breaking out of the innovation box

76 HARVARD BUSINESS REVIEW

Breaking Outthe Innovation Box

by John D.Wolpert

As long as companies manage

innovation as a secretive process,

investment will be erratic and

results disappointing. Ifs time

for a new, more open approach.

THE INNOVATIVE ENTERPRISE AUGUST 2002

A THE ECONOMY BOOMED in the late 1990s, cor-porations went on an innovation binge. Theypoured money into programs for generating fresh

ideas, pioneering new technologies, and promoting en-trepreneurship and creativity among employees. Theylaunched venture capital arms and new-business incuba-tors. They recruited freethinking executives who weren'tafraid to rock the corporate boat. They brought in cre-ativity consultants to spur out-of-the-box thinking.

And where are those efforts today? Many of them havebeen scaled back, mothballed, or disbanded altogether.As the economy cooled at the start of this decade, com-panies quickly cut off the flow of funds into innovation ef-forts. What seemed like a mandatory expense just monthsbefore suddenly seemed discretionary. Even the rhetoricof business took a tum: Executives began to speak lessabout "creating the future" and more about "protectingthe core."

What happened over the last few years is not an anom-aly. It's business as usual. In most companies, investmentsin innovation follow a boom-bust cycle. For a time, thecash fiows. Then, as companies rethink their priorities,the taps go dry. Annual surveys conducted by the Indus-trial Research Institute confirm the cyciicality of corpo-rate innovation. In the early 1980s, surveyed executivessaid that innovation was their foremost priority. Bythe late 1980s, most executives reported little interestin innovation. Similarly, in the early 1990s, innovationdidn't rate among the top five corporate priorities, but itwas back at the top ofthe list by the late 1990s. Harvard

77

Breaking Out ofthe Innovation Box

Business School professor Henry Chesbrough has iden-tified a similar pattem in the 1960s.

Of course, no business initiative should be immuneto changes in market conditions or company strategies.Corporate innovation programs should be subject to care-ful, hard-nosed evaluation, and those that don't promiseadequate retums should be curtailed or refocused. Butthat is not what is going on here. Rather, the way corpo-rations invest in innovation is fundamentally unreliable.When innovation budgets are slashed, strong projects areahandoned along with the weak. The consequences canbe devastating. Promising initiatives are cut off just whenthey are about to bear fruit. Highly touted training pro-grams are discontinued with little explanation, stirringemployee cynicism. Expensive labs are closed, and tal-ented researchers and designers are reassigned or laid off.Partnership agreements costing millions in legal fees arethrown away. Worst of all, the perceived failure of the in-vestments often creates organizational skepticism aboutand resistance to future innovation initiatives. Conse-quently, when dismptive changes in the competitive land-scape come, companies are caught fiat-footed.

Innovation is always a risky pursuit, with an uncertainand often distant payoff. But must that fact doom it toerratic investment? Or can innovation become a staplecorporate priority as, for example, quality has become?My belief is that stability can be brought to corporate in-novation and that the result will be much greater strate-gic gains and much stronger retums on investment. Butsustainable innovation requires an entirely new ap-proach. Instead of being a largely isolated process-carriedout often with considerable secrecy-innovation needs tobecome more open. Initiatives must gain access to andleverage from the insights, capabilities, and support ofother companies without compromising legitimate cor-porate secrets. As counterintuitive as this may sound, in-novation must become part of the ongoing commercethat takes place among companies. Only then will it beprotected from both the ax of short-term cost reductionand the faddishness bom of easy money.

Trapped InsideFirst, let me explain what I mean by "innovation." I'm nottalking about processes for making improvements to ex-isting products and services. And I'm not talking aboutpurely technical invention. Innovation, as I use the term,means pursuing radical new business opportunities, ex-ploiting new or potentially dismptive technologies, andintroducing change into the core concept of your busi-

John D. Wolpert leads IBM's Extreme Blue, an incubator fortalent, technology, and business innovation in Austin, Texas.

ness. It's those efforts that businesses have found hard tosustain, even though it is now widely acknowledged thatthey have become increasingly critical to companies' long-term viability. In fact, nearly 50% of U.S. economic growthat the end ofthe 1990s came from lines of business thatdidn't exist a decade before, as a 1999 study in The Econo-mist showed.

Successful innovation requires what the authors ofRadical Innovation have called "exploration competen-cies"-the ability to harvest ideas and expertise from awide array of sources.' For a company, that means bring-ing in insights and know-how not just from outside par-ties but from other businesses. The need for external per-spectives seems almost self-evident: If a company stayslocked inside its own four walls, how will it be able to un-cover and exploit opportunities outside its existing busi-nesses or beyond its current technical or operational ca-pabilities? Yet perhaps even more self-evident to manycompanies is the need to lock in their innovation initia-tives to protect them from competitors.

This urge to keep innovation inside is reinforced byboth traditional and current thinking on the subject. If

A Network of Intermediaries

Intermediaries could facilitate the exchange of informa-

tion about innovation among companies while keeping

their secrets. If company A, for instance, needs outside

capabilities to commercialize a technology, it could ask

its intermediary to find ita partner. The intermediary

would share the information with other intermediaries

in its search for an appropriate collaborator- like com-

pany B. In the same way, innovation intermediaries can

help company C find the resources it needs to bring

one of its new technologies to market by allying with

companies Dand E.The intermediaries can be trusted

to maintain confidentiality because Ifthey ever violated

the terms of an arrangement no company would hire

them again.



you kx>k at the examples of innovation cited in booksand articles, you'll find that almost all of them describethe exploits of a group of employees within a single com-pany-how they stumble on a new opportunity, struggleto overcome company politics and other intemal imped-iments, and ultimately either succeed or fail to commer-cialize their discovery. Most theories of innovation aresimilarly introspective. Gifford Pinchot III coined theterm "intrapreneuring" in the 1970s; the very name im-plies an intemal focus. Rensselaer Polytechnic's SeverinoCenter for Technological Entrepreneurship recommendsbuilding intemal innovation hubs. Many managementgurus suggest that innovation be thought of as a corecompetency-a distinctive capability that a company nur-tures within itself and protects from outside competitors.Even the concept of "knowledge brokering," which soundslike it should involve collaboration between companiesand across industries, is most often described in terms ofindividuals and groups working within one company.

But organizing innovation as a purely intemal initia-tive pretty much guarantees that cyclical pressures willlead executives to cut back or discontinue funding. No

matter how loudly a CEO proclaims the need to embed in-novation and creativity in the corporate culture, the factis that such initiatives are cut when times get tough or pri-orities change.

Typical is the experience of a large telecom company'sill-fated innovation program, which was called the Op-portunity Discovery Department (ODD). Launched in1995, its mission was to uncover promising ideas in thecompany, spread insights and expertise across the organi-zation, and translate technologies from R&D labs intocommercial opportunities. The ODD team received gen-erous funding and considerable management support.Lab directors, and even the CEO himself, repeatedly en-couraged managers and employees to collaborate withthe group. Nevertheless, the team lost momentum. By1999, the ODD had ceased operations.

Many internal innovation initiatives have shared theODD's fate. They last, on average, about three or fouryears. In most cases, that is not enough time to discoverstrong new business ideas and refine, test, launch, andnurture them to success. A study of innovation at Xeroxthat Chesbrough did showed that over a 35-year period its

THE INNOVATIVE ENTERPRISE AUGUST 2002


most successful spin-offs took an average of 7.5 years togenerate an acceptable retum on investment. That didn'tinclude the time spent researching and developing theunderlying technologies. However, the innovation pro-grams that generated those spin-offs survived an averageof only four years before they were shut down and re-placed by new ones. Often, those initiatives were termi-nated even though the spin-offs they had generated hadnotched up substantial financial retums. As one Xeroxexecutive explains: "We are a $20 billion company. To befinancially interesting to us, an initiative must reach atleast $100 million in revenues within three years." Thatargument, which will sound familiar to many executives,explains why large companies fail to sustain even lucra-tive innovation programs.

There's another problem with inward-looking innova-tion initiatives: They often fail to capitalize on viableideas because the ideas don't fit with the company's strat-egy or capabilities. No company is smart enough to knowwhat to do with every new opportunity it finds, and nocompany has enough resources to pursue all the oppor-tunities it might execute. Internal initiatives routinelyleave a trail of orphans- promising ideas that have no nat-ural home within the company. If the numher of orphans

produced becomes too' "Ny large relative to the

successes - and it al-most always does atlarge companies-par-ticipants' interest inthe initiative falls.

Spinning out or-phans as separate en-tities is possible but,despite the hype sur-rounding spin-offs, itrarely happens. Fewcompanies have thepatience or skills to

'^ do them well and, inany case, companies

routinely kill spin-off proposals because they fear losingthe intellectual property to outsiders. In the past, someorphans escaped corporate labs, falling into the hands ofothers both eager and able to capitalize on them. In theinformation technology business, for example, break-through technologies like Ethernet, the mouse, and thegraphical user interface were commercialized by com-panies that did not develop them. But with aggressivepatenting practices, that will happen much less frequentlyin the future. As Bell Labs' new-ventures chief, ThomasUhlman, famously said in 1999, "No more Intels are al-lowed to escape." Unfortunately, that means that as long

No company is smart

enough to know what

to do with every new

opportunity it finds, and

no company has enough

resources to pursue all

the opportunities it

might execute.

as innovation is trapped inside individual companies,many promising technologies and business ideas will sim-ply die without ever being exploited.

Innovation as CommerceNo company is, of course, hermetically sealed. Outsideperspectives and competencies fiow into and out of or-ganizations through many routes: partnerships withuniversities, alliances and acquisitions, external ventureinvestments, recruiting and hiring, customers and sup-pliers, and the relationships and curiosity of individualemployees. These sources of external influence are valu-able and important. It could be argued, in fact, that theyhave played pivotal roles in all instances of corporateinnovation.

But they're not enough. Their informality, haphazard-ness, and unpredictability make them unreliable founda-tions for sustained innovation. New hires, for instance,may come into a company with brilliant, radical ideas,but they usually find it difficult if not impossible to pro-mote those ideas in an alien, and often resistant, cul-ture. Academic cooperation usually centers on basic sci-ence - one might argue that looking for new businessideas in academia is like fishing for marlin in a troutstream. Customers and suppliers, as Harvard BusinessSchool's Clayton Christensen has shown, tend to providelimited insight beyond incremental improvements toexisting lines. Even more formal means for capitalizingon external business ideas, from venture capital arms tojoint ventures to M&A programs, are rarely dependableas sources of innovation. They tend to be so determinis-tic-so shaped by intemal strategies, politics, and secrecyconcems-that they perpetuate a company's existing busi-nesses rather than open new opportunities. Moreover, thesearch for outside partners often happens late in the in-novation process, when the business opportunity is welldefined, so they have little or no influence over the devel-opment and refinement ofthe idea. Successful innovationdepends on involving partners early in the exploration ofopportunities.

What we need to do is make innovation a natural ele-ment ofthe commerce that takes place among businesses.Finding ways for two or more companies to actively shareideas, technologies, and other capabilities early and oftenis the best way to protect projects from the swings ininterest and funding that inevitably occur in individualorganizations. If we could find a way to do this withoutrisking the unauthorized appropriation of intellectualproperty, businesses would be able to more quickly spotand exploit new growth opportunities.

In an ideal world, where there is no fear of competitors,here's how it would work: If company A develops a great



idea that it can't commercialize, it can more efficientlyshift it to company B, which has the right skills, particu-larly if the two businesses strike a relationship at a veryearly stage of idea development. If company C lacks twoparticular capabilities needed to bring a technology tomarket, it can form a partnership with companies D andE to gain the required resources. If companies F, G, and Hshare a common interest in a certain business oppor-tunity but lack the cash or strategic focus to pursue itindependently, they can pool their investments. When in-novation becomes part of commerce, money and atten-tion flow naturally to where they'reneeded when they're needed. ^

The case of IBM's alphaWorks,which I oversaw for two years inthe late 1990s, shows the power ofopen innovation. In early 1996,IBM's Internet Division realizedthat the company had developedmany promising sofrware pro-grams in research that had yet tobe commercialized. As an experi- ' ^ment, the division created a publicWeb site called alphaWorks on which it posted the programs, hoping that outside companies and developerswould contribute valuable ideas about bringing them tomarket. Anyone could download the programs with a90-day evaluation license from the company. As wordspread that IBM was allowing first-cut versions of its re-search technology to be used for free, hundreds of thou-sands of early adopters, innovators, and entrepreneurscame to tbe site to download the software. Many of theseusers were technically savvy developers and business-people who had the skills to see the opportunities in thatraw code.

One IBM researcher, who had been trying for years tofind a compelling use for his program, received ideas froma developer at another company through alphaWorks.That helped him take his research in a new direction,eventually leading to the development ofa critical com-ponent for the multibillion-dotlar business integration-systems market. When thousands of people began todownload that program, an IBM product group quicklydecided to develop and release a full-fledged version.Within eight weeks, the once-ignored program had be-come a key IBM product. Without this kind of early ex-temal support, the researcher's work might still be wait-ing to go to market today.

Launched six years ago, alphaWorks is still a staple ofIBM's innovation agenda. Its productivity is high: About40% ofthe technologies on the site make it to market asnew offerings, new features in existing products, or newtechnical standards. Unlike other innovative programs

Perhaps the most promising

pool of potential intermediaries

is the rapidly growing population

of baby boomer retirees.

that die after the original champion leaves, the group hassurvived several management changes and divisional re-organizations, indeed, it would be hard to kill alphaWorksbecause so many people in IBM rely on it to do their jobs,and nobody would want to sever connections to thislarge, influential, and involved community. It remains thebest way for many of IBM's engineers to get recognition,feedback, and support for their ideas. It also has the at-tention of IBM's marketing people, who were initiallystunned to find current and potential customers askingthem when alphaWorks technologies would become

commercially available. Most ofs.^ IBM's strategic sofrware initia-

tives since 1996 have started onalphaWorks.

Why don't competitors simplyhelp themselves to these ideas?For one thing, patents and li-censes are easy to enforce. Puttingthe ideas on a popular Web site(often with significant press cover-

^^ age) means that everyone knowswhere they came from. Thanks to

download logs and registration, anyone foolish enoughto download a technology and then try to bring some-thing similar to market would be caught red-handed inviolation ofthe license and the patent.

IBM's alphaWorks-and similar initiatives like Xerox'snewalphaAvenue- have limited applicability, of course.Not every business innovation benefits from public expt>sure as much as software development does. But theyclearly show how a successful innovation marketplacethat crosses the border ofthe firm pjerpetuates itself, gain-ing increasing attention and support as it delivers realeconomic benefits to many different participants insideand outside the company. The broader question is: Howdo you break down the barriers to sharing informationacross companies so you can create more generalized sus-tainable innovation markets without giving your com-petitors an advantage?

A New Kind of Go-BetweenThe answer, I believe, lies in a practice that has long beena central element in commerce: the use of independentintermediaries to facilitate the exchange of sensitive in-formation among companies. Since the Middle Ages, busi-nesspeople have drawn on trusted middlemen to shareconfidential information without revealing tbe principals'identities or motives or otherwise compromising their in-terests. Today, businesses continue to use intermediariesfor many kinds of transactions. Executive search firms, forinstance, play a cmcial role in recruiting top managers.

THE INNOVATIVE ENTERPRISE AUGUST 2002 81


They allow job seekers to remain anonymous during theearly stages of a search, and they protect businesses fromdisclosing their hiring plans to rivals.

In a similar way, intermediaries could facilitate theexchange of innovation information while protectingcompanies from divulging their interests and plans tocompetitors. They could become, in effect, innovationheadhunters. A company might, to take a simple example,entmst an intermediary with the details of a particulartechnology it has developed as well as its need for outsidecapabilities to commercialize it The intermediary wouldthen share the information withother intermediaries in the hope of / ^finding appropriate partners. At nopoint - until a formal disclosureagreement is forged- would any ofthe information be shared with thecompanies the intermediaries rep-resent. The intermediaries could betmsted to maintain confidentialitybecause it is simply in their businessinterest: If they ever violate theterms of an arrangement, no com-pany would hire them again.

Using intermediaries for innova-tion is not without precedent in U.S. ' ^business. In their book InformationMarkets: What Businesses Can Learn from Financial Inno-vation, William j . Wilhelm, Jr., and Joseph D. Downing de-scribe how intermediaries spurred innovation in finan-cial services in the early part ofthe twentieth century. Theintermediaries, including bankers such as J.P. Morgan, as-sisted in creating markets for financial information. Theyused personal relationships to gather and share informa-tion discreetly with people in their network who couldhelp exploit a new opportunity or a new way of handlingfinancial transactions. "Innovation flourished," the au-thors write,"in the context of close relationships and pow-erful intermediaries that tempered competition but pro-tected easily copied ideas and products. This protectionencouraged financial innovation hy more nearly ensuringa fair retum on investment in intellectual property."

Even today, a number of individuals and organizationsplay intermediary roles in facilitating innovation. Man-agement consultancies like Accenture and Cap GeminiErnst & Young operate innovation labs, where clients canshare ideas and discuss technological advances and othernew research. Ideo, the design firm, often creates newproducts by mixing together the ideas and technologiesof different clients. As a business development consul-tancy, ISIS Intemational has for more than 20 years actedas an intermediary to cross-fertilize business opportuni-ties for its clients.

Sitting at the intersection

of many companies and

industries, a network of

innovation intermediaries

would be in a unique

position to visualize new

opportunities.

ISIS, for example, recently helped the chemical divi-sion of a major U.S. oil company find commercial appli-cations for a new molecule it had developed. Althoughthe molecule seemed promising, its potential applica-tions were not immediately obvious to the division's R&Dstaff. They hired ISIS to search outside the company forpossibilities. ISIS convened a brainstorming summit with12 of its contacts in industries ranging from waste treat-ment and building materials to cosmetics and household-cleaning products. The panel quickly identified n busi-ness opportunities for the molecule, with potential

revenues of $150 million. One ofthe"Ny companies represented on the panel

went on to pursue a joint projectwith the oil company and intro-duced a new consumer productbased on the molecule. Without thecatalytic role ISIS played, the projectmay have been killed before it hadthe chance to be successful.

Unfortunately, most consultingfirms consider sharing perspectivesand competencies among clients tobe taboo. Consultants, therefore, areunlikely to be a major source of in-

•— - " ^ novation intermediaries. But thereare plenty of other players operating

in and around the innovation process who could functionas intermediaries. Lawyers and venture capitalists, forinstance, often leam about best practices, ideas for newinventions, and new ways of doing business from compet-ing and noncompetingcompanies. Trade show organizersand trade association representatives frequently conducthigh-level meetings between potential buyers, suppliers,and partners, and identify opportunities for synergywithin and across industries. Investment bankers areoften called upon to find new applications for technolo-gies developed by companies or govemment agencies.

But perhaps the most promising pool of potential in-termediaries is the rapidly growing population of babyboomer retirees who have deep expertise in particularindustries and technologies, hold the trust of the com-panies they worked for, and don't want to spend alltheir time playing golf. With the right training in suchdisciplines as knowledge brokering, business develop-ment, and law, these former corporate executives, scien-tists, and engineers would make ideal agents. And byusing the Intemet to communicate and share informationwith their clients and one another, they could positionthemselves in the idea flow without abandoning theirother retirement pursuits.

Ultimately, I believe we will see the emergence of for-mal networks, perhaps even companies of such agents.



Businesses would pay an annual fee to hire a group of in-termediaries with the appropriate backgrounds and con-tacts, briefing them about their intemal innovation pro-grams. Bound by nondisclosure agreements, the agentswould share information with other agents representingother companies. The agents would signal their clientswhen they thought sharing data would be worthwhile,and they would help stmcture the terms ofthe engage-ment. Whenever it was mutually beneficial, intercom-pany innovation relationships would fomi early and oftenthrough this relatively safe, controlled network. Sitting atthe intersection of many companies and industries, a net-work of innovation intermediaries would be in a uniqueposition to visualize new opportunities synthesized frominsights and technologies provided by several compa-nies-ideas that might never occur to companies work-ing on innovation programs on their own. (See tbe exhibit"A Network of Intermediaries.")

The final shape of such intermediation networks is im-possible to predict In fact, other means of collaborationmay develop. We may, for instance, see the emergence of

new Web services that automate some ofthe basic infor-mation exchange essential to creative partnerships. Or wemay see companies offer data-mining services that gen-erate new business ideas by analyzing information col-lected from several companies at once without violatingprivacy or exposing secrets. What's certain is that, in anincreasingly complex world, the biggest growth opportu-nities will come more offen at the intersection of multi-ple companies than from single visionaries acting on theirown. It's important now that companies break out oftheirinnovation boxes and find ways to link their innovationefforts. In the years ahead, the greatest corporate innova-tion may arise in the innovation process itself. V

1. Richard Leifer, Christopher M, McDermott, Gina Colarelli O'Connor, Lois S.Peters, Mark Rice, Robert W. Veryzer, Radical Innovation: How Mature Compa-nies Can Outsmart Upstarts (Harvard Business School Press, 2000).

Reprint RO2O8ETo order reprints, see the last page of Executive Summaries.

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