Now, what about money?

marinus_van_reymerswale_007

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/)

About Eugene Ivanov

Eugene Ivanov is a PMI-certified Innovation Management Consultant who helps organizations increase the efficiency of their internal and external innovation programs.
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8 Responses to Now, what about money?

  1. Money is the worst invention in human history. This is just another example of how money distorts reason. A huge price was paid, it just wan not paid by the HMS scientist. Instead, they foisted it off on unwitting crowd-source participants. The winner was HMS and one crowd sourcer who got $6,000. But what of the wasted resources from the other 3499 crowd sourcers? They don’t count simply because your accounting system is faulty? No. What you have done is to hide your exploitation, both from those you exploited and from yourself. It’s not as if those other 3,499 experiments didn’t have a cost, it’s just that the cost was not accrued to you. Shame on you! But not to worry, people are adaptive, it will only work for a while, then crowd source platforms will catch on, and they will change the rules to solve their problem (being exploited).

  2. Thank you for your comment, Dr. North Priluck. I briefly checked your website. On the opening page, you write: “Mr. Priluck started this company in his grage.” I supose it should be “garage.”

    Best Regards,
    Eugene

  3. All fixed :^). I don’t understand why none of the popular site builder software packages don’t have built in spell checkers. This has been bugging me for years.

  4. Eugene, I’m curious. Do you agree with my analysis?

    • No, Jonathan, I don’t. As I said in response to your comment on one of the LI Groups, people participate in crowdsourcing campaigns for many reasons, money being only one of them. Take a look at this interview with Dr. Karim Lakhani where he touches upon the motivation factor: http://blog.innocentive.com/2008/07/25/5-questions-with-dr-karim-lakhani; next to last paragraph of his first response.

      Crowdsourcing has been around for many years already, its popularity only growing, however slowly, and there is absolutely no indication of the participants’ outrage with “exploitation.” After all, we live in a free market environment, and if you don’t like economic arrangements of any particular endeavor, don’t participate. But many people do. And I’m not even mentioning very popular, completely voluntary, projects like LInux.

      If you’re really concerned with exploitation of innocent victims, you should take a look at lotteries, which predominantly target less affluent, wealthy and educated.

      Best Regards,
      Eugene

  5. I once wrote a paper entitled “The Only Thing Not Accounted For In Cost Accounting is the Cost Of Cost Accounting” The paper showed, quite conclusively, that the cost of cost accounting was approximately 99 cents on the dollar. The stir it cause within the upper echelons of the Navy SBIR Program was quite amusing for me to watch. I’m not sure if I made things better, but at least after submitting the paper The Navy started giving a slight preferential treatment to Firm Fixed Price contracts over Cost Plus Fixed Fee contracts. So I suppose, perhaps, I did accomplish something. I doubt it had much of an impact in the long run, I never did go back and do any follow up. Perhaps I should.

  6. Pingback: Crowdsourcing: two approaches, two different outcomes |

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