What do you need to innovate? Freedom! Yes, freedom.

Freedom-Series-Logo-720x388We love talking about nurturing a culture of innovation; yet, our list of practical measures to promote entrepreneurial spirit is depressingly short. For this reason, I’ve set out to create a list of specific corporate policies that organizations may try in order to establish the culture of innovation.

One entry on this list could initially appear as not immediately related to innovation at all: labor laws. A 2001 study showed that labor laws making it more difficult to fire employees increase their participation in corporate innovation activities. The authors of the study argued that the lower threat of termination produced by stronger anti-dismissal laws decreased the “cost of failure” for employees to engage in potentially risky innovation projects. Another study, published by MIT researches, found that companies in 34 U.S. states having the so-called constituency statues produce more high-quality patents than those in 16 states lacking the statues. A constituency statue encourages corporate directors to consider non-shareholder (e.g., employees) interests when making business decisions, therefore forcing them to think of the long-term interests of their companies rather than the short-term profits. The both studies strongly suggest that removing the proverbial Sword of Damocles of punishment for innovation failure encourages risk-taking and experimentation. In other words, providing employees with freedom to fail is a great way to promote innovation activities.

The effect of personnel policies on innovation has again been brought into the spotlight in a recent study described in an August 17, 2016 Harvard Business Review article. The study shows that U.S. state-level employment nondiscrimination acts (ENDAs)—laws that prohibit discrimination based on sexual orientation and gender identity—spur innovation. More specifically, the study found that U.S. public companies headquartered in states that have passed ENDAs experienced an 8% increase in the number of patents and an 11% increase in the number of patent citations relative to companies headquartered in states that have not. Interestingly, the result was more pronounced for companies that previously have not implemented nondiscrimination policies, for companies in states with a LGBT population and for companies in human capital-intensive industries. The authors of the study argued that ENDAs positively affect innovation by matching more creative employees with innovative companies.

I’m not going to argue, of course, that in order to be more innovative, you have to be a gay, lesbian or permanently employed (as opposed to employment at will). What I do want to argue is that innovation implies certain level of freedom, be it freedom from fear of failure or freedom from being discriminated for whatever reason.

Sounds too farfetched? Hold on. Last week, the 2016 version of the Global Innovation Index (GII) was revealed. The GII gauges the world economies based on infrastructure, market and business sophistication and research. As in the previous years, Switzerland took the title of the world most innovative country; Sweden was second, the United Kingdom third and the U.S. fourth.

Back in 2014, I made a notion that the top of the GII ranking was heavily populated by countries representing developed democracies, the societies with strongly upheld political and individual freedoms. (And to make sure that this observation had any statistical meaning, I compared the 2013 GII with the 2013 Freedom of the World Report published by Freedom House, a U.S.-based non-government organization that monitors democratic developments around the world.) Nothing seems to have changed on the innovation Olympus since then. Moreover, it’s so tempting to argue–in the light of the findings discussed above–that it’s not by sheer coincidence that among the 10 most innovative countries in the 2016 GII, there are eight Western European countries with strong labor and antidiscrimination laws.

Are we watching a growing body of empirical evidence to what many of us always intuitively knew: in order to innovate, you need freedom? Do we need any further proof to this thesis at all?

Image credit: http://crossroadswaunakee.org/event/celebrating-freedom/

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Crowdsourcing: two approaches, two different outcomes

In my July 16 post, I set out to prove that crowdsourcing is a very cost-effective tool allowing solving problems at much less cost compared to other innovation tools, and, therefore, the low popularity of crowdsourcing, of which I wrote earlier, can’t be explained by its being prohibitively expensive. In this post, I’ll continue the comparison exercise and talk about effectiveness of two different crowdsourcing approaches.

I like saying that one needs only two things to run a crowdsourcing campaign: a question and a crowd. The topic of selecting and formulating a proper question to crowdsource is of immense importance, and I’ll take on this topic later. Today let me deal with crowds.

There are two principal ways to acquire a crowd: to build it from scratch (I call this approach “build-the-crowd”) or to use proprietary crowds already assembled by a number of commercially available crowdsourcing platforms (I call this approach “rent-a-crowd”). Companies build their own crowds usually by creating the so-called External Innovation Portals (or something similarly called). A typical EIP is essentially a website that invites anyone from the outside of the company to register on the site and then submit innovative ideas in the areas of the company’s corporate interests.

Examples of EIPs are numerous. They’re especially popular among consumer-oriented companies: Starbucks runs My Starbucks Idea, General Mills has G-WIN, and Clorox came up with CloroxConnect. Tech companies, including pharmaceutical and medical device, don’t stay on the sidelines, either: Medtronic invites you to Innovate with Medtronic and AkzoNobel suggests that you Enter our Open Space. Energy giant Shell lures you into its own portal modestly named Shell GameChanger.

How effective EIPs are? Unfortunately, hard numbers are difficult to come by: companies are predictably reluctant to publicly discuss the efficiency of their open innovation programs, EIPs being no exception. Yet a brave one, Dell, does provide stats on how its EIP, IdeaStorm, is performing. IdeaStorm’s front page says that all in all, over 24,948 ideas were submitted, of which 549+ ideas have been implemented. Leaving aside the vagueness of the word “implemented,” the success ratio of the project barely exceeds 2%. Not a fountain of innovative ideas for Dell, to say the very least, and as my own involvement with corporate EIPs suggests, other corporate portals aren’t doing any better.

The apparent low efficiency of EIPs stems from the way they crowdsource knowledge from the outside. Many EIPs just ask for “ideas” without clearly defining what represents a valuable idea for this particular company. (I call this approach “bottom-up” and have criticized it on a number of occasions; see, for example, here and here). As a result, a lot of irrelevant or low-quality ideas are being submitted, dramatically decreasing the signal-to-noise ratio but at the same time significantly increasing the amount of resources the company needs to allocate for the initial screening of submissions.

Some companies have recognized this shortcoming and began including descriptions of the areas where innovations are especially welcome. For example, AstraZeneca lists “R&D Focus Areas” on the front page of its OpenInnovation portal; similar descriptions can be seen on Philips’ SimplyInnovate.

Even further went Unilever. Its The Unilever Foundry portal features Challenges, which are reasonably well-defined problems in a few product/services categories. Each Challenge explains the context of the problem and describes what exactly Unilever is looking for. Challenges have a submission deadline and a budget. Unfortunately, I have no data on how successful Unilever’s Challenges are and I’d appreciate any information on this topic.

Unilever’s Challenges almost exactly adhere to the Challenge concept introduced back in 2001 by InnoCentive, an open innovation service provider specializing in crowdsourcing. Instead of asking for “ideas,” InnoCentive’s clients post well-defined technical or business problems (“Challenges”), time-bound and having an “award tag” attached to it descriptions, to the InnoCentive website. Then a huge crowd of InnoCentive “Solvers” (375,000+ from 200 countries) that InnoCentive has assembled over the years and now “rents-out” works on finding solutions to these problems. Submitted solutions are then collected by the InnoCentive staff and delivered to the client. The client has a fixed amount of time to review all the submissions and announce a “winner” who is receiving the money award.

The solution rate of the InnoCentive Challenges is very impressive. Although I failed to find the precise number on the company’s recently redesigned website, about a year ago InnoCentive claimed this value being 85%. Similar high level of success of its crowdsourcing campaigns, up to 90%, was reported by another open innovation service provider, IdeaConnection. Just compare these numbers to about 2% success rate claimed by Dell’s IdeaStorm!

The InnoCentive (and IdeaConnection) mode of crowdsourcing is an example of what I call the “top-down” approach, a process in which a well-defined problem is offered to a pool of potential solvers, after which submitted solutions are reviewed–and successful ones identified–based on a number of criteria articulated in advance. (Again, I already wrote about the benefits of the “top-down” approach: here and here).

The available numbers therefore strongly suggest that the top-down mode of crowdsourcing–from the problem to a solution–is much more effective than the bottom-up mode–from “ideas” to potential implementation. At the same time, I do see a value for a large company (and I emphasize: large) to spend time and money for creating its own online crowd–instead of paying fees to the providers of crowdsourcing platforms, like InnoCentive (IdeaConnection doesn’t charge an upfront fee). So from this point of view, the business model adopted by Unilever with its Challenges, a combination of the top-down approach plus its own crowd of solvers, looks to me as an optimal way to conduct corporate crowdsourcing campaigns.

Image credit: http://www.huffingtonpost.ca/ashley-redmond/gap-year-canada_b_5948708.html

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Now, what about money?

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In my previous post, I wondered why as efficient innovation tool as it is, crowdsourcing is still seldom used by organizations. I offered two answers to this question. First, formulating a question to crowdsource requires careful deconstruction of the underlying technological or business problem, a skill that many organizations simply don’t possess. Second, there are so many different commercially available crowdsourcing platforms that just navigating this marketplace makes your head spin. And make no mistake: choosing ‘wrong’ platform will almost certainly derail your crowdsourcing campaign.

A friend of mine, who read the post, made a shrewd comment. Before complaining that crowdsourcing is seldom used, he said, you should first prove that crowdsourcing is really efficient and, better yet, cost efficient enough for organizations to want using it.

My friend is right. I too strongly believe that crowdsourcing must prove its economic worth to become a mainstream innovation tool. In other words, we need a proof that crowdsourcing can solve problems in more cost-effective way than other innovation approaches. That turns out to be not as easy as it might seem: economic analyses of crowdsourcing campaigns, whether successful or not, are almost never publicly disclosed. That’s why it’s so important to review a couple of publicly available case studies.

A 2010 case study analyzed the return on investment (ROI) realized by a multinational agricultural company Syngenta when using a crowdsourcing platform provided by InnoCentive, an open innovation intermediary. The analysis identified a number of benefits gained by Syngenta from the cooperation with InnoCentive, including cost savings from finding solutions to R&D problems and reduction in intellectual property transfer time. The total value of these benefits was estimated at $11,861,688 over three years. Given that the total cost of using the InnoCentive services over the same period amounted to $4,200,567, a three-year, risk-adjusted ROI for Syngenta was 182%, with a payback period of fewer than two months. Not bad.

More recently, a showcase for the economic prowess of crowdsourcing came from Harvard Medical School. For one of their research projects, the HMS scientists used the MegaBLAST algorithm to process DNA sequencing information; the working capacity of the algorithm was 100,000 sequences processed in 4 hours and 20 minutes. In order to increase the speed of processing, HMS hired a full-time developer (with the annual salary of $120,000), who lowered the processing time to 47 minutes, a 5.5-fold improvement. Because this was still too slow, HMS launched a crowdsourcing campaign offering $6,000 in prize money for further improvements of the algorithm. The campaign that lasted only two weeks resulted in 122 submissions coming from 69 countries. The winning algorithm was capable of processing 100,000 sequences in 16 seconds, a 1,000-fold improvement over the original MegaBLAST algorithm and a 180-fold improvement over the algorithm developed in-house. Taken into account a 20-fold difference in labor expenses ($120,000 vs. $6,000), the HMS crowdsourcing campaign was overall 3,600-fold more cost-effective than the internal approach. Think about it: 3,600-fold more cost-effective than the internal approach.

There are at least two factors making crowdsourcing so cost-effective. First, every organization has limited resources to allocate to solving a particular problem. As a result, the problem is solved in a sequential manner, with only one or a few approaches being tried at the same time, which increase the total project time. In contrast, when crowdsourcing, you engage a large number of independent “teams,” all of them working in parallel. As a result, shorter time is needed to try a large number of solutions to identify the correct one.

Second, and much more importantly, organizations must pay for any attempt at solving a problem, whether successful or not, which drives the cost of the internal problem-solving. In contrast, when running a crowdsourcing campaigns, you pay only for the successful solution, ignoring the cost of unsuccessful attempts.

This combination of running in parallel a large number of problem-solving tries with paying only for the successful try makes crowdsourcing so cost-effective.

Image credit: “The Moneychanger and His Wife” by Marinus van Reymerswaele (https://themathematicaltourist.wordpress.com/tag/counting/page/3/)

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A Performance Paradox: Why Is Crowdsourcing So Seldom Used?

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Call it a performance paradox: while being an effective innovation tool, crowdsourcing is seldom used by organizations. A fresh example of this paradox came in the recent Gartner 2016 CIO Agenda Report (highlighted in a June 27, 2016 Forbes article). The Report showed that although crowdsourcing was the most impactful among ten digital innovation platforms, it was actually the least used (by fewer than 10% of surveyed businesses).

The Gartner Report finding might be the latest, but hardly the only indication that crowdsourcing is slow to become a major innovation tool. A 2013 study by Henry Chesbrough and Sabine Brunswicker looked at specific open innovation tools used by large companies in Europe and the U.S. The study showed that the most popular approaches were customer co-creation and informal networking, while crowdsourcing (along with using open innovation intermediaries) was considered the least important.

The Chesbrough and Brunswicker study echoes yet another report by Robert Cooper and Scott Edgett published back in 2008. Cooper and Edgett reviewed techniques that 160 companies used for product innovation, more specifically, at the front (‘ideation’) end of the product innovation process. They found that the most popular methods were customer visits and focus groups. In contrast, crowdsourcing was unpopular and perceived ineffective.

It thus appears that crowdsourcing still doesn’t find its proper place in the corporate innovation toolbox, and the situation doesn’t seem to be getting better over time.

What’s going on? I think that the roots of the performance paradox lie in the superficial simplicity of crowdsourcing as an innovation tool. At first glance, in order to run a crowdsourcing campaign you need only two things: a question to ask the crowd and a crowd to answer this question. And here the problems begin. First, as any crowdsourcing practitioner would tell you, formulating a ‘question’ to crowdsource requires careful deconstruction of the underlying technological or business problem, something that many organizations are actually quite bad at.

And then, there is a ‘crowd’, an audience you assemble to broadcast your question to. You either build your own crowd, a process requiring time and patience, or you ‘rent’ a crowd by hiring an appropriate open innovation intermediary. And here one encounters another hurdle: there are so many different commercially available crowdsourcing platforms–some estimates put this number at around 200 worldwide–that just navigating this crowded marketplace is a daunting job. Besides, the stakes are high: choosing ‘wrong’ platform will likely doom your crowdsourcing campaign to failure.

So I don’t see any easy way to make crowdsourcing performing at the top of its potential any time soon. A lot of work needs to be done on educating companies how to use crowdsourcing effectively. Again, two questions are critical here: how to choose the problem to crowdsource and how you assemble effective crowd (embedded in the latter is a question about appropriate digital platform). I’m going to address these questions in my future posts.

Image credit: “In the Crowd” by Francesca Bifulco (http://www.mymodernmet.com/profiles/blogs/francesca-bifulco-in-the-crowd)

 

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Dis-r-r-r-uption!

Wrecking_ballMy previous post has triggered a number of interesting, often negative, comments in various LinkedIn Groups. My opponents criticized my suggestion that the current state of innovation wasn’t as bad (“broken”) as a few recent articles I referred to were implying. They argued that the corporate innovation process was indeed fundamentally broken because the majority of companies were pursuing mostly incremental improvements of their core offerings, instead of going after completely new, “disruptive”, products.

The idea that companies should stop wasting time and resources on incremental innovation and focus entirely on disruption–interpreted as the creation of products and services generating completely new markets–has become so popular that some clarification seems to be in order.

Let me first go back to the roots of the term “disruptive innovation.” As originally described by Clayton Christensen, disruptive innovation represents a process by which a product initially appears at the bottom end of a market, usually as a simpler and cheaper version of the current product. Then, by accumulating improvements–often by steps completely incremental in nature–the new product gradually moves up the market, eventually displacing (“disrupting”) the existing incumbent product. Importantly, at the initial stages of the disruptive process, its products are often characterized by lower gross margins and smaller target markets; they also have less attractive features than the dominating (incumbent) products.

From this perspective, I can see why startups or early-stage companies would become obsessed with disruption. Usually having no products on the market–and therefore nothing to improve–their only chance at survival is to come with a product or business model that would “disrupt” the business of an incumbent, usually a large company dominating the existing market. In doing so, they can live, at least in the short-term, with low margins, small market share and even somewhat inferior product.

But why would large companies pursue disruptive innovation? What are they going to disrupt? An incumbent? They are incumbents! The very term “disruptive innovation” is completely meaningless when applied to large and established companies. I hate saying that, but I suspect that many folks who call “disruptive” every product or technology that looks exiting are simply unfamiliar with Christensen’s work.

Sure, in order to stay ahead of the competition and to improve the bottom line–and, of course, in order not to be disrupted themselves–large companies must always look beyond incremental improvement of their core offerings. To describe this “higher-level” type of innovation, the largely interchangeable terms “radical”, “breakthrough” or “transformational” have long been proposed. So why use the term that has completely different meaning? Because we love how energetic and optimistic the word “disruption” sounds? Dis-r-r-r-uption!

Of course, I don’t want to be a terminology cop and although I do believe that precisely defined terminology is vitally important for any substantive discussion, I’m ready to concede to my critics and agree to call any innovation above incremental “disruptive.” I’m doing so with the only goal: to address the very nature of their assertion that companies must pursue nothing but disruption.

First of all, the innovation process is laden with risk–a lot of it!–and the higher level of innovation, the heavier the risk. To mitigate this risk, companies adopt the 3-Horizon Model of Innovation Management. According to this model, as much as 70% of all innovation resources should be spent on the improvement of the company’s core products and only 10% on highly risky projects aimed at breakthrough (“disruptive”) products or technologies.

Now, I assume that when my critics make investments within their own retirement portfolios, they spread the money over various investment options; they don’t put all of it in one speculative stock. Why then do they expect a fiscally responsible company putting all 100% of its innovation resources in a number of projects with the highest probability of failure? Does it make any sense?

Second, let me tell the fans of disruption a little secret: innovation is difficult, and the higher level of innovation, the more difficult it is. If companies could come up with a “revolutionary” product or technology every quarter, they would. But they can’t, and blaming them for that is about the same as blaming Usain Bolt for not breaking the world record every time he hits the track.

So let’s relax and give to incremental innovation the respect it deserves. Inc-r-r-r-emental!

Image credit: https://en.wikipedia.org/wiki/Demolition

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Is Innovation Broken?

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I’m amused with the recent stream of publications describing the supposedly dreadful state of innovation. We’re informed that “innovation today disappoints,” that it’s “not delivering” and that “our innovation systems are breaking down.” We’re also told that “people are fed up with innovation” and that we should reduce using the very term “innovation” and ban the term “innovation culture” at all.

What’s going on? Sure, I’m not particularly happy with what I see in the field myself. Recently, I pointed out to the troubling findings in the Accenture’s 2015 Innovation Survey indicating that there is a mess in the heads of innovation practitioners with regards to the different types of innovation–a confusion that may indeed easily derail any innovation program. And before, I complained that many organizations fake innovation instead of making it.

But the glass of innovation isn’t completely empty; it’s rather half-full. The same Accenture study finds that, despite setbacks, companies keep establishing formal corporate innovation programs, utilize digital platforms to manage innovation process and, most importantly, increasingly approach their customers in search for new ideas. Is it a bumpy road? You bet! But they are trying. Imagine that you’ve just started to learn driving a car. Despite your best efforts to do everything by the book, your car is often frustrating you with sudden stops, risky moves and strange noises under the hood. Is this a reason to trash this car and buy a new one?

The great German philosopher Hegel taught us that small quantitative increases in some entity, when reaching a certain threshold, give rise to a qualitative change in this entity. This is exactly the stage the innovation process is at today: accumulating small, incremental changes–by way of trial and error–which will sooner or later give rise to acquisition of new knowledge and experience. Rushing this process or complaining that it’s not fast enough is counterproductive, to say the very least.

And the best that innovation practitioners, including consultants, can do today is not to push the proverbial panic button. They should instead provide a clear vision of what a real (not faked) innovation is and what strategic roads to reach it are. They should carefully observe things, detect problems and help their organizations or clients correct the course. They should also stop playing childish games of name-calling by fiddling with the established business terminology.

Image credit: https://musicfrombrokenchords.wordpress.com/2013/10/05/broken-trampled-torn/

 

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Chief Decision Maker

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This blog has a recurrent theme: I’m interested in corporate policies that organizations may try to foster the culture of innovation. The only requirement for making the cut is that this policy must be specific and actionable (i.e., not just a call to “celebrate failures”). As of today, the list of such policies is very short; it actually includes only two entries.

  1. I propose to make stock option grants, as opposed to cash bonuses and other monetary rewards, the principal incentive for engaging employees in innovation projects.

This proposal is based on a 2015 finding that companies offering stock options to non-executive employees were more innovative, and that the positive effect of stock options on innovation was more pronounced with longer-term grants.

  1. I propose to place employees involved in innovation projects on fixed-term employment contracts, as opposed to employment-at-will. Alternatively, the creation of tenure-like job arrangements for people involved in strategic innovation initiatives can be considered.

This proposal capitalizes on a 2001 study showing that labor laws making difficult to fire employees increase their participation in corporate innovation activities. It was argued that the lower threat of termination produced by stronger anti-dismissal encouraged employees to engage in potentially risky innovation projects.

A recent article in Harvard Business Review prompted me to introduce one more policy to my list. The article author, Simone Ahuja, identifies an important structural barrier preventing corporate intrapreneurs from “owning” their innovative ideas: the decision to proceed with the idea further or terminate it belongs to managers rather than to intrapreneurs. Ahuja then describes a successful corporate policy introduced at Intuit: there, it’s up to individual intrapreneurs to decide “if and when to pull the plug on a project or prototype.” And if they decide to discard the original idea, the intrapreneurs are encouraged to pivot to another solution instead of terminating the project completely.

Sure, I understand that writing off the cost of “failure” when developing software–as opposed to areas where building prototypes requires significant investments–is easier at Intuit that at other companies. And yet, giving individual intrapreneurs the power of decision-making–granting them the status of the Chief Decision Maker, so to speak–provides an enormous boost to fostering the culture of innovation: it eliminates the very word “failure” from the corporate innovation lexicon. For, if it’s your manager who closes your innovation project, it’s failure (no matter what the followers of the “celebrate failure” cult would tell you); but if it’s you who decide when to bury your idea, it is learning.

So, I propose the following addition to my list:

  1. Whenever possible, provide employees involved in innovation projects with fixed budgets and timeframes to conduct validation studies/prototype building while giving them, within defined borders, the authority to be solely responsible for the key project decisions.

In the future, I’ll try to refine the language of the above proposal.

Image credit: https://www.pinterest.com/pin/64668944619099954/

 

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