The Basics of Open Innovation

By: Jeffrey Baumgartner

Open innovation is one of the hottest issues in the world of innovation today, but also perhaps the least understood. Jeffrey Baumgartner shares a simple framework for thinking about open innovation, its pros and cons, and how you may be able to utilize it to help spur innovation in your organization.

The term “open innovation” was popularized by Henry Chesbrough in his book Open Innovation: The New Imperative for Creating and Profiting from Technology. He wrote  “Open innovation is 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”

Bearing in mind that the definition of “innovation” is “the implementation of creative ideas in order generate value, usually through reduced operational costs, increased income or both”,  a more accurate term for “open innovation would be:“open idea generation.”  However, the term “open innovation” is in widespread use and there is no way we are going to change that. So we will have to stick with it, as semantically unsettling as it may be!

Wisdom of crowds

The theory behind open innovation is that the sphere of knowledge and experience within the organization is necessarily limited. Worse, it may be further limited by corporate practices and processes. As people become used to working in certain ways and thinking in certain ways at work, they find it increasingly difficult to break out of these moulds and adopt new ways of doing things.

By tapping into external sources, you expand your knowledge base, bring in new ways of thinking and new ways of doing things. It is widely known that diverse teams are more creative than teams in which all people come from similar backgrounds. Clearly, then, adding further diversity to internal  teams can only improve the creativity – and hence the innovation potential of that team and hence the organization.

Some people have taken this notion one step further and claim that the more people involved in generating ideas, the greater the diversity and level of creativity. This, however, is unproven empirically as far as I know. Moreover, bringing huge crowds into an innovation process will have two negative effects that I have seen in practice:

1. The efficiency of any idea collection system is reduced as more people submit more ideas, particularly if the system is a suggestion scheme (see below). Thus managing ideas becomes burdensome. Voting on ideas, incidentally, is not an effective means for evaluating whether or not ideas meet your company’s business criteria. Hence ideas need to be reviewed by an internal team before they can be implemented and this eats into resources if there are thousands of dissimilar ideas to work through.
2. Elements of mob behavior can sometimes be seen. This is shown by people backing certain popular participants of a suggestion scheme, complaining that ideas are not being processed and submitting large numbers of highly similar ideas because this is what the crowd is doing. All of these actions add little value or diversity, but create substantial demands on resources.

Neither of the above effects is conducive to creativity and eventual innovation. The rule to bear in mind is that diversity is beneficial to creativity, massive crowds are not.

Open innovation is actually old hat

In fact, open innovation, as such, is not terribly new. Even when I was a child in the 60s and 70s, many hotels and restaurants had suggestion boxes inviting ideas from customers. Any research scientist in industry will tell you that they have been doing open innovation for years, collaborating, officially and unofficially, with scientists in other industries as well as in universities and research institutes. Indeed, this is a key part of why scientists keep up with journals and attend conferences: to exchange ideas with their associates.

Likewise, the Japanese motor industry in particular has a long history of working closely with suppliers through the entire innovation process – and not just idea generation. Toyota’s famous “just in time” inventory strategy would never have worked if business partners were not intimately involved.

Nevertheless, widespread use of the Internet has made open innovation more popular and more public.

Four approaches to open innovation

There are four popular approaches to open innovation: public suggestion schemes, innovation competitions; outsourcing and publicly funded projects. Two of these approaches are effective. One is not. One can be.

1. Open suggestion schemes

An open suggestion scheme is the application of so-called web 2.0 technologies to those suggestion boxes I used to see in hotels 30 or 40 years ago. Rather than put my idea in a box and wonder whether or not anyone would act on it, I can now put my idea on a public idea sharing web site and wonder whether or not anyone will act on it.

Of course, on the public web, other members of the public can vote on my idea and add comments – something that never happened in the old suggestion boxes. But absurdly low implementation rates and experience of suggestion schemes inside large companies suggests that my idea still stands a very low chance of ever being implemented.

This is important to bear in mind if you are considering an open suggestion scheme for your firm. In my experience of firms setting up internal suggestion schemes using web based tools, the schemes inevitably fail after 12-18 months for essentially the same reason: a lot of dissimilar ideas are submitted, processing all of these ideas is highly resource consuming and because suggestion schemes do not align idea generation with strategy or any relevant business needs, there is a very high rejection rate.

If suggestion schemes fail so frequently in closed innovation initiatives, there is no reason to believe they will fare any better when the public is invited to use them, thus increasing levels of usage substantially, without making the back-end any more efficient!

2. Idea competitions

Innocentive popularized the notion of a web site with competitions based on very precise innovation challenges, typically focusing on technical problems, such as “PdCl2 Recovery from Chitosan Resin. An economical method to recover catalyst grade PdCl2 or equivalent from palladium bound chitosan is required.” And a reward is offered for solutions to the problem. In this example, the reward is US$15,000.

Idea competitions are effective because it allows a firm to broadcast a very specific business need and allows experts, who have the wherewithal to solve the problem innovatively, to do so. Suggestions can easily be evaluated according to relevant criteria and the most suitable ideas selected and implemented. Meanwhile, irrelevant ideas are not submitted.

There are now a handful of different firms offering managed idea competitions – a demonstration of the effectiveness of this approach. Indeed, even our idea management software allows clients to create competitions.

3. Outsourcing

Because publicizing specific business needs in an open forum like an idea competition might provide too much information to competitors or simply because the firms in question are uncomfortable using a public forum for open innovation, many companies outsource elements of innovation to trusted third parties, such as small firms specializing in developing specialized innovative technologies.

In these cases, the outsourced firms are not merely generating ideas, they are going much further, typically providing comprehensive concepts often complete with business plans, prototypes and more.

The advantage to such an arrangement is that it facilitates a higher level of sharing of information between the two firms, intellectual property rights can be clarified from the beginning and the company seeking outside innovation can be assured of confidentiality. The downside, is that the group looking into the problem is necessarily restricted and thus there may not be the breadth of knowledge, experience and creativity that would be available in a more public forum.

4. Publicly-funded projects

A lesser known, but well established, means for open innovation is publicly funded projects. The European Commission has been funding research and development projects for more than 50 years and since 1984 has been launching regular Framework Programmes which, to simplify greatly, are legal documents that precede periodic Calls for Proposals. In a Call for Proposals, a consortium of organizations may submit an innovative proposal that responds to one of the action lines. If successful, the consortium receives funding (typically 50%) to implement the project.

Normally, a project must consist of at least two, and usually several, organizations from different member states. Partner companies collaborate to develop the project and provide deliverables along the way. Results must be publicized and certain kinds of projects are expected to develop commercialized products or services.

Having spent some time with EU projects, I know the system is greatly flawed in many respects that are mostly to do with bureaucracy and legal processes. Nevertheless, some very good work comes out of Framework projects and billions of Euro are given away to companies for carrying out their innovative research and development under the program.

Likewise, other governments offer grants which encourage innovative collaboration to develop research and development projects. And many non-profits, such as the Gates Foundation and the Rockefeller Foundation, offer grants to collaborative teams comprising more than one organization.

Low-key open innovation

In addition to the above more public and structured approaches to open innovation, many companies also involve outsiders in their regular innovation process. Many of our clients invite outside  business partners into the idea management application we provide (see advert below!) and report favorable results. Indeed, outside partners are often more active in the idea management application than are employees, presumably because they wish to demonstrate their value to the company and ensure their contracts are renewed.

Intellectual property issues

In short, open innovation is really very much like closed innovation, except that outsiders are invited to participate. However, there is one very big difference, in a closed idea generation environment involving only employees and possibly contracted business partners: the issues of intellectual property rights (IPR) associated with ideas is very clear. It will certainly have been clarified in everyone’s employment contract or outsourcing contract. However, in public forums, no such contracts are pre-existing. Hence the issue of IPR needs to be considered even before the project begins. Likewise, participants in open innovation initiatives need to be aware of what rights they are losing with their idea submissions (all rights, typically in an open suggestion scheme).

Open idea generation

So, in summary, open innovation is simply opening up a part of the idea generation process to a group of people outside the organization. As a result, the same rules that apply to closed idea generation initiatives also apply to open idea generation initiatives. I would further argue that there is a lot of unnecessary hype associated with open innovation as it is really an element of the innovation process which has been around since people started collaborating to innovate!

By Jeffrey Baumgartner

References

H.W. Chesbrough (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology; Boston; Harvard Business School Press, p. xxiv