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One of the highlights at the FT Innovate 2009 conference in London this week was the presentation by UC Berkeley adjunct professor Henry Chesbrough on the topic “Open Innovation: Can it save the world?”

Dr Chesbrough is Executive Director of the Center for Open Innovation at the Haas School of Business at UC Berkeley, and inaugurated the whole field of research into Open Innovation with his 2003 book, “Open Innovation: The New Imperative for Creating And Profiting from Technology“.

Today’s talk was divided into two parts:

1. A recap of previously published work – providing a whistlestop introduction to the concepts of Open Innovation;
2. A proposal that the ideas of Open Innovation could usefully be applied in the context of log-jammed discussions over technologies to address climate change and renewable energy sources.

The background to Open Innovation was research that Henry Chesbrough did into research projects within Xerox PARC.  All companies need to make regular “tollgate review” decisions about which innovative research projects to cancel, and which to progress.  These decisions can go wrong in two different ways:

• A “type one error” is when a project is continued for too long.  It looks promising, but it eventually fails to deliver.  In the process, it consumes budget, personnel, and management attention, which could (instead) have been applied on other projects;
• A “type two error” is when a project is cancelled, that actually had the capability to generate lots of value.

Any process that decreases the chance of type one errors is likely, at the same time, to increase the chance of type two errors – and vice versa.  That’s a fact of life.  No company can have perfect foresight – given that markets change, technologies change, and projects change, all in unpredictable ways.

Chesbrough noted that cancellation is often surprisingly ineffective for innovation projects.  A company may withdraw its formal support, but the project can continue nevertheless.  For example, people inside the company who believe strongly in the project may work on that project outside of formal work hours, and may even cease employment at the company, in order to continue working on the idea in a new startup.

What happened to the projects that were shut down by the company (Xerox, in this case), but which had at least a temporary external lease of life?  The majority of these projects failed – providing an element of vindication for the company’s decision-making process.  But a number turned into spectacular successes, generating more stock market value in new companies outside Xerox than the value of Xerox itself.  (These startups include 3Com, VLSI, and Adobe.)  This again raises the question: in retrospect, can a parent company (Xerox, in this case) improve its decision-making and other innovation-review processes so as to reduce the impact of these type two errors?

The answer given by the theory of Open Innovation is that companies cannot and should not strive to avoid all such type two errors.  It is inevitable that some good ideas will be unable to flourish inside the company.  However, a change in mindset is required.  This new mindset makes it more likely that the company can still benefit from the fruit of the idea, even though development of the idea passes outside the company.  The new mindset (“Open Innovation”) can be contrasted as follows with a “Closed Innovation” mindset:

The “closed innovation” mindset:

1. The smart people in our field work for us
2. To profit from R&D we must discover it, develop it, and ship it ourselves
3. If we discover it ourselves, we will get to the market first
4. The company that gets an innovation to market first will win
5. If we create the most and the best ideas in the industry, we will win
6. We should control our IP, so that our competitors don’t profit from our ideas.

The “open innovation” mindset:

1. Not all the smart people work for us. We need to work with smart people inside and outside our company
2. External R&D can create significant value; internal R&D is needed to claim some portion of that value
3. We don’t have to originate the research to profit from it
4. Building a better business model is better than getting to market first
5. If we make the best use of internal and external ideas, we will win
6. We should profit from others’ use of our IP, and we should buy others’ IP whenever it advances our own business model.

A couple of diagrams help to highlight the contrast:

To be successful, the new mindset requires different skills from before – particularly skills in ecosystem management and IP management.

The really interesting question addressed by Chesbrough in today’s presentation is as follows: can these new skills help address issues of failed innovation management in the context of ideas for addressing runaway climate change, and the adoption of sustainable energy sources?

Chesbrough mentioned the GreenXchange supported by Science Commons.  To quote from their website:

Patent Strategies for Promoting Open Innovation

Nike and Creative Commons are calling upon other companies and stakeholders to bring the network efficiencies of open innovation to solving the problems of sustainability. GreenXchange will seek to bring together stakeholders in working groups to discuss strategies for advancing the commons by exploring ideas such as using patent pools, research non-assertions, and using technologies that support networked and community-based knowledge transfer and sharing.

Networks work best with a standardized and simple set of protocols. The Internet is one example of a network based on the TCP/IP Protocol. The Creative Commons community is a network based on users of Creative Commons licenses who share content under these standard transfer regimes. For the proposed network of sustainability innovation, the core protocols relate to the freedom to experiment and conduct research, the standardization of transfer of ideas, and the use of technology to monitor and quantify downstream impact.

Building a Better Innovation Ecosystem

Nike and Creative Commons share a vision of creating an open innovation platform that promotes the creation and adoption of technologies that have the potential to solve important global or industry-wide challenges. Open innovation is characterized by leveraging knowledge shared across many participants in a market, including companies, individuals, suppliers, distributors, academia, and many others to solve common problems and to assist internal innovation. Open innovation is an investment in the capacity of the market to support a firm’s ability to innovate and implement revolutionary technologies. It enables the development of new business models that leverage the creative output made possible by open collaboration to create new value and products. Open innovation is also a key component of engaging the resources and capabilities of large communities in finding ways to create sustainability, such as developing new ways to promote efficient resource use, implementing green manufacturing techniques, and delivery of products to consumers with lower impact to the environment.

Traditional collaboration is face-to-face. However, increasingly, modern collaboration, powered by the Web, is distributed. Examples of distributed collaboration include the Google search, the Wikipedia article, and the eBay auction, all which bring together disparate and distributed sources of information into a collaborative network mediated by common rules. Network mediated collaboration is based on small transactions, built upon standard technical and policy platforms, that enable low transaction costs both at a technical and legal level. By doing so, network mediated collaboration has a democratizing impact and therefore can engage mass audiences of users, contributors, and mediators, in ways that would otherwise be impossible. Likewise, open innovation is based on the mediated network collaboration concept: by making it easier to share documents, music, software, data, ideas, discoveries, and other kinds of knowledge, it has the potential to engage mass communities in the creative process. That brings with it innovation potential that not single company can match throw internally funded R&D…

The particular problem that Chesbrough mentioned as likely to obstruct progress in ongoing talks about measures to avoid runaway climate change is the following one.  Companies are, understandably, trying to develop new technologies that could help with processes such as carbon capture and storage, or moving to new sources of energy.  Being accountable to shareholders, these companies are driven to gain maximal financial return from the intellectual property they invest into these technologies.  With such a mindset, there is a risk that these companies will take decisions that result in the rough equivalent of the type two errors mentioned earlier: projects are stopped, because companies don’t see how to gain adequate financial return from them.

One response to this dilemma is to decry the financial motivation.  But another response is to seek a more enlightened operating model – once which will deliver both financial returns and highly worthwhile products.  This deserves more thought!

Footnote: The “Open Innovation blog“, by Joel West, one of Henry Chesbrough’s co-authors, is a mine of useful ideas about Open Innovation.