Institute for Innovation & Information Productivity

Outsourcing Innovation

Warren Axelrod writes: — Usually the alignment of the stars and planets is reserved for astronomy and astrology. However, my intellectual planets came together recently on reading an article on page R6 of the special Business Insight section of the November 30, 2009 Wall Street Journal. The article by Michael J. Stanko, Jonathan D. Bohlmann and Roger J. Calantone has the title “Outsourcing Innovation,” and describes the results of a survey that they conducted on 359 companies to determine the factors influencing innovative performance. Innovative performance was defined as the number of patents produced and the number of subsequent patents built on these.

Having written a book with the title Outsourcing Information Security (Artech House, 2004) and being a long-time Academic Advisor to the IIIP, I really experienced an epiphany on reading the WSJ piece.

The article listed four situations in which the outsourcing of innovation activities was deemed appropriate, namely:

1. When companies did not have adequate subject-matter expertise in-house
2. When there are many technical hurdles and the outcome is uncertain as is typical during the initial stages of a project
3. When the intellectual property is not well-protected so that companies want to limit spending, and
4. When companies are well versed in outsourcing.

The authors then look at the impact of outsourcing innovation on performance and conclude that:

• Although not necessarily always less costly, outsourcing innovation often results in a higher return on investment from the resources allocated.
• There is a need to balance the amount of outsourcing since too much can result in higher costs than does too much internal product development, whereas too little outsourcing can result in much poorer performance.
• There is a risk of products being too generic when outsourcing product development.
• There are problems when outsourcers are brought in too late in the product development cycle due to the higher learning curve for contractors.
• Outsourcing can help keep options open and reduce time to market.

To my mind, the most interesting finding (and also the most questionable) is the implication that “businesses that outsourced too much or too little—by just 1%—saw an 11% decrease in [performance]. Even small changes made a big difference.” I really think that controlling outsourcing to within 1% of an optimum target amount is unrealistic and unattainable for the most part.

However I do subscribe to the finding that there is considerable potential value in reducing time to market as I described in my February 13, 2008 Issue Paper “A Value-Hill Model of Innovation,” which can be found on this site.

The bottom line is that the reasons to outsource innovation are similar to those for any outsourcing decision. There is access to specialized skills, the scalability of the project team on short notice, possibly lower costs, and the like. But an overarching issue is the protection of sensitive data, since you certainly would not want your outsourcer to share your intellectual property with competitors. This key issue is not addressed explicitly in the WSJ article … but it is a central focus of my book!

The world’s largest SW company doesn’t understand innovation or productivity

Michael LoBue writes: The title of this post may seem like a blinding glimpse at the obvious, but Microsoft’s CEO Steve Balmer told InformationWeek’s John Foley on October 3rd that he believes that Windows 7 Enterprise will contribute to innovation and productivity — but he can't back it up! Could it be that the largest software company in the world doesn't have a "productivity model" for their products? The same ones that they claim are essential to growing the world's economy!

InformationWeek: One of the things your 'new efficiency' message implies is that businesses can drive through this economy by investing in IT, which is kind of a bold statement.
 
Ballmer: I do believe that very strongly. It may not be the only answer, but at the end of the day the only way for the economy to grow isn't going to be from debt, it's going to be from productivity and innovation. If you look at the source is of innovation in many industries, IT is fundamental. It's fundamental to new exploration, new invention, new science. IT is a fundamental part of the innovation process, so I think it part of the new efficiency in that sense. And certainly from a productivity perspective, the only provable source of systemic productivity gains in the world economy over the last 30 years has come from IT.

page 4 of InfoWeek article

Maybe MS has to loose a little more market share to realize they should be a bit more deterministic around innovation and productivity with their products.

Clouding Innovation

C. Warren Axelrod writes: Judging from the 45 readers’ comments in response to the July 20, 2009 Op-Ed article “Lost in the Cloud” by Jonathan Zittrain, he hit a number of raw nerves. Zittrain is a Harvard law professor and author of “The Future of the Internet – And How to Stop It.”

Alongside his valid concerns regarding privacy and security in the cloud, Zittrain makes the questionable statement that “… the most difficult challenge – both to grasp and to solve – of the cloud is its effect on our freedom to innovate.”

The basic arguments for Professor Zittrain’s case against the cloud, and in favor of personal computers, are roughly as follows:

• Anyone can write code for the PC and sell it or give it away
• The competition from other producers of word processors and browsers, for example, keeps Microsoft honest
• Thousands of applications are developed by “tinkerers and hackers” (hackers?) on their PCs

Zittrain argues that the cloud environment does not permit the above activities, since companies such as Facebook, Apple and, to a lesser extent, Google, are crimping innovation through their restrictiveness.

Even though Zittrain mentions that Amazon.com offers a cloud infrastructure, which allows customers the freedom to develop their own software, his major focus is on those companies that are considered to be protective of their proprietary environments.

It is very difficult to anticipate which types of service providers will dominate the cloud. In the opinion of one of the commenters, the cloud “… is simply a revamp of ASP (as was seen around 2000).” According to another, it is “… [full circle back to … timesharing off mainframes.” To some extent they are correct. And I didn’t notice a slowing down of innovation because of timesharing … quite the reverse.

The current wisdom is that the cloud does (and will) offer a wide range of services, including software, platform and infrastructure services, only the first of which threatens to restrict what developers may do. But this is not new. There have been, and continue to be, proprietary software service vendors and they have clearly not hampered innovation in the past.

A similar set of arguments surrounds “net neutrality.” Proponents suggest that any restrictions or preferential treatment on the Internet will be detrimental to innovation as the larger players will dominate the Web and push out smaller start-ups. Interestingly, the so-called destroyers of innovation in the net-neutrality case are seen to be the large telecommunications companies, such as AT&T, Verizon and Comcast, who oppose net neutrality and want to impose various tiers of online service, which they would control and charge for. The supporters of net neutrality include many of the large Web presences, such as Google, and its subsidiary YouTube, Amazon and Yahoo. Facebook carries a “causes” site for the support of net neutrality.

So what’s wrong with this picture? On the one hand, a number of large Web providers, who are jockeying for cloud business, are for net neutrality, which is claimed to promote innovation, but those same companies are seen as restrictive with respect to what they will allow into their cloud software services, which stymies innovation according to Zittrain.

The truth of the matter is that innovation will flourish whether or not the Internet is “neutral” and whether or not cloud software-as-a-service providers restrict the applications that they accept for their platforms. Man’s creativity will inevitably work around any barriers to progress. In particular, the cloud does offer a range of services, from software to platforms to infrastructure, which enable small and start-up companies to access vast computing resources, which heretofore were way beyond their reach, on a pay-for-use basis. This is, in my view, an innovation enabler of unprecedented power. And, furthermore, the local PC model is not going away for many years to come, so that, even if you believe, which I don’t, that the transfer to the cloud will inhibit innovation in the long run, there will still remain many choices well into the future. And by then an entirely new model will likely prevail.

The Big Paradox from the 2008 Innovation Confidence Index

Michael LoBue writes: Today the Institute releases the 2008 Innovation Confidence Index, the second annual report of global consumer confidence in innovation to improve one's life.

If you haven’t downloaded the report, you can do so — the results are almost certain to surprise!

Page 9 of the report contains the Innovation Confidence Index ranking for each of the 25 countries in the 2008 study. The rankings might surprise — but read the paragraph beneath the table and the charts that follow on page 10.

The Great Paradox of the 2008 Innovation Confidence Index
The Innovation Confidence Index correlates highly a nation’s communal values, an index developed by the World Values Survey. About this Principal Investigator Levie writes:

” This variable is based on five indicators that capture different, but highly correlated, dimensions of communal values, including religiosity, patriotism, need to respect authority, teaching goals (obedience versus independence), and family values. It is usually portrayed as varying from “traditional” communal values to “secular/rational” communal values.” [pg. 9]

Levie questions the seeming paradoxical nature of this finding, asking: “Why would Innovation Confidence be high in countries with strong traditional values, like South American countries, the United States and Ireland, and low in countries where secularism is valued, such as the Netherlands, Finland and Japan? Shouldn’t it be high in countries that are known to be innovative?”

In short, this finding is simply counterintuitive. Levie sums it up this way:

”In summary, it is perhaps an irony that new products and services are welcomed most vigorously by people whose societies are most traditional. New products and services may represent a way of escaping from community rules, because the rules were invented without anticipating such products and services. Individuals in these countries may be less discerning in their cost/benefit analysis of new products and services, because novelty has more value to them than it has to those living in secular/rational societies.” [pg. 10]

Small Businesses Will Be Key For The Economic Recovery

Phil McKinney writes: I'm an eternal optimist when it comes to the ability of people to create innovations - especially when we find ourselves at our greatest need.   This drive to solve problems is a prime catalyst for entrepreneurs.   So are entrepreneurs better at innovating than large enterprises with all of their resources? In simple terms .... yes!

A Chi Research report prepared for the Small Business Administration (SBA) highlights the innovation output from small businesses.  Specifically:

• Small firms produce more highly cited patents than large firms on average. Small firm patents are twice as likely as large firm patents to be among the 1% most cited patents.  That is, small firm patents are on average more technically important than large firm patents.

• Small patenting firms produce 13-14 times more patents per employee as large firms.

• Small firm innovation is more extensively linked to outside technology while large firms build more on their own technology.

This is confirmed by examining the patents with the highest citation indices. Small firms account for 6% of the patents issued to the 1,071 most innovative firms. But when these patents are ranked by citation index, we find that small firms account for:

• 8% of the top 10%,

• 9% of the top 5%,

• 14% of the top 1%.

In addition to the ability of small businesses to generate innovations, they also are the leading creator of jobs. According to a recent report released by the Office of Advocacy of the U.S. Small Business Administration (SBA), small businesses created 1.9 million jobs in 2004, - the most recent year for which job creation was studied.

Other notable statistics from the report include:

• In 2006, the nation had an estimated 26.8 million small businesses, of which 6.1 million were employer firms which means 20 million small businesses in the country have no employees (self-employed).
• Small businesses employed 50.9 percent of the nation’s non-farm private workforce in 2004.
• Women-owned firms totaled 6.5 million and generated $940.8 billion in revenues in 2002 (latest data).

Go small businesses!!  We are depending on you to be a key catalyst for the economic recovery.

Note:  I know that this is clearly a US centric view.  I would welcome comments from non-US readers and how this view does or does not apply to their country/region.

Source: SBA Research Report

This is a cross post from my blog that I felt would be beneficial for the IIIP audience.

Virtual Innovation

Dick Reilly writes: "First he locks himself in a room, preferably in a hotel in Puerto Rico, shuts off the phone, pulls down the blinds, has his meals delivered, and does not speak to a soul for a couple of weeks. In this meditative isolation, (he) engages in what he calls 'backtracking . . . I think about everything I done in the past five years, look in each nook and cranny, down to what I put on my toast in the morning.'"[1]

Clay Christensen coined the term, disruptive innovation[2] to refer to a technological innovation, product, or service that eventually overturns the existing dominant status quo in the market. The quote above is from a disruptive innovator whose identity I will reveal later (no skipping!).

In our forthcoming book, “Uniting the Virtual Workforce[3]” Karen Sobel Lojeski and I discuss some of the issues surrounding innovation when people are working in geographically dispersed teams. The overarching question is, Can innovation be as successful when those doing the innovation are not collocated?

The answer depends on how innovation is defined. Our definition is the same as that used by IIIP – “imaginative activity that is fashioned to produce outcomes that are both original and have creative value”. We like this definition because it allows us to consider a very wide range of activities that span everything from the very front end of innovation to the launch of a new service or product.

The front end is where innovation starts.  If you ask people whether it’s best to generate new ideas collaboratively in a group or allow people to work alone and independently, they will invariably choose the group.  But it turns out that the very front end of innovation – generating ideas – is best done individually.  Quite a bit of research has shown that if you want a lot of original, new ideas, it’s better to have individuals work at it alone than in a group.  Two reasons have been cited by researchers for this contra-intuitive finding.  The first is fairly simple. In a group, only one person can speak at a time, so in given amount of time fewer ideas can be expressed.  The second is a bit less obvious and has to do with the apprehension that people might feel about expressing their ideas in a group.  This fear of being criticized dampens the expression of ideas by more timid souls.  But we believe that there is a third reason that has not been studied very much.  It was suggested to me by Jonathan Sharples at the Oxford Institute for the Future of the Mind. He introduced me to the work of John Gruzelier, a neuropsychologist at the University of London.  Gruzelier has been studying the effects of neural feedback designed to put people into a relaxed state characterized by “theta waves” in an EEG.  What he found was a remarkable improvement in creativity for musicians who underwent neural training that allowed them to put themselves into a relaxed state.

Companies, desperate for innovative ideas, spend billions on research on better ways to develop new products, so it’s surprising that nobody has looked at the role of brain activity in innovation (we could not find any published research), and very little research on how working virtually affects innovation. Both of these areas need to be studied, especially when it comes to the fuzzy front-end, the pipeline for innovation. Even better we might study how these two ideas can be combined. Teach people how to put themselves in a relaxed state and allow them to work in a virtual environment that reduces the apprehension of criticism and let the ideas flow. This might help answer the question posed at the beginning. It may be that the virtual workspace is ideal for the front end.

As promised, the quote that I began with is from Frank Lucas, a disruptive innovator portrayed by Denzel Washington in the film American Gangster. Lucas disrupted the market for heroin in the US[1] by completely changing the supply chain. He offered a superior product for a much lower price and was making about a million dollars a day before he was “disrupted” himself. Setting aside the ethical, moral and legal issues Lucas was a true innovator. I did some research on his life after I saw the film and thought that the similarity between his approach to getting ideas and the work of John Gruzelier was striking.

[1] Jacobson, Mark. The return of Superfly. New York Magazine, August 7, 2000.

[2] Christiansen, C.M. The Innovator’s Dilemma. New York: Harper Business Essentials, 2000.

[3] Sobel Lojeski, K., Reilly, R.R. Uniting the Virtual Workforce: Transforming Leadership and Innovation in the Global Enterprise. New York: Wiley, In Press

IIIP's Definition of Innovation

Michael LoBue writes:  Thanks to IIIP's Academic Advisors we have an Instittue working definition of innovation:

"Innovation is imaginative activity fashioned so as to produce outcomes that are both original and of commercial value"

We welcome comments and feedback on this definition.

The Problem with Productivity As Policy

Daniel W. Rasmus writes: I was struck by a recent Caribbean News piece where Caribbean Community (CARICOM) Secretary General Edwin Carrington Tuesday called for a "massive increase in our productivity" to boost the region's competitiveness in the face of the just-concluded Economic Partnership Agreement (EPA) with the European Union (EU) - (read more here).

Why, because a call for productivity in markets that are small and undifferentiated will not result in economic prosperity. When we look at productivity as independent of other measures, it may be a positive metric for improvement, but as the US auto industry has learned,  being efficient at the wrong things is perhaps even worse than being inefficient - more of the wrong cars in the market is a bad thing when you have to take the hit on liquidating those automobiles.

Productivity and innovation need to be tightly linked. What Carrington really needs to focus on in a competitive global economy is creating economic opportunity that takes into account the capabilities of the Caribbean, its uniqueness and how to not only create innovative goods and services, but to think about innovative business models that may make their limited resources more accessible to the world.

When productivity is a policy, and it drives economic growth more than other factors, it can be a problem. The Caribbean, and every other emerging market segment, needs to create policies that encourage innovation because the doing more of the same, especially in comparison to the US and Europe, will not create the kinds of prosperity that governments seek.

Emerging market government have huge influence over commercial development in their regions, more more than the US or the EU exerts on the companies that reside in those regions. Areas like the Caribbean should use policy to effectively drive the innovation dialog, and figure out what differentiated models can bring about new development and growth, even if those models challenge Western views. Innovation isn't limited to goods and services, and can mean new economic models and new governance models as well - and those are all about policies that leave the industrial age anachronism of productivity much lower on the list of things to tackle than looking through a Western industrial policy lens would leave other nations and regions to believe.

Innovation Central Planning - Can this be done?

Michael LoBue writes: David Simoes-Brown reports on Henry Chesbrough's talk on open innovation during his visit to NESTA (National Endowment for Science, Technology and the Arts).  This link also contains NESTA's just released research report entitled "Leading Innovation".  I haven't read the entire report, but the executive summary suggests that they missed one important and necessary element to the innovation equation. That's TOLERANCE!

While Silicon Valley, often refered to as the "gold standard" of innovative regions, is endowed with many important assets that allowed innovation to spring forth, what made (and I hope continues to make) Silicon Valley a well-spring for innovation is its tolerance.

This is not something that is legislated or orchestrated by "regional planning commissions". At least here in the Greater San Francisco Bay Area it's been a part of the area's fabric since the Gold Rush of the mid-19th Century.

Richard Florida of George Mason University in Virginia stumbled onto "tolerance" as a key differentiator in his research on regional urban and economic development. His two books on the "Creative Class" are well worth reading for any serious study of regional and innovation development. What he discovered was that levels of tolerance were highly correlated with a region's economic development and when a region made capital investments in related areas, but the region's tolerance remainded low, those capital investments did not spark economic growth (driven by innovation).

I think there's little doubt that Europe will find its own formula for "innovation success", but if it's going to study existing models, it should understand all the important elements -- including the "secret sauce".  There's only so much central planners can do to impact attitudes, but they need to be sure that their efforts are focused on developing the right conditions for innovation.  Perhaps it's less about "investing in assets for innovation" and more about "removing the barriers to tolerance"?

Efficiency versus Innovation

C. Warren Axelrod writes: There is yet another article on the seeming conflict between innovation and efficiency (or productivity) in the form of an interview of Gary Hamel by Elana Varon of CIO Magazine.  The interview was precipitated by Hamel’s new book The Future of Management, in which he reiterates the mantra that a focus on efficiency leads to conformity, but diversity is the prerequisite for innovation.

This issue was also discussed in Dan Rasmus’s August 24, 2007 blog on this website regarding “Geoffrey Moore: Use Productivity to Drive Innovation.”  Furthermore, there was a feature insert in the June 11, 2007 issue of BusinessWeek with the title “Inside Innovation – In Depth.”  There was a particularly relevant article by Brian Hindo titled "At 3M, A Struggle between Efficiency and Creativity".  The article supports the strong allegation of the detrimental impact of efficiency programs, such as Six Sigma, on the less structured processes of R&D.

However I question the apparent premise that efficiency and innovation cannot co-exist within an organization. I know of specific situations in which Six Sigma has been successfully implemented in order to standardize business, technology and operational activities to make them more efficient and yet, at the same time, they have been able to produce award-winning ideas both in terms of innovative business practices and improved operational processes.

This would suggest that it is possible to be both productive and innovative, and not being so may be due a lack of effective management, rather than due to inherent deficiencies in the underlying processes and environments. Clearly metrics that might be applied to operational processes should not be same as those that measure the “productivity” of creative processes. Neither should the same discipline and goals be applied to both. If a realistic approach is taken, it is surely feasible, as examples have shown, to have efficiency and creativity reside side-by-side and to optimize each. Yes, one can point to situations in which an overzealous management has extinguished the creative spark in their pursuit of efficiency. But it doesn’t have to be that way.