Saturday, May 30, 2009

ECONOMICS of open innovation

What ROI at what RISK? – every investor’s top question! With respect to open innovation, the same question gets rephrased as below …

a) What is the cost of doing ‘open innovation’ vis-à-vis strictly ‘in-house innovation’?
b) Opening up for innovation is new for me, and new things carry more risk, can I predict my return-on-investment?
c) How can I have a control over people not on my payroll? Will I loose money?
d) We already have an internal R&D, will opening up be an additional cost?

So how are the various aspects of collaborative innovation fair when it comes to the all important, COST?

COST FACTOR 1: By far the most favorable advantage open innovation carries is ‘Pay for real outcome not for trial and error.

This is a huge cost saving, and a simple logic. Assuming there is a 20% chance of an average innovation effort to succeed, in open innovation you pay only for the favorable outcome and not for the effort which does not yield desired results.

A must ask question is “Then who pays for the effort which does not yield desired results”? The rule of averages comes into play, the so called huge cost of yielding no result is distributed among many people, making it most of the times insignificant for an individual. Broad talent pool increases the chances of finding the right fit for you and at the same time increases individual’s chances of finding an opportunity where her talent can fit. As you see it’s a solid win-win situation.

COST FACTOR 2: Benefit from what is yours, in-house.

Opening up to outside of your group but within your organization can also be treated as a type of open innovation.
Leveraging what you have – by connecting the exiting talent of your organization (part time, full time or even coffee time) with the existing challenge of your organization.
Utilizing what you anyway paid for is a cost saving. Garage sales never hurt.

COST FACTOR 3: Avoid risk of not completing the first, fifth or the last mile of your idea just because you do not have a person who can travel that mile for you.

Some great innovative ideas don’t see the light of the day during the execution resulting in financial losses. Fill in the gaps by bringing just-in-time talent. Just as there is a cost of innovating, there is a cost of not innovating, more so when you abandon a worthy idea.

Cost of doing collaborative innovation, internal and/or external, is not more compared to strictly in-house innovation. Though relatively new phenomenon, open innovation provides more control and is less risky. While you won’t have control over the people, you will have a control over paying only for what you get. Open innovation does not need to be a either /or with in-house innovation, nor does it need to make an addition or reduction in your innovation budget – considering open innovation as ‘just another means’ is by far the best way to avoid any cost related roadblocks.


  1. This article seems to be very informative, I seriously would like to try them when I am opproaching with my idea. Thank you Akula Shashi

  2. This is the exact topic I am contemplating on. What do you think of patenting then? Is there value in it or does it only slow organisations?

  3. What do you think about the number that Henry Chesbrough gives in his books about open innovation?

    I found them a little too iffy...

  4. Going to open innovation for economic reasons is perhaps the wrong reason! Once you invest in something, you want to protect, generally by removing the openness.

    US universities as centers of open innovation has worked - papers are openly discussed but you get netscapes, googles come out of it.

  5. I see lots of value to the companies that use open innovation. Butt... what is in it for the inventor/innovator?

    The company has no long term commitment to the inventor, the company only pays for the final result, not for he cos, time, and market value of the innovation. When paid is it just a tiny bit of the true value? Perhaps the inventor should go the patent route and then demand 25% of the profit from those who then market the invention as is the normal model.

    Please let me know why open innovation is of benefit to the inventor as well. True value is created only when both parties benefit. Otherwise it is exploitation.

    Presented by a man with 18 US patents, and 18 foreign patent publications. None of which brought me much at all in personal wealth despite millions for my employers.

  6. Your observation is right, it starts with the benefits for the companies using open innovation, because there is no other way for open innovation or for that matter anything else to be accepted by the corporates, but just like the employing a talent, if not paid appropriately will go to your competition, I strongly believe that open innovator will not innovate for the companies not paying right for this effort. Now the obvious question is - have we reached that stage? The answer is no, we are in the early stages of finding such balance, but it will soon reach, any model which is not win win will perish.

    We are trying to achieve the same at soon to be launched cloud for collaborative innovation.

  7. I actually think the comment about "what's in it for the inventor" is misguided.

    Creativity and inventiveness is a great asset, but it rarely has and rarely will hold the keys to great financial reward. Equally diligence and execution are great skills, and equally they will also rarely hold the keys to great financial reward.

    To ask "what's in it for the inventor" is missing the point. An inventor may be crucial to innovation but is only a tiny part of entrepreneurship.

    It is not the inventor who holds the keys to great financial reward - it is the entrepreneur, who can find a way to turn an idea, concept, or a flow of knowledge or skills into a profit-generating revenue stream. Whether this is done through open innovation or closed innovation is irrelevant. And therefore the only question is whether open innovation serves the entrepreneur better, or worse, than closed innovation.