What Xerox PARC Learned About Executing on Open Innovation
October 15, 2012 Editor 0
The concept of open innovation has moved from business phrase to business reality over the last ten years.
When PARC became a for-profit subsidiary of Xerox to practice open innovation in 2002, Henry Chesbrough had not yet published his book Open Innovation and the concept was not well understood. Companies knew how to engage a design firm, license IP, and form joint ventures, but few knew how to truly co-develop innovations with external partners, such as PARC.
At that time it was hard for PARC to understand how much we needed to invest in a new technology before approaching partners to work together in commercialization. We always wanted to get a partner sooner rather than later, in order to share risk and learn more quickly. However, we learned the difficult lesson that unless we could clearly articulate the maturity level and value proposition for a new technology within the context of our partners’ other choices, there was little or no value in the technology — regardless of how much money we had invested in it. PARC has since learned many more lessons — and is now an industry leader — in how to turn open innovation into a repeatable business model.
As an industry, I believe we are still realizing only a small fraction of the full potential of open innovation. How can we realize this potential? Here are some key strategies I’ve observed from PARC’s experiences.
Strategy #1: Go beyond just the ideas.
Know the risks and the costs.
It’s hard to value an idea without understanding just how much time and money it will take to implement it. So we’ve found that the most successful open innovation partnerships are built when ideas are framed as “options.” In its simplest from, an “option” is the right to buy or sell something at a certain price within a certain period of time. Applied to open innovation, it means framing conversations so decision-makers understand the future value (“the payoff”), how much investment is needed (“the exercise price”), and the associated risks of bringing an externally sourced technology or concept to market.
By encouraging innovators to define and demonstrate their concepts concretely, the options approach provides both parties in an open innovation partnership with enough information to assess value, determine additional product development requirements, and reach a mutually beneficial agreement, efficiently.
Strategy #2: Don’t think only about what you have to offer.
Think about what your partner needs.
Potential open innovation partners can’t always immediately envision later-stage business opportunities from early-stage technology seeds. So it’s not just about the technology fit but also about partners’ appetite for risk and how important the technology is given their plans and competitive landscape. This mindset leads the “seller” to move away from just technology features to defining and packaging options as solutions with strategic benefits.
Strategy #3 Don’t just create prototypes for feedback.
Use them to create an ecosystem.
Packaging options as solutions requires creating a demo or prototype that allows open innovation partners to engage and assess value. But creating the “minimum viable product” (or MVP) doesn’t mean creating the full solution; it’s creating the minimum features required for getting informed feedback from customers. This approach allows innovators to engage the market sooner and learn faster — critical for successfully commercializing innovation. But perhaps more importantly, it supports the process of working together to co-develop the solution, which we have learned is the sweet spot for building the most fruitful open innovation partnerships.
Having an MVP can enable other partners in the value chain to engage with the potential product and gauge value concretely, helping build an ecosystem which is often required for commercializing nascent or immature technology opportunities.
Strategy #4: It’s not all or nothing.
You can invest iteratively.
As innovators engage with the market through the MVP, they learn valuable information to help them refine the product-market fit and better understand and further build for the value proposition. This iterative approach is consistent with “real options” (vs. Net Present Value). A real options mindset not only enables companies to meter and stage their investments as they learn more information about the potential risks and returns, but it can help them manage their innovation investments to create impact in the marketplace.
Strategy #5: Don’t worry about competing agendas.
There’s a solution.
Companies are constantly faced with conflicts between investing in incremental innovation for near-term profits and long-term, game-changing opportunities. Without a principled framework for decision-making within an organization, many promising options will simply languish as fringe opportunities that cannot compete with the more easily understood “safe” options.
To take full advantage of the best options offered by innovators — both from external parties and internal R&D labs — businesses need a clear and consistent portfolio management framework. Such a framework not only balances different categories of innovation investments from a risk/return perspective, but also provides an appropriate set of metrics to compare investments and evaluate them holistically without using a one-size-fits-all approach.***
It turns out that companies tend to do well when they focus on their short-term business or develop options for long-term growth. It’s the middle space — that transition from shiny new object to a young business that needs care and feeding — where they get stuck. This is where open innovation can help, especially for companies who want to move beyond simply sourcing ideas towards extending their core business into new markets.
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