We have often discussed how innovation has become a buzzword with many myths surrounding what drives innovation. I was recently discussing Open Innovation with an R&D executive. He made a pretty significant remark: There are lots of positive articles around open innovation, but there do not seem to be many balanced evaluations of the approach. Fortuitously, Knowledge@Wharton has an interesting note about The ‘Flip Side’ of Open Innovation that addresses some of the concerns.
A lot of people have been writing about open innovation,” says Wharton management professor Felipe Monteiro. A typical example, he adds, is Procter & Gamble’s Connect + Develop strategy, which encourages collaboration with outside organizations as a way to bring new products to market faster and more efficiently.
While the P&G approach “has gained a lot of traction,” Monteiro notes, it also raises questions about whether, and when, companies should be concerned about protecting their own knowledge. Monteiro’s research into this issue has led to a paper titled, “Does Strategic Protection of Knowledge Undermine the Effectiveness of External Knowledge Sourcing?” co-authored with professor Michael Mol from the Warwick Business School, and professor Julian Birkinshaw from the London Business School.
I am going to use the article as backdrop to summarize four key concerns about Open Innovation and why it appears that many companies are not really recouping their open innovation investments (much less earn a return on them). We should all think carefully about these before investing in open innovation:
- Valley of Death: A key concern in innovation is getting it transitioned into delivered products. Many companies I have worked with fail pretty frequently at this stage. We have discussed the valley of death extensively. The more disruptive (and hence the most valuable) the innovation, the more difficult it is to get it to market because it disrupts company culture and bureaucracy. When accessing innovation from the outside, this becomes even more difficult because of “Not Invented Here” mentality. Unless one can find an internal technologist or champion, open innovation just withers on the vine. This is very hard to overcome and needs active management involvement.
- Trade Secrets Protection: We have often discussed how innovation is not about an aha moment or one brilliant idea. Innovation happens at the interface of multiple disciplines and technologies. (For example, iPhone could be seen as combining a capacitive touch screen with low power processing and an intuitive user interface. Each was available in the market, but the integration generated value). To access innovation from the outside, companies will need to share their problems in enough detail that potential suppliers can describe solutions. However, this description will also be available to all competitors – which defeats the whole purpose.
- Evaluation / Management costs: As discussed earlier, managers need to consider many potential issues before deciding on accessing any innovation from the outside. A key issue that is forgotten is the time involved in evaluating innovation ideas. Because of trade secrets related problems described above, most companies use open innovation to access ALL innovation. Broad ideas need to be filtered before they can be sent to the technical teams – a task that requires management involvement. Companies quickly realize that this is VERY expensive. Even when ideas sound interesting, the value is difficult to estimate. Innovation needs to be accessed when needed – we can not just let innovative ideas sit on a shelf and get to them when the need arises. Innovative ideas require maturation and many cospecialized assets to get them to market. This is not cheap to evaluate.
- Liability: When suppliers submit their ideas to companies, how should they be protected? Any implied protection exposes the company to potential litigation liability. Disregarding inadvertent public release, consider the possibility of independent discovery. The company may have independently developed ideas similar to those accessed through open innovation. If they decide to use internal ideas, they might still be exposed to IP litigation. Hence, most companies ask suppliers to submit ideas with all rights released! Most people are not willing to do so…