How to Measure Open Innovation Value – Part 2

What’s Different about Open Innovation?

Better Value

The metrics are less developed in this emerging discipline than in traditional innovation. In my last blog  I outlined a list of the sorts of direct and indirect measures that firms can use to capture all the value that innovation brings. This same list holds true for open innovation. You will want to profit from collaborations and there will still be the usual associated costs. Given the motivations to collaborate (better innovations delivered cheaper and faster) you would expect the benefits to be larger and the costs smaller. Open innovation should deliver better Innovation Value. Interestingly OI firms we’ve worked with such as Procter and Gamble concur, reporting that they get more discontinuous innovations, cheaper and sometimes faster. What remains constant is the hit rate. P&G’s experience shows that out of every 100 ideas that receive investment, one makes it to market and the same ratio is true whether the ideas come from within or without.

In addition to the standard measures, here is a list additional ones that help open innovation to be more accountable.

Table 2 – Open Innovation Value

Benefits Costs
Two sets of profit A shared set of costs
Partner satisfaction Two perspectives on risk
Network engagement Costs of the competition
Trustworthiness Networks and scouting
Seeing new opportunities first Venturing
Time to market Partnering
Ease of decision-making IP and legal
Employees focused on core Managing relationships
Network size and connectedness
Network diversity  and quality
Employee innovative capacity
Better ideas submitted
Scientific value

Two Partners, Two Sets of Metrics

Given that open innovation involves innovating with others, the first observation is that you need to measure each factor from two (or more) points of view. There are two sets of profit metrics, two sets of costs and two markedly different levels of risk. So the first decision to make is how transparent each partner wants to be about sharing these. In fact this is an entirely healthy, albeit rare, conversation as it ensures that objectives and processes are aligned in some detail, avoiding uncomfortable ‘moments of truth’ halfway through the relationship. These conversations should encompass the envisaged business model and IP strategy as well as who shoulders what costs and risks at what points in the relationship. Our corporate collaboration project with McLaren and NATS exemplified this. The two organisations worked closely together in a mutual and flexible business partnership in order to repurpose F1 race control software to air traffic control.

Relationship Measures

The second question concerns the relationship itself. The indirect metrics of closed innovation have parallels in open systems. For example customer satisfaction is broadened to include the satisfaction levels of your partners or network; brand reputation is augmented by a firm’s reputation as a trustworthy partner. In practical terms, enhanced trustworthiness may well increase your chance to see new opportunities before your competitors. By leading the charge in open innovation, P&G are seeking to be the partner of choice.
On the cost side, the time to market and ease of decision-making need to viewed in the context of partnerships – both can take time. We found this in our Open Alchemy project in which Oracle, the NHS, Pfizer and BT joined forces to create the national wellness scheme Wellbe. This succesful outcome would not have been achieved without careful attention paid to the roles of each company, their expectations and the practicalities of running a consortium.
Sometimes it is easier to innovate outside an organisation – flatter reporting, more autonomy and fewer silos to contend with. Employees can be deployed on core, less risky projects with external partners shouldering the burden of more speculative ones. With experience these reductions in administration costs can be accounted for.

Valued Networks

The third question concerns the value a firm derives from establishing an innovation network. Entrepreneurs and inventors innovate serially and so, as in the examples of Hasbro and GSK it can pay dividends to cultivate long-lasting relationships with them. This being the case, measures of the size, connectedness, diversity and quality of open innovation networks makes sense. In our Open Venture Challenge with Cancer Research UK we created a 600 strong network that was tasked to create new ventures. Along the way to the successful birth of five of these, we measured and benchmarked community growth, rate of ideation, comments, member reputations and the level of buzz.
The same observations about measuring external networks also hold true inside large firms. But how many identify and cultivate their intrapreneurs or appreciate, measure and grow the innovation mindsets of their employees?
One final point on networks – the added benefits of better external engagement should also be considered. Easier and more regular filling of the innovation pipeline with better ideas, many submitted unprompted.

Other New Frameworks

Some are indeed beginning to look at the broader picture. Van Horne, Frayret and Poulin (2006) put forward a 3X3 value matrix looking at value generation for innovator, business and consumer. It is being recognised that collaborative innovation needs a different approach and measurement can take place at industry level, though ‘architectures’ (Jacobides, Knudsen and Augier 2006). For example in bilateral relationships it is possible to rate the ‘complementarity’ of products, services and processes and ‘mobility’ of assets .

Conclusions

It is time for innovation to become a true part of a firm’s core growth strategy rather than a kind of corporate hobby. NESTA’s work on a national innovation index has started defining scores that can compare the innovation fitness of different firms and sectors. At 100%Open we’ve had the privilege of looking at innovation metrics afresh in the exciting new open world. Perhaps having to make the case for open innovation in a more rigorous way will also rub off on traditional innovation.

Comments

  1. The challenge of measuring relationship effectiveness reminds me of the truism about community open course software, where different organisations contribute effort.

    At first, people tend to think that it’s like 2+2=5; I put in 2 people, you put in 2 people, and we get the outputs of 5 people!

    But it really doesn’t work like that, which can be a shock. In fact, it’s 2+2+2=3; all three of us each put in 2 people, and we get the total output of 3 people. This is good, because I pay for 2 but get the work of 3 – a great return on investment. But it’s not magic and it allows for the overhead of actual collaboration.

  2. Thanks Laura – this is a really good way of demonstrating that openness shares out the risks and rewards of innovation. Partners each shoulder the costs and for greater benefits.
    Looking out for these sorts of equations will help us be surer of the value of collaboration. As ever, the open source community is showing the way.

  3. Your expansion of the concept of innovation to focus on “innovation value” — beyond financial metrics — is spot on. “But wider and indirect returns should be taken into account and given monetary values or indices.”

    The issue with most organizations pursuing innovation is that they put an early requirement on financial returns before they have any real concept of the many factors involved in establishing the value of the concepts. So project teams — I hate to say it — make up the ROI numbers to check the box. But these early financial predictions are a finger in the air at best.

    Pharma companies who have to place MAJOR bets on early stage development portfolios are actually beginning to abandon the concept of financial projections entirely in favor of the innovation value metrics you discuss.

    Bravo. We are swimming up the same stream.

  4. Hi John thanks for the perspective.
    It’s good to hear about the pharma view. This sector has been a leader in open innovation and absolutely understands the value of cultivating long term relationships amongst other things.
    I am definitely in favour of trying to relate indirect value to monetary terms when we can. In the pharma for example we could ask ‘what is your network worth’ and try to come up with a value that financial controllers would recognise.

  5. Although I am just beginning to review literature on how to measure open innovation value, I tend to lean towards the options perspective when it comes to strategy. Your example on how breakthrough innovation not only generates profits but increases firm value is interesting. Because, in my exploration of open innovation I find that although it may mean x to one firm, its simply y to another. Perspective determines reality, and how an investor defines value will differ from how management sees it. While OI may help achieve something incremental, in some contexts it may just be to beef up confidence / PR. An interesting case is Indra Nooyi and Pepsico. I made mention of it in my recent blog post: http://randomthoughtsoninnovation.blogspot.co.uk/2012/06/corporate-ninjas.html?spref=tw. By the numbers Pepsico has done good since she took the helm as CEO – over 6years ago. Although She has been innovative, and might be on to something big (the company invested in a new R&D lab etc), but there are commentaries that until the strategy shows signs of payoff, investors will remain unhappy. So, the point you make that of sets of metrics for different partners that are directly or indirectly involved in the process is important. Brilliant post David.

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