In this post, I’d like to build on my previous comments regarding the similarities between Open Innovation and Strategic Sourcing.  I think this metaphor can help executives understand the imperatives and challenges they face when considering their innovation strategy.

To compete in the global economy, companies need to establish core capabilities that enable them to take advantage of their scale.  Strategic sourcing is a classic example – manufacturing companies aggregate their demand across their factories for materials and negotiate with vendors from a position of strength and volume.  Sometime after 1960, strategic sourcing became a competitive necessity.  Companies that make stuff in any volume absolutely had to create the organization, processes, and culture that enable strategic sourcing, or they’d be driven out of business by others that had built this capability.

To implement strategic sourcing, firms had to overcome a major cultural barrier:  the traditional role of the factory chief as the “CEO of the plant”.  Many factory heads operated with high levels autonomy.  Management believed that plant managers required complete freedom to operate, or they couldn’t be held accountable for results.  To take purchasing away from them and allow a “central corporate bureaucracy” to buy their critical materials – this was viewed by many the highest form of heresy.  To create this core capability, years of careful organization design, change management, and communication were required.  The companies that were successful are still around – others not so much.

Today, companies face a very similar situation as they consider Open Innovation.  Leading enterprises are well on their way to building a strong, repeatable OI capability.  It’s dangerously naïve to believe that all of the knowledge and skills required to compete exist within the four walls of your company.  Firms that have yet to begin this journey are already disadvantaged.

In many organizations, Open Innovation is battling a cultural barrier very similar to that which faced the pioneers of strategic sourcing.  In this case, it’s the R&D function that’s being challenged to do things differently.  As one senior executive in the pharmaceutical industry put it to me recently, “In our group, admitting that I can’t solve a problem by myself is a bad reflection on me.”  The notion of reaching out to find answers is foreign and feared.  Employees feel that they can’t even seek help WITHIN the company – the cultural stigma is too strong to even allow assistance from down the hall, let alone from another business unit.

Enterprises must embark on a concentrated change program to overcome this inertia – to make “Proudly Found Elsewhere” (PFE) a success celebrated with the same joy as “Invented Here”.  This will require a sustained commitment to creating the organization, processes, culture and infrastructure that enable and empower their people to reach beyond their current boundaries.  And to achieve this transformation, you have to start somewhere.

In both strategic sourcing and Open Innovation, a first critical step is the aggregation of needs.  In strategic sourcing, needs for raw materials must be pulled together across factories.  To be effective practitioners of Open Innovation, companies must aggregate their need for solutions – and then make smart choices about where the solutions can be found, inside or outside of the boundaries of the company.  Aggregating the need for solutions requires a central organization with supporting processes and infrastructure.  We’ve designed our ONRAMP program and the InnoCentive@Work platform specifically to help our clients establish this core capability.

To this point, our October release of InnoCentive@Work includes a major new facet – an interactive workbench that allows our clients to find and collaboratively formulate their key problems.  This new facility brings our unique methodology for challenge development into a powerful but simple interactive space.  Carefully formulating the problems that matter is a foundation for better innovation.  Our tools now bring our leading approach to our clients in a compelling way.  In my next post, I’ll talk more about the Challenge Workbench and how it can help transform your innovation capability.

To compete in today’s economy, companies must find ways to innovate faster with their current resources. Open innovation (OI) is no longer just an interesting new approach to experiment with – OI is an essential core capability for R&D intensive enterprises. If you rely on innovation to drive your business, and you’re not proficient in OI, you’re at a disadvantage – because many of your competitors are already leveraging the talent and insight available throughout the world.

To help enterprises build this critical capability, we are very excited with the launch of the third generation of our @Work enterprise platform, InnoCentive@Work 3. @Work is InnoCentive’s SaaS offering, bringing the InnoCentive.com Challenge methodology into the organization. It is a web-based suite of tools and services that helps companies utilize the diverse knowledge inside and outside of their organization by creating online communities and facilitating collaboration to solve important business challenges, regardless of where solutions are hiding.

Like InnoCentive.com, InnoCentive@Work has the unique ability to present each critical problem to a variety of communities that may provide a solution. With InnoCentive@Work 3, companies not only have access to the talent and insight already present in their employees, it allows them to engage and collaborate even more broadly by connecting with their external communities of customers, consultants and partners, thereby creating newer communities of potential Solvers and increasing the likelihood of finding breakthrough solutions that yield measurable business results. Most significantly, InnoCentive@Work 3 is built for flexibility: it adapts to the community’s optimal style of working and collaborating, allowing Solver teams to define the voting and rating rules of their group.

Essentially, InnoCentive@Work delivers an ability to practice “strategic sourcing for solutions”. Strategic sourcing is a standard practice of manufacturing companies – they aggregate their demand for materials across their factories, using their entire scale to improve their negotiating position with their suppliers. The information collected through the strategic sourcing process allows the company to make careful, leveraged buying decisions. Manufacturing firms that didn’t develop a strong strategic sourcing capability in the 1980s or 1990s pretty much aren’t around today.

With InnoCentive@Work, your enterprise aggregates your “demand for solutions” – by identifying, formulating and publishing the challenges that matter to your firm. @Work allows you to develop these challenges and manage them in a single repository, where all relevant problem solvers can see them and collaborate towards a solution. This central view of your important problems defines your strategic priorities in a powerful way, helping to ensure that your internal and external resources are focused on the work that matters most. @Work allows you to find solutions (Eli Lilly reports that 80% of problems posted to their @Work system were at least partially solved), and also to centrally track the results and impact of your innovation efforts.

We believe InnoCentive@Work 3 is the logical first step toward true open innovation. Developed in close collaboration with current enterprise Seekers, @Work 3 not only extends clients’ ability to collaborate with communities both inside and outside of their company, it also empowers people with backgrounds or roles outside of the specific problem area to make insightful contributions to the solution, successfully fueling innovation.

I’ll be writing more about how lessons from the history of Strategic Sourcing can help inform the successful adoption of Open Innovation within the enterprise.

David Ritter
Chief Technology Officer
InnoCentive

Participation and engagement in SAP’s online communities has exploded over the last few years.  There are now 1.3 million members in the SAP Developer Network (SDN).  Several other related communities span an additional 500,000+ members.  Taken together as the “SAP Community Network”, this ecosystem is actively helping to  shape SAP’s agenda and success.  Many members are employees at major SAP customers and partners.  The leaders in these communities have a strong voice – on SAP’s site and through their own independent blogs and networks.  It’s been great to have a chance to share our model and vision with them and listen to their input and questions.

Here are some quick takeaways from the event so far:

• Jimmy Wales, the founder of Wikipedia, opened the festivities with some bold thoughts on collaboration.  He rightly claimed that Wikipedia and other examples have proven that “collaboration at scale can work”.  He further asserts that essential to unlocking the power of communities is an “assumption of benevolence” in the contributors.  When we eat in a restaurant, everyone has a knife.  But we don’t assume therefore that the other diners are going to use their knives to stab us.  This ideas validate our experience at InnoCentive, where Seekers and Solvers engage with good faith every day.  Accountability for evil-doers is also necessary, but a healthy community manages problems by exception, and allows the community itself to help identify and solve conflicts.
• SAP has taken a leadership position in identifying a new profession – the Business Process Expert.  SAP’s “BPX” community now numbers 450,000 members. These professionals are often at the center of business transformations, and are key to the successful implementation of IT solutions within enterprises.  They’re also in a great position to see where IT systems have gaps – missing or misaligned capabilities where improvement is needed.  We’re excited to offer this group a new way to find solutions that address these gaps by posting them as Challenges to the combined force of Solvers from both InnoCentive and the SAP Community Network.
• In communities such as SDN and BPX, participants are very often willing to help each other solve simple problems with no incentive other than pure good will or “reward points”.  But more complex problems may require real time and resources to resolve.  From the early response to our announcement, many SAP ecosystem members find InnoCentive Challenges to be a very natural extension of the community model, where significant solutions to bigger problems can be rewarded with a more concrete currency.  As I noted in my previous post, combining the incentives of peer recognition, a sense of personal accomplishment, and good old-fashioned cash creates a dynamic in which problems get solved and value gets created for all participants.

We look forward to our interactions with all aspects of the SAP ecosystem.  Please let us know your thoughts.

-Will probably never meet in the first place
-If they should happen to meet, they won’t likely talk about the relevant gaps in their work
-Even if they discuss their needs, they don’t have any basis on which to trust each other enough to engage in collaboration

Michael envisions an ideal “collaboration market” that will enable the open (or at least productive) exchange of ideas. This engendered lots of interesting debate, mostly about why none of the existing collaboration sites, publication archives, and the like are NOT fostering this type of exchange. Since we’ve been thinking about this problem for some time at InnoCentive, I thought I’d share some perspective on what characteristics we believe a collaboration platform needs to be effective.

I propose that at least three elements need to be present to drive effective collaboration in a community:

First, there must be a well-defined artifact around which to collaborate. This defines what you’re going to collaborate about. In Science Advisor, for examples, the artifact is a scientific paper. On eBay, the artifact is the item for sale. In open source software, the artifact is the code. On InnoCentive, the artifact is the “Challenge” posted by a “Seeker” – essentially a problem statement.

To be useful as a subject for collaboration, an artifact needs to be very clearly defined. A scientific paper, a Pez dispenser, a block of C code – these are all very concrete and specific things worthy of comment, purchase, or debugging. But an “idea” or a “topic” – these are often not crisply defined enough to foster focused, useful interaction. Collaboration on ambiguous things often descends into the cacophony of random shouting and discord that accompanies most political blogs.

Second, an incentive to collaborate is essential. Why should I review your paper? Why should I debug your code? There needs to be something in it for me – reward, some form of recognition, or at least personal satisfaction. At InnoCentive, we’ve found that participation goes through the roof when you can combine all three factors together: some currency I can spend at Wal*Mart, the opportunity to be seen as an expert by my colleagues, and a chance to positively impact the world. A generic “certificate of participation” for posting comments doesn’t cut it. Real, valuable incentives are required, tied to visible and (ideally) measurable contribution to understand/improving/solving the artifact.

When artifacts meet incentives, a transaction can occur – an incentive is awarded for contribution related to the artifact. I believe strongly that Michael’s term “collaboration market” is perfectly chosen. Markets are where value is exchanged via transactions. Without discrete transactions, it’s much more difficult to understand the value of what’s been exchanged. Virtually all of the examples cited in the discussion around Michael’s ideas lack the concept of a transaction.

For a market to work, value has to be judged fairly, and fairly consistently. This isn’t easy and deserves further discussion; it’s a likely topic of my next posting.

Finally, there must be a mechanism to establish trust. Fortunately for our thesis, considering our platform as a market with transactions gives us a very workable answer. People participate in collaboration, and incentives are awarded, creating a transaction. Just like on eBay, the participants in a “collaboration transaction” should be able to rate each other – but not on “intrinsic value”. The magic that allows the eBay rating system to work so powerfully is that each rating is applied to a person’s role and behavior in a transaction, not to the person more generally. On eBay, you would say “The bidder didn’t pay me for the Pez dispenser he bought” – an objective comment, versus “He’s not a good person to do business with” – possibly true, but subjective and therefore less useful.

In the scientific community, one can establish technical credibility through a history of publications, but one can’t really establish trust that way. Both are critical to successful collaboration. In an effective market, each potential collaborator should have a visible badge next to their name indicating their history of ratings by their past collaboration partners. A market with this mechanism could provide fairly clear guidance on whether a particular participant is worthy of trust. (Bootstrapping such a rating system is an acknowledged challenge.)

If we put these three elements together into a market-based community platform, we have at least a chance of getting our two hypothetical scientists together and enabling productive collaboration.

-They would come to the market and identify an artifact of common interest. So they could meet, and actually have something specific to talk about
-Because they’re both interested in the incentive, they have a reason to disclose their individual ability to contribute, and the gaps they need to fill
-Since they’ve been rated by their peers based on their previous participation in collaborations, they have at least a basis from which to begin a trusted partnership

Lacking any of the three critical elements tho, these two ships would most likely still pass in the night.
At InnoCentive, we’re developing these ideas in anticipation of enhancing the ability of our Solvers to collaborate on Challenges. Please share your input on this rich and important topic, and we’ll keep the dialog rolling.