NineSigma: Nurturing 'Open Innovation'

Sometimes a company has to go outside its R&D department and tap outside experts. NineSigma CEO Paul Stiros describes how it works

As our 10 cutting-edge designers demonstrate, the most exciting work tends to happen in the fertile ground where two or more disciplines overlap. Or where one intrepid designer or team simply decides to combine them. The same holds true in the related world of product innovation, where a company trying to develop, say, a tooth whitener might borrow from the bleaching experience of a laundry products expert. Or a team trying to develop a product that would keep a cotton shirt wrinkle-free might find the solution in the lab of a professor studying polymers related to the semiconductor industry.

The latter happened a couple of years ago at Procter & Gamble (PG). And while it might seem like a rare case of serendipity, finding the solution to an R&D problem in some far-flung field is not uncommon. At least that is the lesson of NineSigma. The Cleveland-based firm was founded in 2000 to help companies take advantage of "open innovation"—the practice of companies going outside of their own R&D departments and tapping the thousands of independent inventors, university researchers, and other knowledge holders for solutions.

In other words, NineSigma—like competitors InnoCentive (the Eli Lilly (LLY) spin-off) and YourEncore—is a broker in the business of sourcing ideas and, says President and Chief Executive Paul Stiros, a former director in P&G's Corporate Innovation & Knowledge Group, the "solutions come from places you'd never have imagined."

It was NineSigma that, by sending a request out to its network of 1.5 million experts (who are free to forward the request to still more experts), found the semiconductor expert who solved P&G's cotton wrinkling problem, and the company tackles similarly tough problems for companies such as Unilever (UN), General Mills (GIS), and Johnson Controls (JCI). "Many companies come to us out of frustration," he says. senior writer Jessie Scanlon sat down with Stiros at a conference in Boston in May to talk about the advantages—and potential stumbling blocks—of a cross-disciplinary approach to problem-solving. Edited excerpts of their conversation follow.

Why should a company pursue an open innovation strategy?

Here's one example of the benefits. We had a client who was selling laundry detergent in prepackaged pouches. The problem was that the plastic pellets holding the liquid detergent were leaking, staining the packaging, and so sales were tanking. The company had its packaging people working on it, the manufacturing people were working on it, the supplier of the plastic pellets was working on it, and no one could come up with a solution. Our search turned up a small, unheard-of company in Britain that was packaging agricultural concentrates—herbicides, pesticides, that kind of stuff—in a similar type of film. They had had, and solved, a similar problem along the way, and their solution could be adapted to our client's problem. So our client's solution came from a company that no one had heard of in an unrelated industry.

So after trying and trying to invent the solution, it turned out a solution was already out there, waiting to be found. Could the same be said for many of the problems that companies are spending millions to solve?

Yes. The world of knowledge is quite opaque: The people with the problem don't know where to look for the solution. So they spend a lot of money and time discovering something that's already available.

Who are these knowledge holders? Is it a bunch of lone inventors doing material science in their garage?

We only make a small percentage of connections to individuals, because what the clients are looking for isn't something that you can develop in a garage—like a gadget. You might find a new stapler in a garage. But if the problems are more complex, you tend to find the solutions coming from teams with expertise in multiple fields. So about 60% of the connections we make are with other companies, everything from small startups to large companies. About 30% are academic researchers and the remaining 10% are with research labs, either publicly or industry-funded.

It seems like one of the potential downsides of an open innovation process is that you would end up with a lot of inappropriate solutions. Is that a fear that keeps companies from trying the approach?

Getting a ton of irrelevant information happens when you don't describe the problem well enough. Some companies invite people to submit ideas through their Web sites, and those invitations tend to spark hundreds of thousands of ideas that rarely ever pan out. I remember we did that while I was still working at P&G, and out of thousands of ideas, we weren't able to pursue any of them. The way that you ensure that the proposals are relevant is by defining the problem narrowly enough.

But if you define a problem too narrowly, do you risk limiting the very promise of the open innovation approach? How do you cast a wide net but not catch junk?

First, you need to clearly identify a client's most pressing problem or problems. Then you need to translate the problem into basic science or technology terms. So, for instance, when P&G wanted to solve the problem of wrinkled cotton, we didn't send out a request for proposals saying we were looking for a solution to wrinkling because if you describe the problem in terms of its applications, the only solutions you get are from people working in that industry. So instead we talked about surface chemistry and hydrogen-bonding across fibers—the language of science and tech that is understood across industries.

How do you get the RFP [Request for Proposal] in the hands of the right people if you have no idea who those people are or where they might be found?

We send it out to our network of 1.5 million sources and any new sources that we uncover—every time we take on a problem, we do a new search. But most important, the RFP can be forwarded and we encourage people to pass it along. As a result, 40% of the proposals we get back come from people that we didn't reach out to in the first place. It's a testament to the power of an open network.

So to return to your question about the danger of being too narrow, we try to throw out a big net with a fine mesh by distributing the narrowly defined RFP to thousands of people.

Why does open innovation seem to be taking off now?

We've seen an explosion in the availability of knowledge. That's driven by an increase in the access to capital, especially [venture capital] money. We're also seeing greater mobility of talent and a trend in the academic community toward more market-focused research. Finally, there's greater access to talent outside of the U.S., whether in the former Soviet Union or in emerging countries like India and China. All of these contribute to the wealth of available knowledge, and of course the Internet's ability to connect people instantaneously and at no cost is what makes that knowledge accessible. We have solutions coming from places you'd never think about—from Yemen, from Syria, from Bulgaria.

So are internal R&D departments becoming obsolete?

Our clients never use this process as a means of cutting back internal research departments. They see it as a way of supercharging their own R&D investments.

Before it's here, it's on the Bloomberg Terminal.