How to Measure Open Innovation Value – Part 2

Written by David Simoes-Brown and Roland Harwood from 100% Open – an open innovation agency spun out of NESTA, the UK’s National Endowment for Science, Technology and the Arts.

Link to How To Measure Open Innovation Value – Part 1

What’s Different about Open Innovation?

Better Value

The metrics are less developed in this emerging discipline than in traditional innovation. In my last blog  I outlined a list of the sorts of direct and indirect measures that firms can use to capture all the value that innovation brings. This same list holds true for open innovation. You will want to profit from collaborations and there will still be the usual associated costs. Given the motivations to collaborate (better innovations delivered cheaper and faster) you would expect the benefits to be larger and the costs smaller. Open innovation should deliver better Innovation Value.

Interestingly OI firms we’ve worked with such as Procter and Gamble concur, reporting that they get more discontinuous innovations, cheaper and sometimes faster. What remains constant is the hit rate. P&G’s experience shows that out of every 100 ideas that receive investment, one makes it to market and the same ratio is true whether the ideas come from within or without.

In addition to the standard measures, here is a list additional ones that help open innovation to be more accountable.

Table 2 – Open Innovation Value

Benefits	Costs
Two sets of profit	A shared set of costs
Partner satisfaction	Two perspectives on risk
Network engagement	Costs of the competition
Trustworthiness	Networks and scouting
Seeing new opportunities first	Venturing
Time to market	Partnering
Ease of decision-making	IP and legal
Employees focused on core	Managing relationships
Network size and connectedness
Network diversity  and quality
Employee innovative capacity
Better ideas submitted
Scientific value

Two Partners, Two Sets of Metrics

Given that open innovation involves innovating with others, the first observation is that you need to measure each factor from two (or more) points of view. There are two sets of profit metrics, two sets of costs and two markedly different levels of risk. So the first decision to make is how transparent each partner wants to be about sharing these. In fact this is an entirely healthy, albeit rare, conversation as it ensures that objectives and processes are aligned in some detail, avoiding uncomfortable ‘moments of truth’ halfway through the relationship. These conversations should encompass the envisaged business model and IP strategy as well as who shoulders what costs and risks at what points in the relationship.

Our corporate collaboration project with McLaren and NATS exemplified this. The two organisations worked closely together in a mutual and flexible business partnership in order to repurpose F1 race control software to air traffic control.

Relationship Measures

The second question concerns the relationship itself. The indirect metrics of closed innovation have parallels in open systems. For example customer satisfaction is broadened to include the satisfaction levels of your partners or network; brand reputation is augmented by a firm’s reputation as a trustworthy partner. In practical terms, enhanced trustworthiness may well increase your chance to see new opportunities before your competitors. By leading the charge in open innovation, P&G are seeking to be the partner of choice.

On the cost side, the time to market and ease of decision-making need to viewed in the context of partnerships – both can take time. We found this in our Open Alchemy project in which Oracle, the NHS, Pfizer and BT joined forces to create the national wellness scheme Wellbe. This succesful outcome would not have been achieved without careful attention paid to the roles of each company, their expectations and the practicalities of running a consortium.

Sometimes it is easier to innovate outside an organisation – flatter reporting, more autonomy and fewer silos to contend with. Employees can be deployed on core, less risky projects with external partners shouldering the burden of more speculative ones. With experience these reductions in administration costs can be accounted for.

Valued Networks

The third question concerns the value a firm derives from establishing an innovation network. Entrepreneurs and inventors innovate serially and so, as in the examples of Hasbro and GSK it can pay dividends to cultivate long-lasting relationships with them. This being the case, measures of the size, connectedness, diversity and quality of open innovation networks makes sense. In our Open Venture Challenge with Cancer Research UK we created a 600 strong network that was tasked to create new ventures. Along the way to the successful birth of five of these, we measured and benchmarked community growth, rate of ideation, comments, member reputations and the level of buzz.

The same observations about measuring external networks also hold true inside large firms. But how many identify and cultivate their intrapreneurs or appreciate, measure and grow the innovation mindsets of their employees?

One final point on networks – the added benefits of better external engagement should also be considered. Easier and more regular filling of the innovation pipeline with better ideas, many submitted unprompted.

Other New Frameworks

Some are indeed beginning to look at the broader picture. Van Horne, Frayret and Poulin (2006) put forward a 3X3 value matrix looking at value generation for innovator, business and consumer. It is being recognised that collaborative innovation needs a different approach and measurement can take place at industry level, though ‘architectures’ (Jacobides, Knudsen and Augier 2006). For example in bilateral relationships it is possible to rate the ‘complementarity’ of products, services and processes and ‘mobility’ of assets .

Conclusions

It is time for innovation to become a true part of a firm’s core growth strategy rather than a kind of corporate hobby. NESTA’s work on a national innovation index has started defining scores that can compare the innovation fitness of different firms and sectors. At 100%Open we’ve had the privilege of looking at innovation metrics afresh in the exciting new open world. Perhaps having to make the case for open innovation in a more rigorous way will also rub off on traditional innovation.