by MJM on February 07, 2008 09:45am


In reading Jamie’s recent blog post on software and engineering excellence here at Microsoft, I got to thinking broadly about the impact of access on innovation. Obviously, the constant advances in software technology have not occurred in a vacuum. They are the result of people within and outside IT companies who have created, shared and borrowed from each other to create new and better products.

The expansion of the knowledge sources and markets through exploitation of internal and external options has been referred to as “open innovation,” and is described by Henry Chesbrough (who coined the term) in Open Innovation: Researching a New Paradigm as:

“Open Innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology. Open Innovation processes combine internal and external ideas into architectures and systems. The business model utilizes both external and internal ideas to create value, while defining internal mechanisms to claim some portion of that value. Open Innovation assumes that internal ideas can also be taken to market through external channels outside the current business of the firm, to generate additional value.”

A couple of graphical representations I came across recently help make this clearer (from www.openinnovation.eu/openinnovatie.php). The first represents the traditional “closed innovation” R&D model:

In this diagram, the firm boundaries are represented by solid lines, indicating that the company’s ideas all come from within, and they are pushed out within the traditional market paths. Compare that approach to the “open innovation” model:

In this diagram, the firm boundaries are indicated with broken lines, illustrating the free flow of ideas into and out of the company throughout the research and development processes.

Thus, Open Innovation is at base the strategic modification and/or removal of traditional barriers to knowledge sharing and market access to maximize the values of ideas.

Such an approach is contrary to the traditional notion of siloed, jealously-guarded development. Traditionally, companies like AT&T, IBM, Apple and for that matter Microsoft have made billions relying solely on their own people and ideas. But in the interconnected world, a guarded approach to R&D is becoming less realistic and, more importantly, less productive. It is almost impossible to corral ideas when massive amounts of information can be transmitted easily and instantaneously almost anywhere in the world. And, even when it is possible, doing so deprives a company (and arguably society) of the immense power of collaboration.

Ah, there’s that word: “collaboration.” It’s the magic term of the new millennium, but what does it really mean when we get down to brass tacks (or better yet, dollars)? I came across a brilliant example of money-driven collaboration recently in the Innocentive website. This site matches “seekers” and “solvers” in an “Open Innovation Marketplace” and claims to have over 135,000 solvers in 175 countries over 40 different disciplines. The website promises cash awards of up to $1M for solutions to big, industry problems. This approach has been called “crowdsourcing” and “mob wisdom,” and it represents a fascinating, if extreme, example of the open innovation principle.

However, can a business survive solely on an external community for its new ideas? Companies such as Dell, Eli Lilly, Proctor & Gamble, Google, and Best Buy have reportedly turned to crowdsourcing for new ideas, but you don’t see them jettisoning their R&D departments. There’s still a lot of value to be gained from in-house research and development. The key is finding the balance and using multiple avenues of knowledge creation. As Joel West and Scott Gallagher point out “a central concern to open innovation is how to best use the internal R&D capabilities of the firm to maximum advantage…successful approaches will often combine a variety of approaches.”

In my next blog post, I want to look at the interplay between open source and innovation in software generally and discuss Microsoft’s approach in particular. That approach, like all attempts to harness open innovation, is open to critical analysis, but there are sound business reasons for it. I intend to make a discussion of those reasons an important focus of my blogging here on Port 25.