Regular readers of this newsletter have no need for a tutorial on open innovation. There’s a whole library on the subject. However, it has little to say about what might lie ahead. For those insights we turned to CIMS Academic Fellow andRutgersUniversityprofessor Gene Slowinski. Slowinski began “slogging around the innovation swamp” as an innovation researcher and management consultant to some 100 companies nearly 30 year ago when CIMS sponsored his early research on strategic partnerships (see CIMS TMR Spring/Summer 1992). From this vantage point, he makes three observations:
1. Our internal innovation reward systems are out of sync with the marketplace. If I have learned anything over the past 30 years, it’s that the consumer of goods and services simply doesn’t care about the source of innovation. The marketplace reward system says, “Bring me the innovations — that’s what I want.” Does the internal reward system reflect that fact? If I, as a technical person, bring innovations in from the outside, am I seen as being not quite as good as the guy at the bench who invented it him or herself? The real question is whether our internal reward systems are biased toward internal innovation. If they are — and my impression is that in many companies they are — then we have a key link that is not connected to the marketplace. That, in turn, affects a lotof management’s behavior.
We need to ask ourselves, “What are we really rewarding inside our organization? Are we adequately rewarding people who put products on the market by including external innovations? I believe we are not.
2. My second observation is that we have yet to crack the code on how to budget for external innovation. This is fundamental because budget is the lifeblood of the organization. And yet we haven’t figured it out. The problem is that it’s easy to budget for an internal project because you know what that project is. You know the goals, the objectives, the number of people you’re going to need, and the dollars you’re going to spend to make that project successful. With external innovation, though, how do you budget for something that you don’t know is going to happen during the coming budget year? If there is no explicit budget for external innovation and some garage genius walks in the door with the most brilliant piece of technology in the world, where does the budget money come from? I’ll tell you how it works now in too many companies: there are little pots of money hidden around the organization, and you have to find those little pots if you want to fund an external project.
Moreover, not everyone has equal access to those little pots. You have to be politically connected to dip your hand in. This means the only people who can really do open innovation are people who are well connected politically. The result is that open innovation becomes the purview of a limited group.
But it gets worse. While it’s easy to budget for internal stuff, it’s impossible to budget for stuff you don’t know is going to happen later in the budget year.
Let’s say we did put an external innovation budget together. Money would only be used for external opportunities, but six months pass and no external opportunities have shown up. What happens to that money? It just becomes another politically connected pot. So we really have to crack that code. We have to fix that problem because it’s fundamental to any kind of Open Innovation infrastructure the firm puts in.
3. Finally, it’s very easy to underestimate the overhead of working externally. In the CIMS-sponsored research mentioned above, Frank Hull and I reported that “partnerships fail for reasons that have little to do with technology but everything to do with the managerial challenges of coordinating and integrating the partners’ research.” Thirty years later it seems little has changed! Coordinating and integrating a project across organizational boundaries simply takes more time. It takes more dollars, more effort and more emotional energy. And we don’t budget for it. Even simple matters like sending email become problematic. Partner A emails partner B, but partner B’s firewall won’t let the email through. That doesn’t happen in an internal project. Or what happens if Partner A budgets on a calendar year, and Partner B budgets on a fiscal year? A needs B’s numbers, but B’s numbers aren’t available for another eight weeks. Or A may budget by project and B doesn’t. These things don’t happen when we all use the same internal accounting systems.
Every time you run into one of these little frustrations and conflicts, they add up to increase cycle time and decrease efficiency. They increase frustration. The problem is we don’t prepare people for that because we — management — hasn’t thought it through completely.
Given these observations, my prediction is that once you find a good partner, you are likely to do multiple deals with that partner because your overhead will decrease significantly on deals 2, 3 and 4. Each firm understands the other’s systems and can efficiently integrate their skills and resources. Furthermore, when partners do multiple deals, they influence each other’s future thinking. If you know that I’m interested in marketplace A and in technologies 1,2 and 3, your internal R & D effort may be biased toward that technology or toward that market simply because you’re working with me. The reverse is also true because I’m working closely with you and know your interests. You may influence the future course of my R & D organization and my strategic planning process.
Partners who form a good relationship align themselves over time, and I think that’s what you’ll see. As a result, I believe we’ll see more efficient, more productive relationships. These will minimize the operational difficulties, which are significant.
Advice to Managers
So my advice to innovation managers is to identify one, two or three truly strategic partners rather thangoing out and doing 500 deals. I like to say that I’m not impressed with companies that do 500 deals. I am very impressed with companies that do five really, really smart deals. Deals that create true value in the marketplace. Deals that change the nature of competition in the industry. Deals that develop products so elegent that the marketplace will never be the same again. Steve Jobs is one of those deal-makers. The iPod is an excellent example of multiple deals that came together to bring together a truly revolutionary consumer product. The really interesting thing is that Jobs took the next step and moved to an adjacent market. He brought us iTunes when he had no credibility in the music marketplace — no online digital presence — to bring us iTunes. Sony Music or Time Warner should have brought us iTunes, but they didn’t. Jobs asked, when people use iPods what else do they use? And the answer was they use music, and he said, “I’m bringing them music too.” It was simply brilliant.