Point: Open innovation is much more cost-effective than internal R&D

Story: Larry Huston, formerly Innovation Officer at Procter & Gamble, spoke at the World Innovation Forum on June 8, 2011. Huston praised open innovation as a way for big companies to speed their innovation and time to market.  Huston said that open innovation efforts give companies a 2x return compared to developing the innovation in-house because of risk reduction.  The reason, Huston said, is simple: the technology is already proven to work; it just needs to be scaled or adapted. In short, with open innovation a new technology has a much lower risk of failure than starting internal R&D from scratch. Also, given the realities of corporate life, internal R&D people aren’t just doing innovation all the time — they have administrative work and meetings — which means that internal innovation is much less efficient than open innovation.

Huston related the story of an internal P&G employee who had the idea of printing text and designs on Pringles potato chips — designs like Disney characters or trivia questions. The employee made a very thin potato dough and ran it through an HP printer to demonstrate the idea.  But P&G needed edible food dyes that wouldn’t clog the printer or a printing technology that could handle edible food dyes.

So P&G approached a big printer manufacturer to work together with P&G to come up with a way to print on potato chips. The two big companies spent a year in meetings trying to hammer out the intellectual property (IP) rights issue. The printer company wanted all the IP, even though the two companies would be developing it together. P&G even offered to give the partner the patents if P&G could own only the one application of printing on potato chips. If the partner company then wanted to sell the technology to McDonald’s to print on hamburgers, they could. But still the other company did not agree to those IP terms.

Exasperated by the slow pace of the negotiations, P&G wrote a public brief describing the technical problem to be solved and sent it out worldwide. An innovation network in Europe picked it up, and the brief landed on the desk of a professor in Bologna. The professor, as it turns out, had inherited a bakery. He had dabbled with the equipment and created and edible food dye that could be printed on cakes and cookies.  P&G licensed the IP from him and launched Pringles Prints in eight months, compared to spending one year just discussing IP with the large company.  Within one year, the new product grew P&G’s revenues 14% — a very impressive result given the size of P&G.

Publicizing its R&D needs was a big change for P&G.  In the past, P&G kept its R&D efforts closely guarded. “We were afraid to share our technology needs,” Huston said.  “We thought competitors would read our briefs and launch their product first. But not once did that happen, out of hundreds of briefs”  The reality, Huston said, was “Companies work on what they think the problems are.  Reading a brief, they don’t see the end product, and they’re not likely to reorient their efforts as a result.  Once they see the product in the market, then they’ll respond.” Instead, Huston advocated, “let the world know what you want and that your door is open to ideas from the outside.” In response to a question from the audience, Huston elaborated: “Half of our briefs have our name on them, and those get many more responses.  Other briefs do not have our name.” Those briefs couch the request in more scientific terms, solving the underlying problem rather than explaining the consumer product application.

Action:

• Don’t be afraid to advertise your R&D needs in order to attract outside innovators. Competitors are unlikely to reorient their own thinking to follow you.
• If you’re still concerned about competitors taking your nascent idea, don’t put your company name on the brief, and phrase it in terms of the underlying science to be solved
• Look for smaller, nimble open innovation partners with early-stage prototype technologies.
• Innovate faster by leveraging proven technologies created by third parties.
• Focus on lower-risk adaptation and scaling of existing external technologies rather than high-risk creation and scaling of unknown internal technologies.

For more information: World Innovation Forum

Point: Use open innovation and modularity to identify new product/service needs and accelerate your pace of innovation

Story: Rugged handheld computers are used every day byretailers,warehouse operators, service technicians, parcel companies, and transportation operators to log customer purchases, track inventory, monitor shipments, and scan tickets.  Half a dozen manufacturers compete in the crowded market for these devices to serve customers who want everything — devices that are hardy, high-tech, compact, inexpensive, and suited to their particular needs.

PsionTeklogix needed to differentiate itself from competitors like Motorola, Intermec, Datalogic, Honeywell, and LXE.  The company created a modular platform strategy called Omnii with interchangeable keyboards, scanners, communications modules, screens, grips and optional features like a camera and GPS.  Rather than build small volumes of unique devices for each application or new technology, Psion created a modular platform to build components in cost-effective volumes and then mix-and-match the parts to create a custom-built assembly.

For example, Psion or one of its partners can create a new RF communications module (e.g., for a new cellular data standard) and then plug that module into many of the pre-existing Omnii products. This strategy accelerates innovation because it’s faster and cheaper to design a new module than to redesign an entire product.  This strategy also accelerates adoption of innovation by customers because customers don’t have to replace all their handheld computers, only swap in the new modules.

Then, Psion went a step further, introducing its Open Source Mobility initiative.  Psion created IngenuityWorking.com, an open, collaborative online community for Psion employees, developers, partners and customers.  The goals are twofold:

1. to leverage Psion’s large IP portfolio with a wide range of vendors and component suppliers
2. to give customers and resellers the ability to voice needs and identify micro-niches in the market.

In summary:

• PSION uses its IngenuityWorking.com site with customers, developers and partners to drive product developments
• Psion leverages its strengths (modularity & customization) to reduce waste, improve time to market and gain new commercial options

Action:

• Create product/service architectures than enable fast insertion of new technologies. In Psion’s case, interchangeable displays, user interfaces, scanners, radios, etc. all combine to provide a myriad of combinations of functionality inside the rugged case.
• Create an online community among your partners and customers to learn their needs and identify new product/service opportunities.
• Populate the OI site with technical information that helps partners contribute practical and compatible innovations
• Allow customer complaints on the site (valid complaints, not offensive vitriolic rants). This transparency builds trust over time as customers and partners see how you address problems.

For more information, see Todd Boone of PsionTeklogix’s chapter in A Guide to Open Innovation and Crowdsourcing, edited by Paul Sloane, published by Kogan Page 2011.

Point: Getting maximum benefit from innovation requires new organizational practices

Story: In their book Wired for Innovation, Erik Brynjolfsson and Adam Saunders show how innovation and IT drive productivity growth. Productivity growth explains how cars, for  example, went from costing an average of three years of salary a century ago to costing only seven months of salary today. Nor is this gain unique to high-tech products. Even eggs plummeted in their effective price in the last century, dropping from 149 minutes of salary to a mere 5 minutes of salary per dozen eggs. What brought about the productivity improvement? Technology has helped, but it’s not the only factor.

Analyzing both company IT investments and company practices,  Brynjolfsson and Saunders found that high IT spending, by itself, didn’t explain high productivity.  Some companies spent large sums on IT but seemed to have little to show for it.  Highly productive firms, it turns out, also made a set of complementary investments in people and processes.  Brynjolfsson and Saunders identified seven key practices:

1. Move from analog to digital processes: Don’t just automate paper-based practices.  Invest in new ways of doing business enabled by IT (e.g., daily tracking of key performance indicators, enhanced alerts on exceptional events, global collaboration on innovation, etc.)
2. Open information access: Give employees all the information they need to accomplish and accelerate their jobs; in contrast, restrictive access impedes information flow and slows down work.
3. Empowerment: Give employees the authority to make decisions. Information has no economic value if it doesn’t change a decision. The sooner the information can affect a decision and the sooner the decision gets implemented (i.e., by the frontline employee), the better.
4. Performance-based incentives: Reward individuals for their now-measurable contribution to the firm, not just for their years of service, as with traditional seniority-based pay.
5. Cohesive corporate culture: Create cultural cohesion and strategic focus so that employees work toward shared goals that matter.
6. Recruit the right people: The productivity boost provided by technology depends on the quality of the people who use it, particularly when giving employees more information and authority to make decisions.
7. Training: Invest in people by training them to use digital processes, find the right information, make good decisions, and reach their incentive goals.

Action

• Don’t just invest in technology; invest in new processes
• Broaden information access and decision rights
• Invest in training, merit pay, and recruiting