Frank PIller: Service Providers Supporting Open Innovation


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Frank PIller: Service Providers Supporting Open Innovation

  1. 1. Innovation Services The Market for Open Innovation Frank T. Piller, based on joint work with Kathleen Diener RWTH Technology & Innovation Management Group, RWTH Aachen MIT Smart Customization Group, MIT, Cambridge, MA, USA
  2. 2. 2 About us
  3. 3. The RWTH-TIM Group is a large group of researchers, and many of them have contributed to the research providing the basis for this presentation. With about 18 full time research positions plus many graduate student assistants, tutors, and research affiliates, RWTH-TIM is one of the largest groups of its kind in the German-speaking academic landscape. © 3
  4. 4. 4 RWTH-TIM Group: Facts and Figures Established in 1990 as one of the first dedicated chairs in technology & innovation management in Europe Part of RWTH's School of Business & Economics, with strong links to the RWTH Engineering Schools Core student body of industrial engineering students ("Wirtschaftsingenieurwesen") Ranked #1 in our school's faculty ranking w/r to research output (publications), and #2 w/r to external funding. Awarded "RWTH Price for Teaching Excellence 2009/2010". Interdisciplinary team of about 18 full time positions for researchers plus about 25 support positions and student researchers (strong growth since 2007) Successful acquisition of about 500,000 Euro research funding annually for the group out of peer-reviewed funding schemes ("Drittmittel"); in addition industry-funded projects Strong industry partnerships, yet focus on scholarly research, not consulting. Dedicated to research, but excellent in participant-centered learning on graduate student and executive education level. Network of affiliated companies & consultancies for direct project cooperation. November 2009: Moving to new building in RWTH Aachen Research Park next to Research Centers of, e.g., Microsoft, Sony Ericson and Ford (part of "RWTH Campus Project")
  5. 5. 6 RWTH-TIM Group: Selections of Recent Research Project Clusters Open Innovation: Increasing the productivity of technical problem solving by external search Customer Co-Creation: Integration of customers and users in the innovation process in form of a firm-initiated strategy. Focus on toolkits for customer innovation, user innovation contests, and innovation communities Technology transfer : Absorptive capacity, managing ambidexterity, and preventing "NIH" (not invented here) Customer Co-Design in Mass Customization Environments: Strategies to profit from heterogeneities in the customer domain Modeling the contingencies of the innovation process: Database of 300 methods for the innovation process and marching tool to corporate challenges of managing innovation Managing the ramp-up: Connecting the new product development process with scaling up the manufacturing system
  6. 6. Objective of my talk Addressing the advent of a new class of service firms. Innovation as a service? • Introduction into the idea of open innovation – and how it builds on crowdsourcing as an underlying principle • Central role of intermediaries and brokers for open innovation • Results of recent study on global landscape of (open) innovation service providers • What will be next? => Focus is on advise for management practice! © 7
  7. 7. 8 Two problems that make new product development difficult
  8. 8. 10 Every innovation process requires two kinds of information, influencing the efficiency and effectiveness of the process. Solution Need Information Information ef ea In sticky s fic sin cr sin nes e th ie g information nc th ea e g cr ctiv y e I n fe ef market Ideation launch Doing things Doing the right right Realization things concept ("R&D", service / development Inc ffici es e product en th rea enc e s iv g local develop.) sin y ct i n fe s ef rea gt search he c In bias
  9. 9. 13 Netflix is the world's largest online movie rental service More than eight million subscribers. Members can choose from >100,000 titles Total subscribers have grown at a compound annual rate of 70 percent. Total estimated rental revenue of over $1.5 billion at the end of 2007 -- DVD rental totals approximately $8 billion annually -- still a lot of growth potential At the same time, Blockbuster's revenues continue to decrease at a rate of 5 to 9 percent / quarter.
  10. 10. 15 Objective: get root mean square error (RMSE) <= 0.8563 (Netflix's own algorithm Cinematch has RMSE of 0.9525, this equals to one point of error of recommendation on their 5-point scale of "hate-love" movie evaluation)
  11. 11. What is open innovation? The formal discipline and practice of engaging the world for problem solving ... Licensing out External technology (knowledge) acquisition and sourcing Consortia and other cooperative ventures Lead user innovation Co-creation with customers ( Today also: Inter-functional / inter-divisional knowledge exchange and idea generation within large corporations ) ... using new forms of organizing the collaboration with external actors. Crowdsourcing / commons-based peer production Beyond formal contracts and networks Beyond autonomous user innovators © 25
  12. 12. 26 Crowdsourcing (Interactive Value Creation) "Crowdsourcing represents the act of a company or institution taking a function once performed by employees and outsourcing it to an undefined (and generally large) network of people in the form of an open call. This can take the form of peer- production (when the job is performed collaboratively), but is also often undertaken by sole individuals.“ (Howe 2006) Other terms, same idea: Commons-based Peer-Production of Innovation (Benkler 2002; Lakhani 2006); Open Innovation (Chesbrough 2003, Piller 2002); Interactive Value Creation; (Reichwald & Piller 2006; Piller 2004), Wikinomics (Tapscott 2007)
  13. 13. The term "open innovation" has been made popular by Henry Chesbrough, UC Berkeley Open innovation: A system where innovation is not solely performed internally within a firm, but in a cooperative mode with other external actors. Companies are using external ideas as well as those from their own R&D departments, and both internal and external paths to the market, in order to advance their technology. Open innovation is characterized by cooperation for innovation within wide horizontal and vertical networks of customers, universities, start-ups, suppliers, and competitors. Open innovation is opposed to closed innovation, in which companies use only ideas generated within their boundaries, characterized by big corporate research labs and closely managed networks of vertically integrated partners. © Figure from: Chesbrough 2003. Definition building on Lausen & Salter 2006; 27
  14. 14. 30 Increasing the productivity of problem solving
  15. 15. 31 31
  16. 16. 33 Broadcast Search at Firm R&D Labs Firm R&D Labs Firm R&D Labs Firm R&D Labs R&D Labs of large firms Knowledge Broker 160,000 independent scientists Context: 1. R&D Labs inside of major multinationals are not able to solve certain scientific problems - Their own internal and external experts cannot obtain solutions 2. Hope to get solution by going to distributed scientists that they do not know who may have an answer
  17. 17. 34 Karim Lakhani (HBS) found that Innocentive has a VERY efficient mechanism for technical problem solving • Context for posting problems – Firms spent 6 months to 2 years trying to solve problems internally – Offer on average $30,000 for solution – Solutions need to be submitted within ~6 months of initial posting • How many problems that had not been solved internally were solved (n=166)? – 49 problems (29.5%) were solved – 75 solution awards given • Participation Patterns: – Average 240 individuals examine detailed problem statement – Average 10 solution submissions per problem – Average time spent ~74 hours by winning solvers and ~36 hours by non-winning solvers
  18. 18. 35 Efficiency in problem solving is based on re-use of knowledge Leverages distributed and preexisting knowledge (72.5% reuse) Interest diversity and solver specialization attracted helps solves problems Solvers solve problems that are outside of their own field of expertise (65% have PhDs in scientific disciplines) Motivation: Intrinsic motivation (challenge to work on scientific problems, “proof myself”) and monetary incentive (award) go together for winning solvers And this is highly profitable for companys: And this is highly profitable for companys: Seekers’ cost (per challenge): $60,000 Seekers’ cost (per challenge): $60,000 Value generated for firm: $10,300,000 -- ROI: 2175% Value generated for firm: $10,300,000 -- ROI: 2175% © Source: Lakhani 2009
  19. 19. 37 Would Innocentive work in your industry? What is your Netflix Challenge? What are the hurdles when you move from chemistry or software to other domains? Can you sketch the basic parameters for such an approach in your industry? What information would you have to open to the crowd?
  20. 20. InnoCentive is not alone: NineSigma and Yet2 are seen as core competitors, but have a slightly different business model Network Size 2m+ 160K+ Solvers, 175 120,000 registered users, 650K+ individuals Countries, 40 Disciplines 70+ brokers, 200+ 120+ Affiliates consultants How they make money Posting Fee Posting Fee Membership fee $4,000 to $12-20,000 $6,000 to $20,000 posting $30,000 Success fee = % of final fee* Consulting service fee contract or fixed amount Success fee = 40% of $30,000 to $40,000 (Retainer) contract or award Success fee = % of value of the deal Solver/Solution Provider $5,000 to $50,000 plus $5,000 to $1m Contract or licensing value awards follow-on contract value ($1.5m average) Growth 500 RFPs to end 2006 2008 postings nearly 25+ deals in 2008 400 RFPs in 2007 double 2007 postings Expansion of broadcasting large growth in 2008 and Opening of European office services 2009 in 2010 © 38
  21. 21. Piloting open innovation via broadcast search in German industry association among SMEs Starting situation FVA, research consortium of approx. 150 German SMEs in mechanical engineering related technologies (driving systems) as part of VDMA (one of Germany's largest industry associations with 2000+ members) FVA funds own research program (contract research, pre-competitive, shared IP) Need to improve productivity of R&D spending on consortium and firm level Idea to pilot open innovation: Research contract to RWTH-TIM First stage Getting of commitment of members and corporate education (took 12+ months !!!) Evaluation of legal situation of working with problem solving platforms in Germany Second stage Piloting of six challenges (two company challenges, one that failed on the consortium level before, one that just had been contracted externally, two from up-coming research agenda) Decision to partner with NineSigma RFP drafted, search ongoing ... (today) Third stage If evaluation of pilots is positive, establishment of OI platform as membership service for association on VDMA level © 39
  22. 22. VDMA Project to Pilot Open study of Explorative Innovation: Research Agenda existing applications of Identification of suitable OI in domain problem statements Comparing different tools and methods Piloting: Contracting of platform and formulation Legal constraints and of RFPs requirements 2. 1. 1. Identification of Evaluation of results Evaluation and open innovation platform of approach Development modification of OI to measure efficiency of OI methods for industry Definition of incentives domain Market study and comparison of OI platforms ("beauty 3. contest" of OIAs) Recruiting "problems" Piloting of platform and 4. evaluation of efficiency and Development of effectiveness of approach as Final reports to executive business model compared to conventional board and "checklist" for SME members means of organizing R&D for future operation of platform on the Development of operating & pricing FVA level model for association ("NineSigma inside") © 40
  23. 23. 41 Open innovation with customer: Co-Creation
  24. 24. 42 Co-creation is an active, creative and social process, based on collaboration between producers (retailers) and users, that is initiated by the firm to generate value for customers.
  25. 25. 43 Idea contests
  26. 26. Recent research project:* "Open Senior Innovation": A new approach to reduce the NPD risk and increase NPD efficiency Picture: Age Simulator by duke HealthCare Communication Objective: To develop a method which enables senior citizens to directly transfer their needs into an artifact that highly corresponds with their needs. This means to shift some specifications of the product into the domain of the user. The idea is to isolate the source of uncertainty, i.e. sticky information about user needs, and to place it entirely outside the boundary of the manufacturer. This is a fundamental break with the current understanding of the innovation process (Piller & von Hippel, 2007). The idea is not to try to understand what older consumers may think and want, but to enable them to co-design exactly what they want. Open Senior Innovation Platform: Provide platform and supporting infrastructure so that senior consumers can participate in defining fitting products for their needs, but also in solving technological problems along the innovation process. * More info: 44
  27. 27. Objective of project is a feasibility study to build our understanding of senior innovation platforms. Main objectives of project: (1) Create proof of feasibility for internet platforms for open senior (service) innovation (2) Understand technical and economic principles. (3) Build an exploratory prototype of platform and pilot it. (4) Generate business model how to operate platform sustainable. Stay tuned ... project has start in Jan 2010 ... First idea contest online since March 10, 2010: Design the best cell phone for senior citizens ( 46
  28. 28. Such a platform promises a broad set of benefits and advantages – their realization however still has not been shown. Overcoming the sticky information problem of accessing need information. Providing direct access of older users to manufacturers and service providers (firm partners). Initiation to innovation project can be user community, but also firm. Ideas can be generated by individuals or groups of users Utilizing resources of experienced contributors with heterogeneous set of experiences Transfer of idea to (offline) senior expert networks. Utilization of large untapped labor source (matching requirements on corporate level). Special requirements of designing platform with regard to usability and incentive structure Special focus on service development 47
  29. 29. 48 Case example BtoB idea contest: Fujitsu Siemens Computers
  30. 30. Web2.0 technology delivers the technological background Crosslinking Active cross linking of ideas and knowledge Wiki Principle Evaluation Allows Web2.0 collaborative Community working on ideas Technology evaluates and discusses Look&Feel Enhances pleasure and motivation on the idea generation Source: HYVE AG Net. Contact: 50
  31. 31. Overview: Elements of an idea competition Employees Customers Combined Idea entry Describe, categorize, evaluate and  submit the ideas  Reporting Screening Measure and proof  Canalize and  Idea objectives preselect ideas Structured realization of ideas Idea portfolio Idea evaluation Compare and sort  Evaluators / experts  ideas  and take  evaluate and publish the  decisions ideas Idea list Search, print and comment ideas Source: HYVE AG Net. Contact: 51
  32. 32. 52 Open Innovation Accelerators (OIA): Brokers and intermediaries facilitating open innovation
  33. 33. The Challenge [of doing open innovation alone]: Or why firms often face difficulties in going outside for innovation Global Industry x Global Innovation Community Large / small companies Universities Private / Government Labs WHY Individuals Venture Capital • Knowledge disaggregation • Tacit Knowledge • IP Considerations (protection/pollution) • Leading Edge Knowledge Not in Public Domain • Need for translation and Disguise • Leakage of Competitive Information • Culture/Policies/Authority • Processes Efficiency Source: Zynga 2009 © 53
  34. 34. Open Innovation Accelerators (OIAs) defined Innovation Intermediaries are actors specialized in the articulation and selection of new technology options; in scanning and locating of sources of knowledge; in building linkages between external knowledge providers; and in developing and implementing business and innovation strategies (Bessant & Rush 1995; Howells 2006; Lopez-Vega 2009). Open Innovation Accelerators (OIA) are innovation intermediaries that operate on the behalf of organizations seeking to innovate in cooperation with external actors from their periphery. Their mission is to bridge structural disconnected knowledge pools caused by the lack of diversity within a firm. OIAs offer one or several methods of open innovation (e.g. idea contests, broadcast search, co-creation toolkits etc.) and complementary services for the innovation process. © 54
  35. 35. Open Innovation Accelerators (OIAs) offer value-added services from their client perspective The mediating position allows agents to create a shared and stable syntax to ensure reliable communication between sources and destinations in knowledge management – they establish a common language of reference as a template for knowledge management activities. In order to achieve common interpretations, intermediaries align different styles of thinking and incongruent understandings (Dougherty 1992). Intermediaries are making localized and embedded “knowledge stock” actionable (Choo 1998) because they operate across multiple clusters of specialization and practice to transform interpretations through innovation and its diffusion. Or, in short: Scanning and gathering information, Facilitating communication and knowledge exchange. © 55
  36. 36. RWTH-TIM Study comparing open innovation intermediaries (Diener / Piller 2010) Strong growth of special intermediaries for open innovation We coined them "open innovation accelerators" First study comparing these intermediaries 65 companies identified, 43 met our definition Extensive analysis and profiling of these 43 OIAs Self reports, interviews, survey, secondary sources, client interviews © 56
  37. 37. Research Design and Sample Explorative data gathering by questionnaire and interviews Questionnaire consists of 5 parts referring accelerators positioning referring applied methods / services to accelerate open innovation at clients company referring the users and actors for integration referring work environments and markets Mixture between pre-defined answer sets and free answer space Follow up interview to clarify answers and gather further information (duration between 40-60 min) Confirmation by internet research, client interviews, expert interviews © 57
  38. 38. The number of OIAs is increasing strongly since 2000 © Source: Diener & Piller 2010 59
  39. 39. How do the intermediaries differ? We find three core elements which "define openness" The most distinguishable Open Search Open Call Initiation difference of open Facet I Contracting innovation seems to be to Task Self selection avoiding the active assignment Constitution search for information / solutions with a clear presumption about its location and Informalized composition Facet II formalized Collaboration (self organization) Along the dimension of openness, companies give away the ‘control’ over parameters of Facet III IP Exploitation Open license knowledge acquisition processes, and, (partly) about the exploitation of the generated results. © Source: Diener & Piller 2010 60
  40. 40. Conceptual Framework of Openness in the Innovation Process © Source: Diener & Piller 2010 61
  41. 41. We found three core characteristics to structure the market of open innovation providers © Source: Diener & Piller 2010 63
  42. 42. Services offered by OIAs can be structured into three different clusters (1) Community Managers: Managing a (online) community that is used as a source for problem solving and idea generation, but also to generate open problems at a first place. (2) Software Providers: Providing dedicated software for open innovation, often in form of a web-service. (3) Consultants: Acting as an open innovation consultant to provide a customized and integrated service for the client's innovation process. © 66
  43. 43. OIAs offer a broad range of services (often combining several services) © Source: Diener & Piller 2010 67
  44. 44. Using the services of an OIA is surprisingly affordable – strong competition of providers is even driving prices down Typical figures: - Open Innovation platform for broadcast search: Fixed fee of $12-20K; Success fee of about the same amount, plus about $200K set-up / consulting / education cost recommended - Idea contest: $50-100K plus awards for winners - Netnography study within existing online communities: $30-50K - Lead user study: $100K plus internal cost of team (3-4 people, 4-6 months) - Online brainstorming: $5000 © Source: Diener & Piller 2010 69
  45. 45. Observations from the market study • Very young market far before consolidation • Dominated by new players / outsiders / start-ups • A few established players like InnoCentive, NineSigma, Yet2, CommuniSpace, Hyve ... • ... but the majority is still in the early stages • Lack of coherent business models (take "boradcast search" / problem broadcasting providers as an indication: How to profit from value generated for clients) • How to scale business without increasing cost proportionally? • Strong education and training element required, client field characterized by "piloting" rather then "contracting practice" • Low price level, strong competition in a few market segments • Expect strong "competition" from public bodies / "tech transfer" © 70
  46. 46. The client perspective: Success factors of selecting an OIA (and working with them) • Determine the objective of your open innovation venture! • Decide about the control you want to keep on the open knowledge transfer process (and the exploitation opportunities of the results) • Decide about your resource allocation: Do you want to outsource or to co-create the innovation process with the OIA? Hint: Much "open innovation" today is inside the firm • Consider what's next in the short term: Shall the OIA provide support before and after the open task? (e.g., generating thousands of ideas is one thing, evaluating them another) • Consider what's next in the long term: Think of, e.g., community management • Look on your budget (especially if you are piloting) © 71
  47. 47. Conclusions • Innovation is taking place also in the periphery of the firm • A firm-perspective on open innovation is required to supplement (but not to substitute) conventional practices in TIM • The "new" in open innovation are new open forms of initiating and facilitating the collaboration. • Firms need to establish mechanisms (“interaction competence”) to access input from their periphery and to manage the collaboration. • Increasingly, this "bridging" is done by a new breed of innovation service providers: the Open Innovation Accelerators (OIAs) • The market is still in the making and its early stages: Very little academic research and shared experiences from companies are existing • PS: There is only very little research on open innovation of service offerings. © 81
  48. 48. More information ... Prof. Frank T. Piller RWTH Aachen University, TIM Group Kackertstraße 15-17 52072 Aachen, Germany Tel.: +49 (0)241-809-3577 Diener / Piller: The Market for Open Innovation: The first market study comparing the brokers, platforms, and intermediaries for open innovation, Feb. 2010, Lulu Inc. €795.00* * Please contact me for an academic version. © 83