How much for a fountain of youth?

I thought I'd talk about the use of open innovation markets and the outsourcing of innovation. However, in order to so I'll need to define a few terms first and explain what innovation is. Lets start with those definitions:-

From Jan Fagerberg, Innovation is the first-ish attempt to carry out an idea into practice. It is the embodiment, combination, or synthesis of knowledge in original, relevant or new products, processes or services.

An idea is an image or a concept or an abstraction. As John Locke said “it being that term which, I think, serves best to stand for whatsoever is the object of understanding when a man thinks”.

Discovery or invention are processes that result in the generation of new concepts or postulated entities or devices. Both of these processes involve serendipity, questioning and the use of analogy. So for example, you can have:-

• Invention: a Turing Machine (a postulated entity)
• Idea: the use of a Turing Machine to solve business problems (an abstraction of how to use the postulated entity)
• Innovation: LEO, the worlds first business computer (putting the idea into practice)

This general movement from invention to idea and then on to innovation, I've summarised in the diagram below.

Figure 1 - Invention to Innovation

Now, this is a very neat, cosy and comfortable view of innovation which implies an ordered logical flow from one to another. Of course, innovation rarely works like that. Prior to the innovation, "pre-event" so to speak, there is a massive amount of uncertainty as to what will be invented or discovered, what ideas will be created and what will actually get put into practice. The Wright brothers apparently believed that powered flight would stop future war by removing the element of surprise. Unfortunately, others had different ideas.

Research is a highly uncertain activity, and most large research groups have a plethora of incidental creations. The often cited question is - "how do you turn these creations into something of value?" One possible solution is to use an open innovation market, such as InnoCentive, an exchange of problem seekers and problem solvers.

Let's consider such an exchange in terms of creations that are either "post-event"(i.e. something already discovered or invented or an existing idea or innovation) or "pre-event"(i.e. something which has not yet been discovered, invented, thought of or implemented)

Now for a "post-event" creation which is not directly useful to the owning company, then an exchange which allows for this incidental to be sold to another is beneficial. An alternative form of this exchange, is when a company which has a problem is able to announce this problem and allow other companies to see if they have a ready made solution. An exchange of "post-event" creations makes a great deal of commercial sense.

Now let's consider "pre-event" requests, such as we want a miracle cure for aging. The problem with pursuing such a requests is that you don't know how to get there, you will need a lot of trial and error. The danger with such a request is that you are proposing someone undertake a "pre-event" service but you are intending to buy a "post-event" good such as the miracle cure for aging. Who will end up paying for all the failures, the time spent on unsuccessful work and chasing down blind alleys?

At this moment in time, a fair amount of that chasing down blind alleys occurs in corporate research labs. It is tempting to think that such "non profitable" effort could be outsourced, that somehow we can outsource innovation to a marketplace and pay for only what we use in terms of results.

It is worth remembering:-

1. There are no economies of scale with the creation of innovations as they are novel and uncertain.
2. Any "innovation" providers will not only require a suitable price to cope with the risk of failure, but they will also benefit from the incidental discoveries.
3. Any company handing over innovation is in effect handing over its future source of profits to a market place. It becomes dependent on the marketplace.

So whilst such markets are a useful "post-event" tool, the outsourcing of "pre-event" innovation could well result in higher cost and a loss of control in the long term. Though they do offer the possibility of addressing the in-balance between the distribution of ability and the distribution of opportunity, there is also the danger that such markets could be exploitative on universities.

Whilst I would agree that innovation markets have a positive role to play, the idea that innovation can be outsourced entirely (post and pre-event) without creating some permanent form of exploitation would appear to be little more than youthful exuberance with the latest plaything.

Maybe I'm just getting old.

The pitfalls of outsourcing ....

A couple of months ago, a friend of mine from "a galaxy far, far away" mentioned how the policy of outsourcing that they were following was causing all sorts of problems. The promised benefits and cost savings were much less than expected and they felt they had not only lost significant amounts of talent but were dependent upon the vendor.

What had gone wrong? I can't talk about the details but I'll try and explain.

If you take an snapshot of a company at any time, you will find that it consists of a mass of different activities (where each activity is either a process, or part of a process, or related to the result of a process such as a product or service). Each of these activities is on their own pathway from innovation (some new and relatively unknown) to commodity (something common and well defined).

In figure 1 - I've provided a very simplistic and hypothetical example of such activities in a profile form. The components are actually all connected but the profile helps to highlight that many are far more widespread (ubiquitous) and well defined (certain) than others.

Figure 1 - Hypothetical examples of organisational activity

Now, many companies organise themselves by type of activity such as marketing, finance, operations and IT. Each "function" of the business will therefore consist of a range of activities from innovation to commodity. Ideally when you outsource a "function", you want to outsource those activities which are well defined and common in your industry i.e. the commodities, see figure 2.

Figure 2 - Focus of outsourcing

Such activities are more likely to be suitable for economies of scale, standards and an ecosystem of providers. This is where outsourcing can work and for a business consumer this roughly translates to lower prices, reliability, increases in speed and potential for portability in a competitive market.

However if you outsource a function of the business, such as marketing or finance or IT, then along with the commodity like activities you will be outsourcing some innovative and transient activities - see figure 3. For such activities there will be no economies of scale, standards or an ecosystem of providers.

Figure 3 - Additional activities lost in outsourcing

The net result of such an outsourcing would be a loss of innovative activities, potential future profits, capability and talent. Furthermore such outsourced activities are unlikely to show any economies of scale and are more likely to result in lock-in and cost overruns.

Outsourcing is a sensible approach for commodity-like activities, for all others, buyer beware. If you are intending to outsource a function of the company, then ideally you should only be outsourcing those commodity activities, and ideally to multiple service providers.

I mention this because the same conversation came up again recently. I was a little bit harsh in my response by making numerous references to the Golgafrinchan B Ark and why management consultants were included.

In general though, if you are considering outsourcing, then :-

For goodness sake, make sure you are fully aware of ALL the activities you are outsourcing and whether those activities are suitable for outsourcing. Not everything is.

Look before you leap!