of ideas will actually be complaints about your products. But those are not the real problem with suggestion web sites.

The real problem is the 1,000 or 5,000 or 10,000 ideas. Stop and think how long it would take you and your team to read all of those ideas and determine which are worth taking further? In my experience it will take 5-10 minutes per idea on average. So even 1000 ideas will take over 80 hours, or two working weeks to review! Can you afford that? Moreover, based on my experience, no more than 2% of the submitted ideas will be actionable – and they will be incremental product and service improvements unlikely to have more than a trivial effect on your bottom line.

Public competitions

A better alternative to simply asking the public for ideas is asking the public for specific solutions to problems. This concept has been around for ages, but was recently made famous by the Ansari X Prize which offered a reward of US10 million to the first non-government team to launch a manned spacecraft into space twice within two weeks. The prize was eventually won by a team led by Burt Rutan who not only won the prize, but was also bombarded with investment offers and business proposals.

Since then, companies such as Hypios and Innocentive have launched similar initiatives on a smaller level. Companies and non-profits can post on the their web sites challenges together with prizes which typically range from US$5,000 to US$1,000,000. Problem solvers, either as individuals or teams, can submit solutions. The submitters of the selected solution win the prize. Many of the challenges on these sites are highly technical or scientific in nature and require a detailed solution. But all kinds of problems can be posted. A small handful of similar sites are also doing business. If you need innovative technical ideas to solve problems, one of these sites might be a suitable place to solicit ideas.

Of course you could also launch an innovation challenge on your own company web site and promote it through local media. However, the advantage to using a well known, international site, that specialises in promoting challenges, is that you have access to an international collection of expert problem solvers. The downside can be that substantial rewards will be expected.

Another approach, which can be effective for technical and scientific innovation, is to partner with a local university and invite students to submit solutions. This would have the benefit of tapping into the creative expertise of young people as well as the possibility of identifying potential future employees. At the same time, you give university students the opportunity to work on real-world problems and get real-world feedback on their suggestions.

Private brainstorms

The alternative to inviting the public to suggest ideas is to invite a very select group of people to suggest ideas as well as begin developing them. This is something my company has done to great success on a number of occasions. As an example, a company which makes heavy duty construction equipment was looking for a way to simplify the design of a complex component. Doing so would reduce their manufacturing costs as well as increase the reliability of the component – and hence their equipment. They invited employees from one of their suppliers as well as their own employees to submit and collaborate on-line using an innovation process management software (Jenni). Within a couple of weeks, they had a handful of great ideas, several of which were combined in order to substantially reduce the complexity of the component. They will save a lot of money thanks to the ideas.

On another occasion, a European non-profit, working with cultural heritage sites, wanted to explore how such sites could generate additional value to visitors by using new technologies. Representatives of museums, tourist attractions and historical sites went to Brussels for a day of brainstorming. People were put into smaller, diverse groups and given exercises based around specific creative challenges. A number of intriguing ideas were generated and have since been implemented across Europe.

In scenarios such as these, the external participants have a stake in finding and developing innovative solutions, so no additional reward is necessary. However, you may also wish to bring together people who have no stake in the solution, but who have expertise you would like to tap into. In such instances, you may have to provide a fee for their time. Although this adds to the cost, it does permit you to bring greater diversity to the problem solving table – and that can lead to a high level of creativity in the idea generation.

Quick and dirty open innovation

In addition to the structured approaches we’ve looked at already, there are a number of quick and dirty solutions you can use in order to tap into the creativity of others. For example, I use Facebook primarily as a means of keeping in touch with friends, sharing jokes and seeing which on-time classmates look older and fatter than me! Aside from occasionally promoting my book, Facebook is a non-business space as far as I am concerned. As a result, it can be a great place to post questions to a diverse range of people who are often willing to give feedback.

LinkedIn, the professional networking site, has special interest groups and forums for asking questions – which can provide places for requesting ideas and getting suggestions. However, your competitors are probably hanging out on LinkedIn as well. So you need to think about what you share there.

In addition, there are numerous bulletin boards and specialised networking web sites where you can post questions and get solutions. Again, others in your line of business may hang out in such places, so the ideas you get will not be secret. Nevertheless, you can get some great ideas and feedback from people in these groups. Moreover, a business which would be a competitor in Johannesburg is a potential resource for information and ideas if they are based in New York (assuming you both focus on local markets, of course).

Be careful about what you ask customers

Asking customers what they want will generally lead to product improvement ideas.

Henry Ford once said that if he had asked his customers what they wanted, they would have said faster horses. There is great truth in this. Asking customers what they want will generally lead to product improvement ideas. But it seldom, if ever, leads to breakthrough innovation. Indeed, if a customer has an incredible yet viable idea that is a radical improvement on your product, she is more likely to launch a business making and marketing her improved product than to share her idea with you. In other words, she is your future competitor!

Nevertheless, you are in the business of pleasing your customers better than your competitors are capable of doing. So it is important to communicate with those customers and potential customers in order to ask them questions. But your questions should be more focused on gathering insights that you can use to develop radical new products and services.

Great questions to ask include:

“What do you use our product for?” You may find that some customers are using your product in ways you never intended. Once you know this, you can look at ways to make the product more suited to this alternative use. More importantly, you may discover a whole new way to market your product? You might go one step further and ask “What unusual or unexpected things do you do with our product?”

“What do you wish to achieve when you use our product?” Clearly Henry Ford’s customers wanted personal transport that would get them to their destinations faster.

“What are you unable to do with our product?” This again may identify that people wish to use your product in ways other than you intended. Find out what those ways are and identify how you can change the situation.

“What else do you do when you use our product or service?” This may identify additional opportunities to sell products to your existing customers.

In addition to asking questions, it is useful to visit places, where customers use your product, and observe. How do they use your product? What else are they doing? What other products are in this environment? What seems to cause difficulties?

You can also run brainstorming sessions in environments where customers use your products. Invite in a few customers and suppliers and get to work. Actually putting yourself into your customers’ shoes while brainstorming is great for insight and inspiration.

Putting it all together

Open innovation is an approach every company, from the one-man-band to the world’s biggest multinationals, can use. It has the advantages of bringing new perspectives, insights and inspiration to your idea generation and development process. Nevertheless, you need to consider how much internal information you wish to share with whom and ensure that you retain – or can license – the intellectual property to ideas that you receive. You also need to design initiatives that generate relevant ideas that meet your business needs.

By Jeffrey Baumgartner