The average lifespan of a company listed on the S&P 500 index has decreased by more than 50 years in the last century. It is estimated that by 2020, more than 75% of the S&P 500 index will be companies we have not heard of yet. Traditional companies need to adopt a different approach to quell the tide, and many are embracing open innovation as a result.
We are transitioning away from a world of expertise silos and towards one in which everything is connected. We have recognized that the best ideas don't always come from experts alone, they emerge from the random collision of different perspectives. Open innovation (OI) is a term created by Henry Chesborough to refer to 'the use of purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation, respectively.' We have seen some of the largest companies in the world adopt the methods of open innovation, including the Samsung, GE, and Lego, among others, all of whom have reported benefits such as better research, superior product development and cheaper R&D costs.
However, many organizations also have significant challenges, both perceived and real, to overcome before they commit to OI and make it work. OI is an innovation in itself and therefore has to be managed accordingly if it is to be implemented successfully. We have outlined three key factors that need to be in place to create the right environment for OI to be done.
Gary Hasty, Director Of Strategy & Innovation at AT&T, says that the primary issue is, 'Trust… but hey, that’s what lawyers are for right? When you open yourself up to the outside world you will quickly find out who your frenemies are, but you’ll also find the organizations that see the greater good of complimenting your growth.'
Alex Kruglov, VP Global Technology at the Valspar Corporation, agrees, but notes that the problems are more difficult to overcome. He argues that, 'Large companies are internally focused and programmed to develop within, plus, there are too many ‘checks and balances’ to scrutinize the risks of going outside. Small companies are much more open to harvesting and exploiting external collaborations, but often they have to be opportunistic and focus on commercial projects at hand.'
Ultimately, both small and large organizations need to take the time to find partners who they can trust and from whom they will benefit. Sharing problems and disclosing project details with others may be intimidating, but if a competitive risk comes off, the benefits can be tremendous. This is solved in two ways. Firstly, build trust incrementally, without disclosing too much. Don't disclose the final function of the product, instead focus on the specific problem as a challenge that external organizations can solve.
Second is IP management. This is most pressing in patent-centric industries such as medicine. It is achieved by making clear agreements between seekers and providers, and ensuring IPs are resistant to possible legal risks. You should also ensure inventors and development partners are fairly rewarded, or you risk nobody trusting you.
Establishing Efficient Internal Structures
Denise Powell, Open Innovation Manager at IQE, argues that you must, 'Be ready internally! Everyone tells you this when you first begin to develop an OI program, but you only truly appreciate the meaning and importance of internal readiness once you go through a steep learning curve! At the same time, you need to go through a learning curve to know what processes are needed to allow a smooth flow of external ideas and technologies into the business. Organizations are made up of people, processes and influenced by cultures, so methods for internal readiness are not always transferable from one company to the other.'
Celine Schillinger, Head Of Quality Innovation & Engagement at Sanofi Pasteur, agrees, noting that. 'It is not easy for organizations to adapt to open innovation. Their operating model is built on schemes that worked well in the 20th Century (intellectual property, in-house experts, control of communications and many others) but these are increasingly becoming obsolete. Very often, organizations today lack the competencies to transform their operating model. They don’t even really want to because it’s a challenge to move away from a model that has served you well for decades or more.
For an organization to deal with open innovation effectively, it needs to be able to solicit ideas quickly and thoroughly, rapidly act on which are the best to pursue, and communicate regularly with the innovator. This requires an agile structure that isn't overwhelmed by bureaucracy.
Independent OI teams working within the traditional company configuration are a very popular choice, while moving employees between departments within an organisation can help improve the intensity of internal networks and increase cross-functional working.
Fear Of Failure
Brian Platt, Director, Office Of Innovation for The City Of Jersey City, notes that: 'The biggest challenge with innovation, in general, is risk. Skepticism forms if there is a high risk of failure, but any bold new innovative initiative comes with some degree of risk that cannot be avoided. Leaders must be willing to accept the fact that not everything will always work out as initially planned, but more importantly, that failure only occurs if you give up.'
The same is true with open innovation, although it clearly comes with more risk as you are making yourself vulnerable to other organizations. Leaders need to accept that failure will happen, but they also need to invest in tools such as data analytics to give them the best chance of accurately predicting where risks will occur and how they will impact the project so that they can be mitigated against.
Ultimately, adopting OI means seeing the world of business differently, often in direct contradiction to behaviour that was allowed and endorsed in the past. You need to embrace collaboration, put competitive risk to the back of your mind, and realign the company so that the best ideas rise to the top and get acted on as quickly as possible.