Beyond the Bounty - The Risks and Rewards of the RTP Challenge

Posted by abingham on Feb 6, 2009 11:51:38 AM

Alph Binghamby InnoCentive Founder Alph Bingham, Ph.D

There has been a recent discussion on the LinkedIn Open Innovation group around use of incentives for public good.  In that discussion, David Lincoln, founder of Novipella, raised some excellent and very thoughtful points about how Open innovation (OI) may evolve and what consequences might eventually arise.  These are, in fact, so thoughtful, that I am not surprised to learn that he was trained in synthetic organic chemistry :) .

David's comments were specifically in regard to the Reduction to Practice (RTP) Challenge type, and the expense involved in operating a lab necessary to work on these Challenges -- an expense which is not recovered unless the solution submitted by that lab or practitioner is successful and awarded.  This is a potential disincentive for some researchers who may be able to provide a solution but are wary of undergoing the expensive endeavor of developing and validating their solution without the guarantee of payment.

It is a problem that was considered at the launch of InnoCentive -- and in fact, the very first RTP Challenges were seen as an experiment in the business model itself.  Could/would Solvers absorb the risk of investing in a reduction-to-practice?

In an interesting quirk of history, those first Challenges were issued just prior to the major anthrax scare of 2001.  As a consequence of that timing, in the late fall of 2001, both U.S. government officials, and InnoCentive began receiving white powders in the mail from unfamiliar addresses.  We, however, did NOT don hazmat suits.  We cheered.  The model worked!  Since those early experiments we have striven to understand why it worked and how InnoCentive can facilitate success for both Seeker and Solver to an even greater degree.

Our earliest efforts along those lines were to issue a Challenge in two stages:  The first Theoretical and the second, a call to the awardees to Reduce to Practice (RTP) if they chose.  Some did, some did not.  In that instance they were able to use the bounty on the first Challenge to fund the efforts on the second.  As it turned out, this was critical only in a handful of instances.  In many other cases, the upfront costs were borne for a variety of reasons.  Some of these are only relevant as long as such incentive systems remain the minority of work done and in other cases the reasons will endure as this mode of innovation continues to grow.

The fact that open innovation may go from a tiny minority of the research efforts to a more substantial role in global innovation suggests that there are two time horizons on which the RTP problem should be considered.  The near-term, which I'd set at no less than 5-10 years and the long-term which may arise anywhere from 10 to 25 years in the future.

In the near-term future, I believe there will be a robust continuance of RTP problem solving based on the following:

  1. Contract Research Organization (CRO) labs practicing the "bounty hunting" type of OI may often do so by aggregating efforts on many problems -- thus raising the chance that single wins cover expenses across multiple losses. This strategy is really not at all unlike the risks undertaken in internal R&D labs owned by commercialization entities. (This is also a part of long-term system behavior with other ideas below)
  2. CRO labs that practice this risk-sharing OI usually also practice traditional contract work -- and thus only have to absorb marginal costs, not full costs (think of the bottles of leftover chemicals on your shelf after any given project.) Even the costs of the labor can be considered marginal as contract demands ebb and flow. The short term gains of adjusting the size of the workforce for these capacity demand changes is quickly eaten up in the transaction costs associated with "hiring and firing." A lab in Belfast kept its best staff onboard during a shortage of work, employed them on InnoCentive problems and worked out a split of the bounties. Thus, they didn’t lose those personnel as they otherwise might have. And, they were ready to go when the contract work picked up again.  (This rationale works until prize-based systems are sufficiently dominant that they define expenses and are thus not easily marginalized)
  3. Individuals who undertake an open innovation Challenge with prize-based compensation almost always have non-cash reasons for engagement. And even when there is some upfront expense, they are willing to absorb that as a means of making a contribution on behalf of these alternative motives, i.e., this is the way I give back to help cure a disease, purify water, positively impact climate change, etc. In one instance, an individual motivated to tackle a Challenge related to food supply convinced his employer (NOT a CRO) to allow him to work on the Challenge using employer's materials and then donated the award to a not-for-profit foundation that was seen as relevant to both the employer's and the individual's humanitarian interests. A different situation but related to non-cash utilities, we learned of one organic chemistry class in which InnoCentive Challenges were used as the homework sets. (I do acknowledge that these non-cash rationales may be hard to justify for purely commercial problem solving though problem "overlap" often still creates both cash-based and charity-based benefactors)
  4. We frequently get responses from individual Solvers speaking about their "aha" moment, and the fact that they saw a novel and efficient approach, thus raising the probability that they would experience much lower execution costs than those typically associated with the trial and error demands of advancing and testing serial hypotheses. (To be fair, lower expenses ain't the same as none -- and while this helps, it isn't a solution by itself)
  5. And finally, we learned very early on that individuals who respond to RTP Challenges have often independently collaborated with research labs. This allows the individual and the lab to simultaneously benefit from the efficient execution of a novel approach brought by the individual Solver as well as the marginal costs of underutilized equipment and supplies (see #2 above).

While these are realistic facts about why the RTP-upfront-cost problem is addressable in the short term, I realize that we need to responsibly extrapolate to some future state in which we imagine that incentive based problem solving with risk becomes a dominant mode of innovation and how we reconcile the upfront expenses of R&D.  It's a very meaty problem and David in his comments on LinkedIn suggested a couple of excellent approaches.   I will repeat his ideas and briefly discuss what InnoCentive has done to begin addressing them.  I believe that in one form or another, they are likely be a part of any overall solution.  I will then add just a few of my own that are being (or have been) pursued as well.

  1. David suggests: "Create aggregate portfolios of unawarded IP." This is a very intriguing possibility and may well create sources of revenue other than the awards themselves. Over the years, InnoCentive has received literally thousands of submissions containing unawarded IP that belongs to the Solvers themselves. Obviously, ANY utilization of this MUST put compensation of the Solver at its center, along with protection of seeker IP. But, it is certainly recognized as a growing body of work that cannot help but have marketplace value.
  2. David suggests: "Find ways to make IP available and searchable in order for Solvers to monetize efficiently." This too seems to be part of a right answer and I agree that the current system of governance, advertising, transacting, etc., makes it tough for solo inventors to be duly compensated without adding even more egregiously to their upfront risky expenses. Many Solvers have suggested that InnoCentive provide an outlet for this IP and we have looked at how best to that either alone or in partnership with others who have more specialized search and taxonomy tools. At the same time, new modes exist for Solvers to undertake this on their own with minimal costs, i.e., the Ocean Tomo bid/ask online auctions.
  3. As part of a growing body of best practices, InnoCentive has taught seekers to appropriately dissect program objectives into Challenges -- properly scaled to the capacity of individuals, small labs or ad hoc academic teams, i.e., minimize those upfront costs. Sometimes this requires that the results from multiple Challenges be reassembled internally. Defining Challenges in this manner serves not only to better protect IP but also increases the potential for greater diversity in solution approaches by broadening access.
  4. And, not lastly (because more ideas will come forth), some of the problem lies in the "all or none" approach to IP. You license it or you don't. It becomes commercially successful and you have royalty streams... or it doesn't. Any IP (and I'm often thinking of new molecular compositions of medicines) has some net present value. It might have to be probabilized for success and it might have to be modulated for commercial attractiveness, but the NPV is not zero. Markets need to be created to monetize that value. (And I believe they will be.) Conceptually it's pretty simple. The analysts would emerge if the markets were created and IP holders could then choose how much of the risk they wished to hold against future returns and how much they wanted to share in exchange for funds to maintain their efforts in creating yet additional intellectual property.

Finally, let's not any of us forget that OI, and more specifically "OI, with risk-sharing," is taking baby steps in a newly connected world.  I can easily imagine 100 times the current innovation traffic going through a system like InnoCentive.   And, we don't yet have all the answers for system behavior closer to equilibrium.  I'm glad there are smart people like David worrying about it.  I know that InnoCentive and other  initiatives of which I am aware remain committed to finding ways to fairly and effectively tap the great diversity, knowledge and creativity often more widely distributed among mankind than our current modes of problem-solving can access.

-alph-

Topics: Innovation Insights, Solvers

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