Report 103

Your newsletter on applied creativity, imagination, ideas and innovation in business.

Tuesday, 17 November 2009
Issue 160

Hello and welcome to another issue of Report 103, your fortnightly newsletter on creativity, imagination, ideas and innovation in business.

As always, if you have news about creativity, imagination, ideas, or innovation please feel free to forward it to me for potential inclusion in Report103. Your comments and feedback are also always welcome.

Information on unsubscribing, archives, reprinting articles, etc can be found at the end of this newsletter.

PREDICTION MARKETS AND INNOVATION

Prediction markets are an intriguing and, when used correctly, surprisingly accurate tool for predicting future events. Indeed, a handful of companies have had great success with prediction markets. However, a small number of firms are now trying to incorporate prediction markets in the innovation process in the wrong way and the result will most likely to be to accomplish nothing highly inefficiently!

A prediction market is essentially an on-line market in which people can buy and sell shares in future events, rather like the futures market. Several famous public prediction markets include The Hollywood Stock Exchange which allows people to buy and sell prediction shares in films, actors, and directors. It has been surprisingly accurate at determining income returns on films and famously predicted 32 of 39 of the main Oscar awards in 2006. The University of Iowa's Iowa Electronic Market has been remarkably good at guessing election outcomes in the USA.

Corporate Examples

In addition, a small but growing number of companies have been experimenting with internal prediction markets. Two of these include Google and Best Buy, a US based chain of discount electronics shops.

Both organisations have found prediction markets to be an effective means of predicting measurable outcomes. Bo Cowgill, who has been running Google's prediction market for two years, claims that prediction markets have been very useful with such questions as “How many people will use Gmail in the next three months?” or whether or not project deadlines will be met. He has also seen success with predictions regarding events in the market place.

Jeff Severts, Vice President of Geek Squads which is a services arm of Best Buy, says that an early experiment in which 350 people were invited to use prediction markets to predict holiday sales resulted in a prediction that was within an amazing 0.1 percent of actual sales!

Why It Works

It seems that prediction markets tap into hidden knowledge within a population, such as employees of a firm. Moreover, by allowing employees to buy and sell shares, you allow them to act anonymously on information that they might be reluctant to share directly. For instance, a salesperson who is interacting with customers may realise that a certain new product will be harder to sell than a the existing, familiar product it is replacing. However, she may be reluctant to voice that opinion for fear of offending her manager or the product development people who are so enthusiastic about the upcoming product launch. Hence, this sales person, and others, will expect poor sales and buy their shares accordingly.

Likewise, a team responsible for opening a new branch outlet for a retail chain my realise that there is now way the shop will open on schedule, but be reluctant to bring such bad news to managers, particularly if they fear taking part of the blame for the delay. On the other hand, in a prediction market, they will buy shares in a delayed opening of the new shop.

However, while employees know a lot about their own companies, Severts notes that “we’ve particularly noted a bias toward underestimating the ability of competitors or to think you know more about them than you do”. Also, Cowgill noted that the higher a person sits in management, the less profitably that person's trades are likely to be. That would suggest, as many suspect, that employees working on production lines, interacting with customers and, perhaps even being customers, have a more accurate vision of the company's short term future than does top management – at least en masse.

Where It Does Not Work

Thus far, prediction markets have been shown successful at predicting measurable results in the near term future. They have not shown themselves successful at “forecasting genuinely discontinuous innovations or leaps” according to James Surowiecki, a staff writer at the New Yorker magazine and the author of the influential book The Wisdom of Crowds – the book which introduced prediction markets to the world. To be fair, he points out that there simply has not been sufficient research in the topic upon which to demonstrate effectiveness one way or another.

Attempts to tie a prediction market to a suggestion scheme, which I have seen on a couple of occasions, are also potentially dangerous. Consider a suggestion scheme that allows any user to buy or sell shares in any submitted idea immediately. The theory is, presumably, that people will invest in ideas they believe will be the most profitable implementations. However, in any firm, management is unlikely to invest in implementing all ideas and users of the system will know that. Therefore, in fact, they will invest in the ideas they believe management is most likely to implement – rather than ideas with the most value potential. For example, if management is known to be highly risk adverse, then employees will not invest in the most innovative ideas, because those ideas will also be the most risky and hence are not likely to be implemented by management.

Likewise, if a senior manager is known to like a particular kind of idea, that kind of idea will always appeal to employee investors, not because they believe in the ideas actual market potential, but because they believe it is likely to be implemented by the manager in question irrespective of its market potential or lack thereof!

Moreover, prediction markets appear to work best when managed by a knowledgeable manager who can frame offers appropriately. For instance, rather than an abstract, “do you think this product will succeed in the marketplace?” which does not provide information about what constitutes success, a manager would probably do better to ask a question with a more measurable outcome, such as “what income do you predict for this product in its first year?” This information could be balanced against the cost of making and marketing the product in order to get a viable calculation of profitability – assuming prediction markets are accurate at such a level of abstraction: calculating the income generated by a product that does not yet exist.

Where Prediction Markets Are Likely to Succeed in Innovation

While prediction markets clearly offer potential to the overall innovation process (see Defining Corporate Innovation in the 6 October issue of Report 103: http://www.creativejeffrey.com/report103/archive.php?issue_no=20091006), evidence suggests that they would be most effective as a separate element of the overall innovation process, rather than an automatic action applied to every idea submitted to a suggestion web site, for example.

Information gleaned via prediction markets might more effectively form the basis of an ideas campaign (ie: a process that begins with an innovation challenge based on a business problem; is followed by collaborative idea submission and is concluded with an evaluation process that leads to the selection of ideas deemed most likely to become profitable innovations). For example, if via prediction markets, employees forecast that sales of a product will decline in the upcoming year, you can begin a process of determining what information has formed the basis of this prediction and then run ideas campaigns designed to solve the problem and make the product in question more attractive.

Likewise, if an ideas campaign delivers a number of good ideas which together might be implemented to solve the problem, prediction markets might be used to forecasting the financial return the ideas might deliver; the likelihood the ideas will be implemented to schedule or other issues related to the implementation of the ideas in question. Nevertheless, you should bear in mind that prediction markets are unproven in forecasting results on highly innovative ideas such as breakthrough innovations. But why not add to the knowledge base by experimenting and sharing your results?

References
1. “Prediction Market”; Wikipedia
http://en.wikipedia.org/wiki/Prediction_market

2. “Iowa Electronic Markets”; Wikipedia
http://en.wikipedia.org/wiki/Iowa_Electronic_Markets

3. Renée Dye (April 2008); “The promise of prediction markets: A roundtable”; McKinsey Quarterly https://www.mckinseyquarterly.com:443/ghost.aspx?ID=/the_promise_of_prediction_markets_2114

BACK TO INNOVATION BASICS

If you are a regular reader of Report103, you will know that we are writing a serious of articles on the basic terminology and processes associated with innovation. Following an informal survey some weeks ago, we have found that there is a lack of clarity with respect to the basic terms used in innovation – there is even disagreement on the definition of the very word itself! Hence, I've made the rather audacious move to run in Report 103 a series of articles covering basic terms and processes associated with innovation. If you missed the introduction to this series of articles or would like to read it again, you can do so at http://www.creativejeffrey.com/creative/innovation_basics.php And if you disagree with what I've written, let me know!

OPEN INNOVATION

The term “open innovation” was popularised by Henry Chesbrough in his book Open Innovation: The New Imperative for Creating and Profiting from Technology. He wrote “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 the firms look to advance their technology” Bearing in mind that the definition of “innovation” is “the implementation of creative ideas in order generate value, usually through reduced operational costs, increased income or both” (http://www.creativejeffrey.com/report103/archive.php?issue_no=20091006), a more accurate term for “open innovation would be:“open idea generation”. However, the term “open innovation” is in widespread use and there is no way we are going to change that. So we will have to stick with it, as semantically unsettling as it may be!

Wisdom of Crowds

The theory behind open innovation is that the sphere of knowledge and experience within the organisation is necessarily limited. Worse, it may be further limited by corporate practices and processes. As people become used to working in certain ways and thinking in certain ways at work, they find it increasingly difficult to break out of these moulds and adopt new ways of doing things.

By tapping into external sources, you expand your knowledge base, bring in new ways of thinking and new ways of doing things. It is widely known that diverse teams are more creative than teams in which all people come from similar backgrounds. Clearly, then, adding further diversity to internal teams can only improve the creativity – and hence the innovation potential of that team and hence the organisation.

Some people have taken this notion one step further and claim that the more people involved in generating ideas, the greater the diversity and level of creativity. This, however, is unproven empirically as far as I know. Moreover, bringing huge crowds into an innovation process will have two negative effects that I have seen in practice:

The efficiency of any idea collection system is reduced as more people submit more ideas, particularly if the system is a suggestion scheme (see below). Thus managing ideas becomes burdensome. Voting on ideas, incidentally, is not an effective means for evaluating whether or not ideas meet your company's business criteria. Hence ideas need to be reviewed by an internal team before they can be implemented and this eats into resources if there are thousands of dissimilar ideas to work through.
Elements of mob behaviour can sometimes be seen. This is shown by people backing certain popular participants of an suggestion scheme, complaining that ideas are not being processed and submitting large numbers of highly similar ideas because this is what the crowd is doing. All of these actions add little value or diversity, but create substantial demands on resources.

Needless-to-say, neither of the above effects is conducive to creativity and eventual innovation. The rule to bear in mind is that diversity is beneficial to creativity, massive crowds are not.

Old Hat

In fact, open innovation, as such, is not terribly new. Even when I was a child in the 60s and 70s, many hotels and restaurants had suggestion boxes inviting ideas from customers. Any research scientist in industry will tell you that they have been doing open innovation for years, collaborating, officially and unofficially, with scientists in other industries as well as in universities and research institutes. Indeed, this is a key part of why scientists keep up with journals and attend conferences: to exchange ideas with their associates.

Likewise, the Japanese motor industry in particular has a long history of working closely with suppliers through the entire innovation process – and not just idea generation. Toyota's famous “just in time” inventory strategy would never have worked if business partners were not intimately involved.

Nevertheless, widespread use of the Internet has made open innovation more popular and more public.

Four Approaches

There are four popular approaches to open innovation: public suggestion schemes, innovation competitions; outsourcing and publicly funded projects. Two of these approaches are effective. One is not. One can be.

Open Suggestion Schemes

An open suggestion scheme is the application of so-called web 2.0 technologies to those suggestion boxes I used to see in hotels 30 or 40 years ago. Rather than put my idea in a box and wonder whether or not anyone would act on it, I can now put my idea on a public idea sharing web site and wonder whether or not anyone will act on it.

Of course, on the public web, other members of the public can vote on my idea and add comments – something that never happened in the old suggestion boxes. But absurdly low implementation rates and experience of suggestion schemes inside large companies suggests that my idea still stands a very low chance of ever being implemented.

This is important to bear in mind if you are considering an open suggestion scheme for your firm. In my experience of firms setting up internal suggestion schemes using web based tools, the schemes inevitably fail after 12-18 months for essentially the same reason: a lot of dissimilar ideas are submitted, processing all of these ideas is highly resource consuming and because suggestion schemes do not align idea generation with strategy or any relevant business needs, there is a very high rejection rate.

If suggestion schemes fail so frequently in closed innovation initiatives, there is no reason to believe they will fare any better when the public is invited to use them, thus increasing levels of usage substantially, without making the back-end any more efficient!

For more information on why suggestion schemes do not work, review the back issues of Report 103 at http://www.creativejeffrey.com/report103/archives.php – I have written several articles on this issue.

Idea Competitions

Innocentive popularised the notion of a web site with competitions based on very precise innovation challenges, typically focusing on technical problems, such as “PdCl2 Recovery from Chitosan Resin. An economical method to recover catalyst grade PdCl2 or equivalent from palladium bound chitosan is required.” And a reward is offered for solutions to the problem. In this example, the reward is US$15,000.

Idea competitions are effective because it allows a firm to broadcast a very specific business need and allows experts, who have the wherewithal to solve the problem innovatively, to do so. Suggestions can easily be evaluated according to relevant criteria and the most suitable ideas selected and implemented. Meanwhile, irrelevant ideas are not submitted.

There are now a handful of different firms offering managed idea competitions – a demonstration of the effectiveness of this approach. Indeed, even our idea management software allows clients to create competitions.

Outsourcing

Because publicising specific business needs in an open forum like an idea competition might provide too much information to competitors or simply because the firms in question are uncomfortable using a public forum for open innovation, many companies outsource elements of innovation to trusted third parties, such as small firms specialising in developing specialised innovative technologies.

In these cases, the outsourced firms are not merely generating ideas, they are going much further, typically providing comprehensive concepts often complete with business plans, prototypes and more.

The advantage to such an arrangement is that it facilitates a higher level of sharing of information between the two firms, intellectual property rights can be clarified from the beginning and the company seeking outside innovation can be assured of confidentiality. The downside, is that the group looking into the problem is necessarily restricted and thus there may not be the breadth of knowledge, experience and creativity that would be available in a more public forum.

Publicly Funded Projects

A lesser known, but well established, means for open innovation is publicly funded projects. The European Commission has been funding research and development projects for more than 50 years and since 1984 has been launching regular Framework Programmes which, to simplify greatly, are legal documents that precede periodic Calls for Proposals. In a Call for Proposals, a consortium of organisations may submit an innovative proposal that responds to one of the action lines. If successful, the consortium receives funding (typically 50%) to implement the project.

Normally, a project must consist of at least two, and usually several, organisations from different member states. Partner companies collaborate to develop the project and provide deliverables along the way. Results must be publicised and certain kinds of projects are expected to develop commercialised products or services.

Having spent some time with EU projects, I know the system is greatly flawed in many respects that are mostly to do with bureaucracy and legal processes. Nevertheless, some very good work comes out of Framework projects and billions of Euro are given away to companies for carrying out their innovative research and development under the programme.

Likewise, other governments offer grants which encourage innovative collaboration to develop research and development projects. And many non-profits, such as the Gates Foundation and the Rockefeller Foundation, offer grants to collaborative teams comprising more than one organisation.

Low-Key Open Innovation

In addition to the above more public and structured approaches to open innovation, many companies also involve outsiders in their regular innovation process. Many of our clients invite outside business partners into the idea management application we provide (see advert below!) and report favourable results. Indeed, outside partners are often more active in the idea management application than are employees, presumably because they wish to demonstrate their value to the company and ensure their contracts are renewed.

Intellectual Property

In short, open innovation is really very much like closed innovation, except that outsiders are invited to participate. However, there is one very big difference, in a closed idea generation environment involving only employees and possibly contracted business partners: the issues of intellectual property rights (IPR) associated with ideas is very clear. It will certainly have been clarified in everyone's employment contract or outsourcing contract. However, in public forums, no such contracts are pre-existing. Hence the issue of IPR needs to be considered even before the project begins. Likewise, participants in open innovation initiatives need to be aware of what rights they are losing with their idea submissions (all rights, typically in an open suggestion scheme). For more information on this critical issue, read “The Legal Side of Open Innovation” in the 6 October 2009 issue of Report 103: http://www.creativejeffrey.com/report103/archive.php?issue_no=20091006

Open Idea Generation

So, in a nut shell, open innovation is simply opening up a part of the idea generation process to a group of people outside the organisation. As a result, the same rules that apply to closed idea generation initiatives also apply to open idea generation initiatives. I would further argue that there is a lot of unnecessary hype associated with open innovation as it is really an element of the innovation process which has been around since people started collaborating to innovate!

References

H.W. Chesbrough (2003) Open Innovation: The New Imperative for Creating and Profiting from Technology; Boston; Harvard Business School Press, p. xxiv

INNOVATION BASICS IN YOUR FIRM?

If you are impressed with what I've written in this and previous issues of Report 103? Imagine, then, what my team and I could do in your firm! If you need support in designing and implementing an innovation process in your organisation, contact me and let's talk.

We can also facilitate idea generating events and provide training courses anywhere you'd like. Let me know what you need – and I'll let you know how we'll deliver it!

INNOVATION IN THE 21ST CENTURY: KEEPING THE US COMPETITIVE

Yesterday, Newsweek magazine and Intel (the silicon chip manufacturer) released the findings from their survey on innovation and the economy in the US. Overall, they found that Americans retain their belief in innovation and technology as the “primary engines” of growth. Nevertheless, Americans feel that the country has suffered as a result of the economic slowdown. More information in the Huffington Post at http://www.huffingtonpost.com/justin-r-rattner/innovation-in-the-21st-ce_b_359383.html

LATEST IN BUSINESS INNOVATION

If you want to keep up with the latest news in business innovation, I recommend Chuck Frey's INNOVATIONweek (http://www.innovationtools.com/News/subscribe.asp). It's the only e-newsletter that keeps you up-to-date on all of the latest innovation news, research, trends, case histories of leading companies and more. And it's the perfect complement to Report 103!

JENNI: ALIGNING YOUR INNOVATION WITH YOUR STRATEGY

Did you know that Jenni is the only idea management software specifically designed to align innovation with strategy? From Jenni's sophisticated ideas campaign module that allows you to set up precisely targetted ideas campaigns to her criteria based evaluation tool that not only sets up multi-expert evaluations, but compiles the results in an easy to interpret report, Jenni is all about focusing innovation on your strategic needs. Better still, our experts are at your beck and call to coach you through the innovation process and its management.

Perhaps that's why a leading water provider in Australia selected Jenni to support innovation according to their complex strategic needs. Owing to severe drought, they needed to improve significantly the efficiency of their water delivery system, encourage customers to use less water and still make a profit. Moreover, with super busy employees, they needed a system that was incredibly easy for employees to grasp and use. They chose Jenni. And for three years, Jenni has supported ideas campaigns that have generated ideas leading to substantial efficiency improvements, resulting in reduced operational costs, communications ideas and more.

And perhaps that's why a global convenience food provider, that needed to improve the healthiness of their snack foods, choose Jenni for their research and development unit. They needed not only healthy snack food concepts, but also packaging that communicated this new brand value. Jenni did the trick and enabled their creative thinkers to generate all kinds of terrifically tasty and healthy food ideas.

How about your firm? If it is important that your innovation process is aligned with strategy, you owe it to your firm to learn more about how Jenni can help you innovate more effectively and gain an unfair advantage over your competition!

Tell us your strategic needs and we will tell you how Jenni can help you align your innovation to meet those needs – with complete confidentiality from our first conversation. Find your nearest Jenni representative at http://www.creativejeffrey.com/jenni/contact.php and we'll direct your questions to the person best placed to determine how we can answer them.

More information about Jenni, meanwhile, can be found at http://www.creativejeffrey.com/jenni/

ARE YOU AN INNOVATION CONSULTANT?

If you are providing innovation services such as consulting, training or coaching and want to add a great idea management software solution to your portfolio of products and services, contact me and let's talk about how Jenni can help your clients innovate better – and help you gain new clients.

You benefit from our generous commission programme, marketing on the popular www.jpb.com web site (150,000-200,000 page hits/month) and collaborating with a fantastic global team of innovation, marketing and sales experts (http://www.creativejeffrey.com/about/index.php). In addition, by packaging your services with Jenni, you can provide your clients with value added innovation services that help them increase profitability.

It's a fantastic win-win-win scenario for your, your client and jpb.com!