Open Innovation's Secret: It Takes a Crisis

As I was chairing the first day of the Open Innovation Summit today, I was struck by something that many speakers acknowledged: Their companies converted to open innovation—relying on outsiders for their next products or services—only after falling into a crisis. Moreover, the panic struck most around the time of the previous recession in 2001, which suggests that we should start seeing many more open-innovation practitioners soon.

Among those that found religion a decade ago are Johnson & Johnson, Procter & Gamble, and Whirlpool. Others which came to open innovation more recently after moments of doubt are Rockwell Collins and the consumer-products unit of GlaxoSmithkline. As Cheryl Perkins, former chief innovation officer at Kimberly-Clark and now president of her own consultancy, Innovationedge, told us in her presentation: “Often open innovation starts with a burning platform.”

I’ll get into a few observations and quips from presenters at the summit in a bit, after I return to this theme of crisis-triggered conversions. But first here’s a quick description of this gathering: The two-day conference in Orlando is organized by World Research Group and consists of speeches (and requisite PowerPoint slides) from dozens of big name companies and innovation boutiques. Here’s what bloggers tweeted from the talks. Now back to the main story.

P&G turned to open innovation directly because of a crisis in 2000, said Pramod Reddy, associate director of global business development. The consumer-products giant missed its financial forecasts for two quarters in a row, something unheard of at the steady-Eddy stalwart. The shortfalls were a symptom of something larger, of course. P&G was no longer able to generate enough blockbuster products on its own. Today, P&G is widely cited as the role model for open innovation.

Whirlpool came around that same year after top management realized that big-ticket appliances had become a commodity. As a result, prices and margins were in a permanent decline, steepened by the recession. Unlike P&G, it didn't respond initially by opening its portal to product suggestions from outsiders. But it did enlist proposals from all employees. Further, it trained some 3,000 in the innovation process and began collaborating with suppliers. Now, in Phase II, Whirlpool is inviting consumers to help, said Moises Norena, global innovation director.

J&J had been into partnerships since at least 1978, when it founded COSAT, or its corporate office of science & technology. But its main mission, said Robert Zivin, the office's senior director, had been to sprinkle money to research scientists in academia. It was only around 2000 that J&J actually began to "harvest innovation" from these outsiders, as Zivin put it.

The payoff from open innovation can be huge. GSK's consumer-products unit was getting about 20% of revenue from goods invented with the aid of external partners three years ago. That's when the bottom fell out for one of its biggest U.S. brands, Aquafresh toothpaste, said Helene Rutledge, the unit's director of open innovation. "A bad economy is good for innovation," she said. Hard times force companies to cut back—GSK had ordered layoffs at the struggling unit—and that in turn can push them to link up with partners to share the burden.

GSK's goal was to boost its share of externally developed products to 33% in three years. Instead, it hit 50% even sooner than that. Among the open-innovation products is a new form of Aquafresh that turns to foam in your mouth. Rutledge said the idea came from someone in the oral-care business who had background in gel foams like Gillette's Edge, but it never would have hit the market if not for technology that came from four outside partners.

Here are some smatterings from the rest of the Open Innovation Summit:

* Phil McKinney, vice-president and chief technology officer for Hewlett-Packard's personal systems group, said: "Knowledge is becoming a commodity." Further, measuring innovation by comparing R&D spending to total revenue is BS. A better gauge is gross margin.

* R. Lemuel Lasher, president of global business solutions at Computer Sciences Corp., said: "Good management is what kills innovation." Lasher also scolded the tech world for calling customers "users." "They are not the same people that shoot heroin into their arms," he said.

* Russ Conser, manager of Shell's Gamechanger unit: Stupid ideas are often the real winners.

* P&G's Reddy said the company just launched Chinese and Japanese versions of its open-innovation portal, and will translate it into Spanish and Portuguese within the next six months to better reach would-be helpers in Latin America.

* And finally, this from Zivin of J&J: "Early-on innovation is parasitic." Most ideas in business end up as failures, which means they only suck away resources and could kill the host if management isn't careful.

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