Expanding product innovation outside of corporate research and development (R&D) teams is increasingly critical, but businesses should beware the pitfalls associated with crowdsourcing and not stake their future on this model alone, advise observers.
It is becoming imperative for businesses to be more open in the way they innovate as well as involve customers in the innovation process, said Atreyi Kankanhalli, associate professor and coordinator of the Service Systems Innovation Research Lab at National University of Singapore's (NUS') Department of Information Systems.
Technology companies, she added, "can benefit considerably" when they leverage internal and external stakeholders for ideas or as paths to innovation.
Open innovation, Kankanhalli explained in an e-mail, is becoming important due to two reasons. First, businesses are realizing that there is "a wealth of diverse ideas out there" that they can access due to technologies such as the Internet and social media. Second, customer preferences are changing rapidly and this may be difficult for companies to capture or assess accurately.
"By engaging customers in the product or service innovation process, firms can hope for a better understanding of their needs and better acceptance of the innovation if the customer is involved in the design," she noted.
According to Kankanhalli, Procter and Gamble is one of the leaders in open innovation, where over 50 percent of all its innovation originating outside the organization. Apple's involvement of customers in developing iPhone applications has also contributed to the company's success with the smartphone, she added.
Michael Chui, senior fellow at McKinsey Global Institute, concurred. In a phone interview with ZDNet Asia, he pointed out that open innovation has taken form for some 10 years. The concept arose from the thinking that "rarely is the smartest or most talented person one of your employees--actually, it almost never is".
"There's usually a lot more potential innovation from outside your organization than inside," Chui said.
Open innovation is also championed by Eric von Hippel, professor of technological innovation at the MIT (Massachusetts Institute of Technology) Sloan School of Management. In his book Democratizing Innovation, von Hippel wrote that end-users are "increasingly able to innovate for themselves" and cited empirical studies indicating between 10 and 40 percent of users were engaged in developing or modifying products.
In a study last year which polled 1,173 consumers in the United Kingdom, von Hippel and two other academics concluded that the aggregate annual consumer investments over the last three years were about 2.3 times the annual R&D investments made by U.K. consumer goods producers. This meant that consumers on their own were investing more in research efforts.
Von Hippel, who is also a professor at MIT's engineering systems division, told The New York Times that the study showed that people were "missing the dark matter of innovation" and that the findings presented a "new pattern for how innovations came about".
Social the way to go
Chui said he was starting to see an increasing number of companies tapping social media as a means of open innovation. Technologies such as social media increase the number of people who could potentially contribute to innovation and increase the modes or ways in which businesses could interact with people.
While many of companies that have taken this route are "consumer facing", B2B (business to business) companies, particularly those involved in supply chain components, are also embarking on open innovation, the analyst said.
According to Chui, taking innovation public greatly increases the number of people who could potentially help the company in its development efforts, as well as improve the amount of constructive interaction among participants.
In addition, many companies see open innovation as a great way to get work for free or cheaply, he said, noting that not everyone craves for monetary rewards.
"If you're doing a contest or some sort of crowdsourcing, maybe the prize doesn't have to be that big compared to the value you could create," he said.
On the flip side, it is "tricky" to build a critical mass of participants or contributors in the social innovation process and make sure this "community of people can sustain themselves", said Chui. This also includes getting the "right people" or individuals with domain expertise, a lot of industry influence or who are highly connected in terms of physical networks.
NUS' Kankanhalli added that for complex products such as medical devices, it can be difficult for the consumers to offer innovation because they are not likely to have the necessary knowledge and tools, and it may be difficult to transfer the relevant knowledge to them.
However, this does not mean that consumers cannot contribute to complex innovations in any way.
They can still provide inputs to the product designer on what they do not like, or what more they want from the product, she pointed out, citing Dell's IdeaStorm as an example.
Some companies also encounter difficulties in sharing knowledge as intellectual property issues may get in the way. In addition, they find it challenging to properly specify or "codify" their requirements, said Kankanhalli. Other problems faced include setting up the right incentives for the crowd to participate, and efforts to filter a high volume of submissions from the crowd to glean valuable ones can be costly--as was the case in Dell's experience, she noted.
McKinsey's Chui said to manage the challenge of filtering, the prioritization of ideas can also go the crowdsourcing path but this will not always work.
Shared innovation risk
Pointing to potential benefits, Kankanhalli said companies, through crowdsourcing of R&D, can not only access diverse knowledge of the crowd, but also reduce the cost of task execution and externalize the risk of failure.
The crowdsourcing trend has spurred new business models, she observed. Mass.-based InnoCentive, for example, connects companies with R&D or innovation problems with external sources, while China's TaskCN is a site on which companies can crowdsource less complex tasks such as Web site or poster design.
Technology companies may no longer afford to ignore open innovation, said Kankanhalli, noting that closed R&D may "backfire on them". Not tapping this route, she noted, signals that these businesses are not open to opportunities that exist outside their boundaries.
"One problem that can arise from designing new products is that [the company] may not have adequately captured market requirements," she pointed out. "One of the reasons believed to be behind the low acceptance of the Microsoft Kin phone was that it might not have reflected the needs of customers well, [given the lack of] IM or calendar features."
Chui added: "In innovation, to a certain extent, the more shots on goal you have the more likely you are to be successful.
"So a company that's interested in doing R&D ought to think about whether this idea of using social media and crowdsourcing can give them a different set of insights or design, and so on, which are generally useful and powerful."
Companies that already do so can also explore whether they can go about "experimentation in a rigorous way", he said, citing the idea of organizations as a 24-7 laboratory. They can also look at how to better tap social media to try new ideas or improve products, he noted.
However, this does not mean that companies should limit themselves to innovating in this format, added Chui.
"Only in very rare cases is this the only model the company uses for innovation--companies [should] have a portfolio of different ways," he said, pointing to corporate R&D labs and user groups as part of the enterprise development strategy.