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12 November 2009

Can Open Innovation help to save the world?

Filed under: climate change, Open Innovation — David Wood @ 1:19 am

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.

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21 October 2008

Open Source: necessary but not sufficient

Filed under: Open Innovation, Open Source, Smartphone Show — David Wood @ 5:57 am

Building the software system for complex smartphone products is one of the toughest engineering challenges on the planet. The amount of software in a high-end phone has been roughly doubling, each year, for the last ten years. In order to reap market success, smartphone software has to meet demanding requirements for performance, reliability, and usability. What’s more, to avoid missing a fast-moving market window, the software needs to pass through its integration process and reach maturity in a matter of months (not years). As I said, it’s a truly tough problem.

[Author’s note: a version of this article is appearing in print today, to mark the first day of the Symbian Smartphone Show. I thought that people might like to read it online too.]

In broad terms, there are two ways in which a company can seek to solve this kind of tough problem:

  1. Seek to keep careful control of the problem, and rely primarily on resources that are under the tight direction and supervision of the company;
  2. Seek to take advantage of resources that are outside the control of the company.

The attraction of the first approach is that it’s easier to manage. The attraction of the second approach is that, in principle, the company can take better advantage of the potential innovation created by users and developers that are outside the company.

Writers and academics who study how innovation works in industry sometimes use the terms “closed innovation” and “open innovation” to describe these two approaches. In his pioneering book “Open innovation, the new imperative for creating and profiting from technology”, Henry Chesbrough lists the following contrasts between open innovation and closed innovation:

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.

In the modern world of hyper-complex products, easy communication via the Internet and other network systems, and the “Web 2.0” pro-collaboration zeitgeist, it is easy to understand why the idea of open innovation receives a lot of support. It sounds extremely attractive. However, the challenge is how to put these ideas into practice.

That’s where open source enters the picture. Open source removes both financial and contractual barriers that would otherwise prevent many users and external developers from experimenting with the system. For this reason, open source can boost open innovation.

However, in my view, there’s a lot more to successful open innovation than putting the underlying software platform into open source. We mustn’t fall into the trap of thinking that, because both these expressions start with the same adjective (“open”), the two expressions are essentially equivalent. They’re not.

Indeed, people who have studied open innovation have reached the conclusion that there are three keys to making open innovation work well for a firm (or platform):

  • Maximising returns to internal innovation
  • Incorporating external innovation in the platform
  • Motivating a supply of external innovations.

Let’s dig more deeply into the second and third of these keys.

Incorporating external innovation in the platform

The challenge here isn’t just to stimulate external innovation. It is to be able to incorporate this innovation into the codelines forming the platform. That requires the platform itself to be both sufficiently flexible and sufficiently stable. Otherwise the innovation will fragment the platform, or degrade its ongoing evolution.

It also requires the existence of significant skills in platform integration. Innovations offered by users or external developers may well need to be re-engineered if they are to be incorporated in the platform in ways that meet the needs of the user community as a whole, rather than just the needs of the particular users who came up with the innovation in question.

  • This can be summarised by saying that a platform needs skills and readiness for software codeline management, if it is to be able to productively incorporate external innovation.

Codeline management in turn depends on skills in:

  • Codeline gate-keeping: not accepting code that fails agreed quality criteria – no matter how much political weight is carried by the people trying to submit that code
  • Reliable and prompt code amalgamation: being quick to incorporate code that does meet the agreed criteria – rather than leaving these code submissions languishing too long in an in-queue
  • API management, system architecture, and modular design – to avoid any spaghetti-like dependencies between different parts of the software
  • Software refactoring – to be able to modify the internal design of a complex system, in the light of emerging new requirements, in order to preserve its modularity and flexibility – but without breaking external compatibility or losing roadmap momentum.

Motivating a supply of external innovations

The challenge here isn’t just to respond to external innovations when they arise. It is to give users and external developers sufficient motivation to work on their ideas for product improvement. These parties need to be encouraged to apply both inspiration and perspiration.

  • Just as the answer to the previous issue is skilled software codeline management, the answer to this issue is skilled ecosystem management.

Ecosystem management involves a mix of education and evangelism. It also requires active listening (also known as “being open-minded”), and a willingness by the platform providers to occasionally tweak the underlying platform, in order to facilitate important innovations under consideration by external parties. Finally it requires ensuring that third parties can receive suitable rewards for their breakthroughs – whether moral, social, or financial. This involves the mindset of “growing the pie for mutual benefit” rather than the platform owner seeking to dominate the value for its own sake.

But neither software codeline management nor ecosystem management comes easy. Neither fall out of the sky, ready for action, just by virtue of a platform being open source. Nor can these skills be acquired overnight, by spending lots of money, or hiring lots of intrinsically smart people.

Conclusion: On account of a legacy of more than ten years of trial and error in building and enhancing both a mobile platform and an associated dynamic ecosystem, the Symbian Foundation should come into existence with huge amounts of battle-hardened expertise in both software codeline management and ecosystem management. On that basis, I expect the additional benefits of open source will catalyse a significant surge of additional open innovation around the Symbian Platform. In contrast, other mobile platforms that lack this depth of experience are likely to find that open source brings them grief as much as it brings them potential new innovations. For these platforms, open source may result in divisive fragmentation and a dilution of ecosystem effort.

Footnote: For more insight about open innovation, I recommend the writings of Henry Chesbrough (mentioned above), Wim Vanhaverbeke, and Joel West.

13 August 2008

There’s more to Open Innovation than Open Source

Here’s the challenge: How best to capitalise on the potential innovation that could in theory be created by users and developers who are based outside of the companies that are centrally responsible for a product platform?

This is the question of how best to make Open Innovation work. Recall the following contrasts between Open Innovation and so-called Closed Innovation – taken from the pioneering book by Henry Chesbrough, “Open innovation: the new imperative for creating and profiting from technology”:

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.

In the modern world of hyper-complex products, easy communication via the Internet and other network systems, and the “Web 2.0” pro-collaboration zeitgeist, it is easy to understand why the idea of Open Innovation receives a lot of support. The challenge, as I said, is how to put these ideas into practice.

It’s tempting to answer that the principal key to successful Open Innovation is Open Source. After all, Open Source removes both financial and contractual barriers that would otherwise prevent many users and external developers from experimenting with the system. (What’s more, “Open Innovation” and “Open Source” share the prefix “Open”!)

However, in my view, there’s a lot more to successful Open Innovation than putting the underlying software platform into Open Source.

To see this, it’s useful to review some ideas from the handy summary presentation by leading Open Innovation researcher Joel West, “Managing Open Innovation through online communities”. Joel makes it clear that there are three keys to making Open Innovation work best for a firm (or platform):

  1. Maximising returns to internal innovation
  2. Incorporating external innovation in the [platform]
  3. Motivating a supply of external innovations.

Let’s dig more deeply into the second and third of these keys.

Incorporating external innovation in the platform

The challenge here isn’t just to stimulate external innovation. It is to be able to incorporate this innovation into the platform. That requires the platform itself to be both sufficiently flexible and sufficiently stable. Otherwise the innovation will fragment the platform, or degrade its ongoing evolution.

It also requires the existence of significant skills in platform integration. Innovations offered by users or external developers may well need to be re-engineered if they are to be incorporated in the platform in ways that meet the needs of the user community as a whole, rather than just the needs of the particular users who came up with the innovation in question.

  • This can be summarised by saying that a platform needs skills and readiness for software management, if it is to be able to productively incorporate external innovation.

Motivating a supply of external innovations

The challenge here isn’t just to respond to external innovations when they arise. It is to give users and external developers sufficient motivation to work on their ideas for product improvement. These parties need to be encouraged to apply both inspiration and perspiration.

  • Just as the answer to the previous issue is software management, the answer to this issue is ecosystem management.

But neither software management nor ecosystem management comes easy. Neither fall out of the sky, ready for action, just by virtue of a platform being Open Source. Nor can these skills be acquired overnight, by spending lots of money, or hiring lots of intrinsically smart people.

Ecosystem management involves a mix of education and evangelism. It also requires active listening, and a willingness by the platform providers to occasionally tweak the underlying platform, in order to facilitate important innovations under consideration by external parties. Finally it requires ensuring that third parties can receive suitable rewards for their breakthroughs – whether moral, social, or financial.

Conclusion: On account of a legacy of more than ten years of trial and error in building and enhancing both a mobile platform and an associated dynamic ecosystem, the Symbian Foundation will come into existence with huge amounts of battle-hardened expertise in both software management and ecosystem management. On that basis, I expect the additional benefits of Open Source will catalyse a dramatic surge of additional Open Innovation around the Symbian Platform. In contrast, other mobile platforms that lack this depth of experience are likely to find that Open Source brings them grief as much as it brings them potential new innovations.

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