ECONOMICS of open innovation

What ROI at what RISK? – every investor’s top question! With respect to open innovation, the same question gets rephrased as below …

a) What is the cost of doing ‘open innovation’ vis-à-vis strictly ‘in-house innovation’?
b) Opening up for innovation is new for me, and new things carry more risk, can I predict my return-on-investment?
c) How can I have a control over people not on my payroll? Will I loose money?
d) We already have an internal R&D, will opening up be an additional cost?

So how are the various aspects of collaborative innovation fair when it comes to the all important, COST?

COST FACTOR 1: By far the most favorable advantage open innovation carries is ‘Pay for real outcome not for trial and error.’

This is a huge cost saving, and a simple logic. Assuming there is a 20% chance of an average innovation effort to succeed, in open innovation you pay only for the favorable outcome and not for the effort which does not yield desired results.

A must ask question is “Then who pays for the effort which does not yield desired results”? The rule of averages comes into play, the so called huge cost of yielding no result is distributed among many people, making it most of the times insignificant for an individual. Broad talent pool increases the chances of finding the right fit for you and at the same time increases individual’s chances of finding an opportunity where her talent can fit. As you see it’s a solid win-win situation.

COST FACTOR 2: Benefit from what is yours, in-house.

Opening up to outside of your group but within your organization can also be treated as a type of open innovation.
Leveraging what you have – by connecting the exiting talent of your organization (part time, full time or even coffee time) with the existing challenge of your organization.
Utilizing what you anyway paid for is a cost saving. Garage sales never hurt.

COST FACTOR 3: Avoid risk of not completing the first, fifth or the last mile of your idea just because you do not have a person who can travel that mile for you.

Some great innovative ideas don’t see the light of the day during the execution resulting in financial losses. Fill in the gaps by bringing just-in-time talent. Just as there is a cost of innovating, there is a cost of not innovating, more so when you abandon a worthy idea.

Cost of doing collaborative innovation, internal and/or external, is not more compared to strictly in-house innovation. Though relatively new phenomenon, open innovation provides more control and is less risky. While you won’t have control over the people, you will have a control over paying only for what you get. Open innovation does not need to be a either /or with in-house innovation, nor does it need to make an addition or reduction in your innovation budget – considering open innovation as ‘just another means’ is by far the best way to avoid any cost related roadblocks.

Learning from the collaborative innovation cases

While most of us are trying to understand and incorporate the collaborative innovation in our organizations, there are some people and organizations that have experienced it already, it makes lot of sense to understand these cases and learn from it.

I am starting a sister blog http://spotopen.blogspot.com/ which will act as a repository of the success and failures in open innovation, collaborative innovation, co-creation from across the world.

Though the information going in these case studies is already available at various places on the internet, I am trying to achieve following.

1) Single point for reference.
2) Classify the case study information in a predefined format. (E.g. Industry, extent of openness etc.)
3) Uncover the finer and otherwise hidden aspects of these success or failure cases.

The format for the case study along with the first case study is posted at http://spotopen.blogspot.com/

Please feel free to suggest any changes or additions in the format.

You can also suggest a case study or point me to the case study.

Metrics for Open Innovation – “what’s my open innovation quotient”

[One slightly disconnected thought! – Can percentage of people quitting from a particular organization and becoming an entrepreneur provide any kind of metric? More the better or less the better?]

Metrics have always amazed me, be it for how different people perceive it differently or for the conviction with which it can drive one away from facts! It has amazed me equally for its subtle power to steer one to the goals at hand..

This post is for you and me to come up with measurement criteria for an open innovation effort in an organization.

Thinking aloud for the pointers … a) Is my organization doing enough to promote open innovation, b) Where and how much to invest, c) Am I utilizing all possible resources, d) Metric can’t help me remove any mental blocks, but how can I keep the open innovation in say top 5 priorities e) What is the Return on investment, f) How much is the open innovation productivity, g) How much Risk I can take for how much return?

With this laundry list, let’s create the metrics, in no particular order.

Metric A: Open innovation budget allocation proportionate to the profitability hotspots.

First I need to track and arrive at the hotspots which have potential for open innovation. Then rank them according to the profitability per unit and volume it can fetch. Allocate the open innovation budget in the similar proportion while maintaining the hotspot diversity.

Overly simplified example - For a consumer durable product, the hotspots could be the pricing or psychology of a first time buyer, the yield per unit could be low and volume high. For a new techno yacht, yield per unit could be high and volume low.

Metric B: Extent of talent utilization from outside the core team.
Measure how much non core team individuals contributed from rest of the organization and/or from outside the organization.

Example / Pointers - How many idea-bar-camps my organization organized this quarter. Someone should be telling - we received 30 ideas from the core team, 70 from rest of the organization and another 50 from outside the organization for a given hotspot. In 2006, P&G’s 50% of the product and process ideas came from outside of P&G.

Metric C: Extent of Leadership involvement.
This one is bit difficult, but open innovation won’t take roots without it.
How much effort the leaders putting to leverage the opportunity of open innovation?

Example / Questions - How many times employees hear about the genuine support for open innovation from leadership? How much time does the leadership spend on open innovation vis-à-vis overall routine work. How recently your leaders heard and discussed the idea which came from outside the core team or from outside the organization.

Metric D: Percentage of skin
% of risk taken with respect to the investment in last one year. A conscious strategy to analyze and make Proactive + Reactive investment in future.

Example/ Questions – Was my TV ad budget for the existing service line far bigger than the innovation budget? Does my organization invest for short, medium and long term innovation outcomes or is there an imbalance?

Metric E: Percentage of fresh footprint
% of number of product, service, process or business model launched in last one, two, three year(s) which were not similar to the existing ones and had an open flavor.

Example/ Pointers – The ones where we changed the color and packaging may not be counted here, repurposing the same product for a new user group might. Still better is the one where you incorporated the end user feedback.

(A fair process to decide what is genuinely ‘open’ i.e. if the contribution came from outside the core group or not, and how much, is a different topic altogether and we will discuss this in subsequent posts.)

Metric F: Percentage of fresh dollars
% of revenue generated from NEW product, services, and processes launched in last one, two and three year(s)

Example / Pointers – Revenue from a really innovative product launched 5 years back be better kept off, and if it takes effort to associate the dollars as fresh dollars, its probably a wrong association!

Metrics are a very personal thing, each organization need to derive the ones which suites them. But as a rule of thumb, the metrics which resemble the simplicity of GPS, gives you the X, Y and Z coordinates of your current open innovation state, are more likely to take you where you intend to go.

Best Time, Team and Technique for Innovation …

... do they exist?

Time …

I get some of my best ideas when I am not trying to get one, while not at my desk, during a casual walk. One probably does not innovate on 25th Avenue, at 3:00 p.m. Sometimes, the harder one tries to sleep, more difficult it becomes, same with ideas.

However, on a broader level, if one does not have an innovation agenda, innovation probably doesn’t happen. So it is a good idea to create a placeholder for innovation, meet to take stock; meet to elaborate the ideas.

Time boxing does not help in innovating; however the other extreme - time pressure gets amazing output, sometimes!

Team …

Focus groups, Innovation councils, R&D teams, Centre of Excellences, apart from doing innovation are better suited for doing equally important tasks of managing innovation. They are better equipped to provide the anchor for an organization’s innovation agenda, anchor for ideas from across the organization and optionally from outside the organization.

There is no such thing as idea team, there shouldn’t be.

Techniques …

Six Thinking Hats, or TRIZ are great techniques to ideate and innovate, however I believe that if one has a Six Thinking Hats or TRIZ mindset then it is far more productive than having a round table discussion for innovation using these techniques.

I read that some people are successful in submitting their problems to their mind, sleeping over it, and the subconscious mind coming up with clues, if not the solution the next morning.
I believe in something similar – our minds have an incredible capability in parallel imagination for the problems we have at hand. Leverage this, submit the problem to yourself, don’t start working on it.

Organizations should have capability to manage ideas and innovations just like an ERP manages inventory or General Ledger.

Don’t ignore non-techniques like gut feeling and intuition.

One old fashioned thing, record your ideas, however stupid or great. Instead of remembering idea, sometimes I only remember that I had a good one!

In a nutshell … ideas during after hours, at a lab, in the bathroom or on a treadmill … Innovation teams more as an anchor across and beyond organization … Innovation techniques with processes diluted … is probably the best time, team and technique for the innovation.

What is fueling collaboration?

It’s an increasingly outdated debate whether one is doing “what one loves to do”, trash this thought. We do jobs, or may be jobs do us in, the bigger harm is done by the thought that we are not doing what we love to do.

Traditionally we were given a choice of “loving what we do” OR “to start doing what we love to do”, any other state of mind was considered bad, for you and for people around you!

Most of the people on this planet cannot afford to do what they love to do, for some it’s the daily bread, for others it’s equated monthly installments. And there are too many mundane things to be done to keep the world spinning.

Early on humans found the way out by introducing hobbies. It works fine, but it lacks variety in intellectual fulfillment. The connected world has started solving this problem bit by bit! Today one can choose the area of interest and contribute at will, start all over again at something else tomorrow.

The good things in life are always relative, there has to be some bad to call the good as good and some good to call yet another better.

People are slicing their time, and some slices are being used to do what one loves to do intellectually. People are increasingly becoming dual.

It’s this duality which is fueling collaboration in this age. An hour of intellectual fulfillment is giving a day long high and we love it. When we collaborate; a little contribution can make us feel part of bigger achievement. Collaboration facilitates the variety of part time intellectual fulfillment which otherwise was not available.

Erma Bombeck once said … “When I stand before God at the end of my life, I would hope that I would not have a single bit of talent left, and could say, "I used everything you gave me.”

I believe more and more people are feeling what Erma felt, and duality is the means for some people to “go get it”.

“I just volunteered your name”

!! … something does not sound right with this quote, isn’t it? I would hear this once in a while from the outside of my cubicle at Melbourne, my boss would have finished a call with her boss and she would start assigning work to me “I just volunteered your name for..” she would go. We both knew the lighter side of it, and I still cherish those moments.

In recent decades, we make products, launch new services, and create new processes on behalf of our customers, volunteering ourselves to create something they might need. Not bad, we put ourselves in customer’s shoes, a definite progress since the days of Henry Ford and his famous declaration “Any customer can have a car painted any colour so long as it is black.”

Since then, this paradigm is shifting big way, customers are now part of the effort that companies otherwise volunteered themselves to, … co-creation is the name of the game.

Simulated car racing game or a 4D roller costar is fun, but not as much as fun as driving down Great Ocean Road or experiencing Wipeout! Companies are constantly simulating consumer behavior to stay in competition, be it by predicting, doing a market research, trial and error or using a suggestion box. It is only a logical progression that we now have reached a stage to do co-creation with our customers; we are out on the road to get the real experience.

So simply put, instead of creating a product and then expecting that customers might like it, in co-creation you allow your customers to have a say or decide what you build, customers are on boarded well before the product starts taking shape or sometimes even before it is conceptualized.

So what does it take for companies to co-create?

1. First and the foremost, companies need to start moving towards complete transparency. When you want to prove that your restaurant’s kitchen is clean, you can advertise that your kitchen is the cleanest, or get somebody to certify it … best way is to allow your customers to walk into your kitchen, if and when they wish. One needs to have an insight to provide any value inputs. In other words if you are not moving towards transparency, you are not moving towards co-creating.
   
2. Find ways to encourage voluntary involvement from customers, employees, any stakeholders. Asking for a slogan for your product in return of holiday-for-two is not co-creation. If you need value input, it needs to be voluntary, it has to be spontaneous.
3. Gear up your communication infrastructure and CRM to enable two way communications. The partners in co-creation need to come together physically, virtually, or in whatever way. Also your CRM should no longer aim only to sell more but also to bring back more on what customers are experiencing.
4. Last but not the least, is preparing yourself on what you do with the inputs you get from your partners in co-creation. This is the tricky one; you might get all the first three steps right, but if you do not have a solid strategy to deal with the outcome of first three, you haven’t moved an inch.

To sum it up, closed doors opening up to greater transparency, requests replaced by engagement, value derived from the point where it is experienced, and the inputs received not being just tick marks.

When you co-create, you are actually going back to the fundamentals and going back to the fundamentals never hurt.

Given a choice between a “Picture” and “Thousand words”, choose “Hundred words”!

Collaborative innovation, open innovation or co-creation, one of the frequently asked questions is “how do you go through the heaps of inputs you might end up getting and arrive at a meaningful solution”. In other words “how do you reduce all the noise and reach out to the music?”

Here I am listing two extreme enablers, most “obvious” and most “not so obvious”, there is lot in between, left out for some other time!

1) Most obvious is “Use technology to do part of the job”. Like Bugzilla does it for finding out the probable duplicate bugs, Wikipedia allows team to work on the same page so you don’t need to merge.

2) Most not so obvious, yet the game changer is to be to-the-point and encourage others to be to-the-point.

If you are an idea contributor, a solver, think of a risk that your “very valid” input was buried under your own stories and nobody noticed it. If you are a moderator, a seeker, think of the amount of time you would spend going through haystack to find the needle.

At the same time there is a risk in being too crisp, risk of not being understood. (Sometime the “picture” does not convey!).

So the right balance needs to be found.

• Try stretching & shrinking the articulation of your idea till the right “playback” is reached, similar to the original one in your mind.

• Group and Un-group your thoughts, doing this will remove many duplicates.

• Don’t go beyond one level from the original topic, and if you do then come back quickly.

• What works for me is - write what I want to write and then go back and make it to the point, so scribble endlessly if you need to, but then edit it like a devil.

While ago, I read this wonderful book “Don't Make Me Think” by Steve Krug. Steve says “If you have room in your head for only one usability rule, make this the one ... “Get rid of half the words on each page, then get rid of half of what’s left“. I think this usability principle applies to lot many scenarios than obvious …“a Website and a Visitor”, “an Author and a Reader”, “the Leader and a Team”, “Marketer and a Customer”, “Seeker and a Solver”.

You will be amazed to find that “you can” actually make your point clear in lot less, lesser than you first thought.

When it is about collaboration ... less is more ... to-the-point is huge.

My experiments with “mindset” for “opening up”

Have you come across a long argument just because people thought arguments were meant for winning?

Have you ever created a powerpoint presentation painting a good picture, when you yourself were not convinced?

Have you come across a situation when the genuinely better solution did not make it?

Have you heard an external consultant to your company recommending what you already thought was the way to go?

Actually this post is not about finding a solution to these challenges or calling them right or wrong.

For now I want to point to a behind the door thing - the “mindset”, which I have been currently experimenting with myself and found to be immensely helpful. While you give it a thought, let me try to list down the “desired” characteristics of this “mindset” when it comes to “opening up”. Do drop a comment, if you think of any additional characteristics.

• It is amazingly refreshing and eventually rewarding to tolerate people and ideas “worse than yours”, “as good as yours” and “better than yours”.

• It is tough but turns out equally good later, to get contradicted and yet not mind too much!

• It hurts less and keeps the door open when you develop an ability to trash the genuine trash without creating an opinion of any sort.

• It pays-off to believe that execution, and not the origin or the idea itself, is the crux of the matter.

• It is fun and sometimes even more productive to be less formal in all your dealings.

• It changes quite a few of your beliefs when you develop an ability to genuinely look out for value inputs from sources beyond “yourself” and beyond “your known sources”

• It is worthwhile to revel in personal satisfaction, while building upon each others ideas.

• It surprises you, when you realize that sharing your ideas paves way for even better ideas from you, the next time around.

If I could summarize these … when you develop a capability to “collaborate”, is when you start getting results from “opening up”.

When in Rome, why do what Romans do. My views on “open innovation”

In-house innovations are great, when the companies and individuals have the capability, when these innovations are utilized to address the market need, when one does not stop at one-off innovations and off course when these innovations does not cost earth. But these are the exact challenges you and me face with in-house innovations, one or more of the above is usually not true.

I believe that more and more companies are opening up to "open innovation" as an extended arm to their in-house innovation effort. BT, P&G, Nokia to name a few.

Open innovation, apart from giving you a wider perspective on the solution, can as well change your problem definition itself!

Organizations do innovations, and then wait for one of them to click, the new trend however is towards “on demand innovation”, benefit from it, and move on to next one. It does not matter from where the ideas come from, what matters is how much you can benefit from it.

Software as a service and now cloud computing, in open innovation you pay only for results, these new trends make essential services accessible and affordable.

You no longer write one on one snail mails, nor do you refer Britannica encyclopedia, your city has grown to become your country and your country has expanded and has now become the world, and you access the world from your desktop. This connected world has opened up the new ways of doing everything and innovation is no exception, future of innovation is “open”, the world has opened up, and so has everything you do.