Penn Club / Wharton Crowdsourcing Presentation

Outsourcing to the People

Niagara Falls, NY 1847

Engineers on the Niagara Falls Suspension Bridge were out of ideas on how to get the first line strung between the US and Canada. The 800 foot gorge under Niagara Falls could not traversed by boat (the typical method), other ideas included: shooting arrows with lines attached, rockets, cannons, etc. A steel worker suggested a kite contest to deliver the line. The bridge company accepted the contest idea, and a fifteen year-old boy by the name of Homan Walsh won the contest by landing his kite on the opposite side. This crowdsourced project cost the bridge company a grand total of $10. This is crowdsourcing at its best and most simplistic – taking a task normally preformed by “professionals” and farming it out to amateurs.

Crowsourced products are all around us. Use a Swiffer brand brush? P&G reached out to its network of retired scientists to develop this leading product[i]. The mountain bike, developed collaboratively by riders on Mt. Tam, CA[ii]. Kodachrome color photography, invented by two musicians[iii]. The thermometer, invented by a British cabinet maker and amateur watch maker[iv]. The steam engine, perfected by a community of British coal miners[v]. The number two web browser, Firefox, created by volunteers[vi].

Today there is a rush of companies using the crowd to do everything from recommending which DVDs you might like to developing breakthrough medicines. Wikipedia used the crowd to grow faster and in many cases be more accurate than traditional encyclopedias. If you drive a BMW, you are driving on the open source software Linux which manages the engine, radio and climate of your car[vii].

What makes crowdsourcing tick? Why would people work for free? And how do they get so much accomplished with no money?

Crowdsourced teams operate by a different set of rules than traditional business working groups. Many companies such as P&G, Google and Netflix have figured out ways to allow crowdsourcing and traditional business to coexist peacefully and complement each other. Here are some of the conditions under which crowdsourcing excels.

• Self Selection - People do a wonderful job matching their skills to volunteer tasks. Would you volunteer for something you’re bad at?
• Democratic Decision Making - The crowd is unfettered by politics and will (on balance), make objective decisions. Most crowdsourced projects make use of member ranking systems to promote or demote ideas that are based solely on the ideas merit.
• Fresh Perspectives – people from outside a particular discipline can often solve problems in unique ways. The little girl freed the truck because she was unfettered by experience. Experts are always welcome in crowdsourcing but well run crowdsourced teams often include a mix of backgrounds that keep fresh ideas coming.
• Equal Voices - By not meeting physically a greater number of participants will participate. Most crowdsourced teams never meet, they collaborate online and avoid the human tendency to blindly follow the “alpha” team leader.
• Meritocracy - Those who have consistently contributed the highest quality work and shown dedication to the team will be the best managers. Crowdsourced teams often elect members to positions of responsibility. This is how Linux and Firefox manage their software development.
• Natural Selection - What works well is absorbed into the whole, what does not work is rejected without malice. Crowdsourced teams have no problem cannibalizing thousands of work hours and starting over again. It’s called “branching” and it allows crowdsourced projects to maintain a deadly objective viewpoints regarding their own projects.
• Self Healing - Since project contributors are themselves consumers of the end product, great care is taken to fix problems. An error on Wikipedia is on average, corrected in three minutes.

Crowdsourcing is all the rage now but before there were large corporations and patent law, governments sponsored open contests offering rewards for the solutions to challenges of the day. The British solved the dilemma of maritime navigation this way[viii] and the Nobel Prize has its roots in a similar French programs[ix].

So what changed? Why did we rediscover crowdsourcing?

The widespread adoption of the Internet is the catalyst for a renaissance of collaboration and a limitless repository of knowledge. We have found new ways to gather and share thoughts using the Internet as the platform for exchange, and that has allowed people to converse about their hobbies and interests, make smarter purchases, and do something totally new; create important products and services in their spare time. Now open innovation and crowdsourcing are powerful economic forces, and three market realities made it happen:

• The Internet allows people to freely associate, form groups and publish on a scale never imagined before. Individuals and groups have the power to get their ideas across at a level once enjoyed only by large organizations, corporations and governments.
• People can and will find ways to express themselves outside of their job descriptions and these expressions rapidly turn into powerful products e.g., Linux, Wikipedia and Firefox...
• The price of knowledge is falling to zero. Anything from powerful server computer software to how to become a six-sigma black belt can be found on the Internet. A child in India can monitor classes at MIT for free[x]. The quality of this information is getting better all the time.

These three factors contribute to a new economy that some companies are starting to harness. Welcome to the post-consumer era where we all pitch in to build the products & services we use:

• 50% of all web sites are brought to you by open source software, built and maintained by volunteers[xi].
• Google, the world’s most popular search engine and an economy unto itself, relies primarily on the recommendations of web page authors to drive its search engine[xii].
• A 2006 Forrester Research study shows almost 40% of Gen Y consumers research products online before making an offline purchase[xiii]. Conversely, the influence of advertising is falling at a similar rate.
• IBM now makes twice as much money servicing its Linux open source software customers than it does selling intellectual property and patents ($2 billion in 2003)[xiv].
• BestBuy allows its employees to place bets on which products will sell and which ones won’t[xv]. Among all BestBuy employees, the person who consistently outperforms all other employees in this most critical task is the CEO’s secretary. Why? (they studied this) Because she types all the meeting minutes for important meetings. No one else in the company has such wide exposure to what’s going on.

Netflix SideBar:

This week an important milestone in crowdsouring was achieved, a diverse team of computer scientists, statisticians, and psychologists won the $1 million dollar Netflix Prize[xvi]. What’s the Netflix Prize you ask? Do you like movies? Do you hate it when you rent a movie that looks like something you might like and it really stinks (“Sphere” is my personal greatest movie let-down). OK, the folks at Netflix feel the same way and they understand if they can suggest movies their customers like, they will have more dedicated customers. Three years ago they created the Netflix Prize offering $1 million dollars to anyone who could improve their movie rating service by 10%. In order to make the contest work, Netflix had to release all kinds of data on what their customers liked and did not like about the movies they watched. Heresy! Many shouted. If you give away the data, Blockbuster will use it to copy your business model and put Netflix out of business! Netflix looks that the release of data in a different way. A 10% improvement in their recommendation engine is a revolutionary improvement and far outweighs any advantage competitors might gain from sifting through their old rental data, Netflix will already be on to bigger and better things.

Endnotes:
[i] Tapscott, Don & Williams, Anthony. (2006). Wikinomics. Portfolio. www.wikinomics.com/
[ii] Sawyer, Keith. (2007) Group Genius. Basic Books. http://keithsawyer.wordpress.com/
[iii] http://en.wikipedia.org/wiki/Kodachrome
[iv] http://en.wikipedia.org/wiki/Bi-metallic_strip
[v] Sawyer, Keith. (2007) Group Genius. Basic Books. http://keithsawyer.wordpress.com/
[vi] http://www.mozilla.org/about/
[vii] Tapscott, Don & Williams, Anthony. (2006). Wikinomics. Portfolio. www.wikinomics.com/ and BMW Wants Joint Effort to Develop Open-Source In-Vehicle Platform http://www.autonews.com/article/20081023/COPY/310239911
[viii] http://en.wikipedia.org/wiki/Longitude_prize
[ix] http://en.wikipedia.org/wiki/Leblanc_process and http://en.wikipedia.org/wiki/Beno%C3%AEt_Fourneyron
[x] http://ocw.mit.edu/OcwWeb/web/about/media/
[xi] Netcraft December 2008 Web Survey http://news.netcraft.com/archives/web_server_survey.html
[xii] Google’s page rank technology explained http://www.google.com/technology/
[xiii] Forrester. Marketers: Keep A Keen Eye On Gen Yers http://www.forrester.com/Research/Document/0,7211,40303,00.html
[xiv] Yochai Benkler, The Wealth of Networks, P. 47 http://cyber.law.harvard.edu/wealth_of_networks/Main_Page
[xv] Best Buy Taps 'Prediction Market'. The Wall Street Journal, September 16th , 2008. http://online.wsj.com/article/SB122152452811139909.html
[xvi] The Science Prize: Innovation or Stealth Advertising? The Wall Street Journal, May 8th, 2009. http://online.wsj.com/article/SB124173078482897809.html

Crowdsourcing: Innovate or Die

By Steve Fisher, Microengagement Co-founder

Crowdsourcing is a growing business phenomenon. It is the process of gathering relevant groups of people together with defined characteristics and tapping their knowledge to create something new of value. Related terms include: Mass Collaboration, Peer Production, Wikinomics, Open Sourcing, Wisdom of Crowds, and Open Innovation. Crowdsourcing has been increasingly written about in prominent publications such as Business Week and in Jeff Howe’s 2008 book, “Crowdsourcing: Why the Power of the Crowd Is Driving the Future of Business.” The term was first coined by Jeff Howe in a June, 2006 Wired magazine article.

Crowdsourcing in fact can spur increased innovation at greater speed and efficiency than ever. The key driver behind crowrdsourcing is simply that in today’s world innovation more than ever is critical to business success. Business leaders, especially of medium and larger-sized companies, and in any industry that…

1. is not living largely off the fruits of the past, or in a situation of limited competitive pressure (protected by patents or a unique niche), and
2. has access to one or more constituencies outside of its normal internal resources to provide new business ideas

…need to be (1) thoroughly familiar with the capabilities of crowdsourcing, (2) the potential opportunities for new business development, and (3) be prepared to take advantage of one or more of several proven approaches to leverage this phenomenon.

Leading-edge companies have and are leveraging this technique successfully. Examples include P&G, Netflix, Electrolux, Phillips and HP (see examples described below), but these not always as part of broader business strategy where crowdsourcing is utilized as a systemic resource for growth, rather often represents opportunistic trials of rising social networks and access capability via Web 2.0. We contend that companies which systematically install crowdsourcing capabilities in their organizations will reap significant rewards that others won’t.

At Microengagment, our goal is to help educate leading-edge organizations, guide an opportunity assessment where we (a) gauge the current value being created through innovation (we call this Total Innovation Value or TIV), (b) assess how crowdsourcing can increase TIV as innovation builds via tapping external knowledge capital, and (c) identify the specific elements, prioritization and proposed scope of projects/programs. In so doing, we work with partners well established in the field of implementing systemic approaches to leveraging external constituencies for new product/service development and growth, including key consumer groups, social networks, B-to-B customers, end users, supplies/vendors, employees and subject matter experts, among others, accessible through business and social media networks.

Our practice focuses on crowdsourcing education, assessment and implementation. We conduct leading-edge research and showcase this on www.crowdforum.org as the first step in providing information to business leaders.



Crowdsourcing Is Taking Hold

Our research shows that more and more business executives, over 70% in fact, are increasingly familiar with crowdsourcing as an important avenue for business development, according to a recent survey of 100 senior marketing executives. This is up from just 30% one year ago. (Source: Marketing Executives Networking Group surveys, sponsored by The Crowd Forum, 2007 and 2008). One-half of these executives were Presidents, CEOs, COOs, and CMOs of corporations and professional services firms.



The Imperative for Crowdsourcing

When you look around these days the reality is undeniable: bedrock corporations failing and brands we grew up with going away, replaced by innovative new models and products/services. The world is becoming flatter such that the "blocking" tactics traditionally used by category dominants just don’t work any more. Just think GM, Chrysler, Microsoft, Circuit City, Starbucks among others. They thought they could control distribution and force products and services on consumers they did not want or no longer viewed as compelling. Meanwhile companies such as McDonald’s have flourished by listening to their consumers and introducing innovative new products on the menu.


Rather then preach “innovate, innovate” as so many corporate pundits do, at Microengagement we are focusing on innovation as the product of a healthy relationship with brand constituents. We call this “Constituent-Driven Innovation” (or CDI for short). The brands that are failing today never fully realized the power of working with theirconstituents. Brands that continue to thrive in this economy place high value on these
relationships. Companies like Google, Intel, and P&G understand the value of their constituents and will continue to thrive because the critical mass of constituents built up behind them will not allow them to fail. Here are some of the realities driving the movement to CDI:

• The days of dominance of traditional major media are over, be it TV, magazines or newspapers. There is no group just waiting around for your brand message on good old Channel 5. It must be created in coordination with your brand constituents, and delivered to where they gather, or they will often not any longer hear it and therefore may no longer buy it.

• Consumers are hyper-networked and eager to praise or punish brands on the Internet. The Internet allows people to freely associate, form groups and publish on a scale never seen before. Individuals and groups have the power to get their ideas across at a level once enjoyed only by large organizations and governments. The line between producer and consumer is eroding and so with it have fallen many tenets of traditional business wisdom. With Web 2.0, power has shifted to the users and is starting to eclipse that of paid advertising.

• The pace of change in consumer preference is so fast that traditional product development cycles can not keep up. Only by involving customers in the product development process will successful companies be able to make product development a destination rather than an isolated journey.

• Most corporations have categorized people into divisions of labor that have not essentially changed despite many efforts to reduce traditional functional “silos”. Yet today people are enabled and empowered to find ways to express themselves outside corporate walls.

• There is growing talent moving into the open market. Examples include the rise of crowdsourced consultancies such as Gearson Lehman, and Innocentive, and the havoc open-source software is causing companies like Microsoft. The rapid decentralization of expertise with the growth of business and social networks across the Internet represents an opportunity for project managers. With CDI, companies can attract thousands of talented people to work for them and achieve goals not possible with a fixed staff.

• There has been a proliferation of collaborative vendor relationships whereby suppliers play a key role in product development. Boeing is just one example, where several years ago Boeing gave its vendors access to collaborative software that let engineers join together in designing and producing aircraft. With the development of its 787 family of aircraft, Boeing has taken collaboration much farther by making its suppliers responsible for delivering design work as well as components.

• • How does one compete against free? Increasingly paid products and services are under attack from “open” products. Examples include Firefox vs. Internet Explorer, Linux vs. Windows, VOIP vs. landline, social media vs. advertising, and Wikipedia vs. Britannica. Winning companies are finding ways to work with open products rather than fight them.

Constituent Driven Innovation – The Next Big Thing, But It’s Already Here


Simply put, CDI (Constituent Driven Innovation) is any innovation driven by ideas tapped from outside an organization. In the case of new product development, CDI is casting a net for new ideas well beyond the inner sanctum of a modern organization’s typical market research, product development and marketing functions. Major organizations are using CDI as a business practice and are all around us: P&G, Linux, Netflix, Hewlett Packard, Boeing, Phillips, Dell, Lego, Goldcorp, and Threadless T-Shirts. (Again, see “Business Examples” below).

We truly believe CDI is not simply a buzzword or passing fad. Rather it is the next big thing as it can dramatically increase an organizations’ ability to out-innovate its competitors. America will best prosper through more innovation as traditional industries have increasingly moved overseas and been commoditized. Just think Apple and you see that power of innovation – increase market share and at an attractive price that consumers are willing to pay!

While healthcare and education have created most of the new jobs the past several years (the present recession excepted) there is a problem. These industries do not directly produce revenue that we can trade with overseas and reduce the trade deficit. So we will continue as the world's largest debtor nation unless we make more stuff that the rest of the world is willing to buy. The U.S. auto companies once had mighty war chests of dollars (GM used to have over $40 billion just a couple years ago), yet have failed to innovate in a way that captures the fancy of consumers, both U.S. and abroad. This is true for frankly too many U.S. businesses (with Apple, Google and some other notable exceptions).

The ability to leverage CDI, especially as a strategic capability, can add a new completive weapon in the arsenal. If your business needs to innovate, then you need to spend your dollars as wisely as possible. There is very little downside to tapping into CDI as it has a very low cost of entry. What's key is how you use it, and that's where seeing CDI as a necessary strategic capability comes in.

In the 80's without TQM – you risked losing business to better competitors. In the 90's without CRM – you ran greater risk of losing key customers. In the early part of this 21st century, without CDI – you just may risk falling hopelessly behind!



The How and Why of Constituent Driven Innovation


With the advent of the Internet, CDI began in the form of open source software. People who develop open source projects often receive no compensation for what they do but they derive satisfaction from the challenges and community of the experience. Open source products are challenging proprietary incumbents. Examples include Firefox vs. Internet Explorer, IBM joining Linux, and Wikipedia vs. Britannica. IBM now makes more money selling and servicing open source software than they did selling their proprietary offerings (and scuttled consumer hardware long ago).

Online communities reached a tipping point when enough members were willing to write code, make comments, and organize data to the point where they became market forces. Wikipedia and Linux have become market forces after beginning as open source projects.

This progression occurred from (a) the early web delivering news, entertainment and e-commerce on a one-way basis, to (b) the growth of communities which allowed people to start conversations with each other and the merchants they patronized, and finally (c) to these communities getting into the development of high-value products, a notable example being P&G’s Swiffer®. The result is the beginnings of a parallel economy with virtually unlimited potential!

Google is most likely the largest CDI endeavor in the world, with millions of web-page owners working together to create value. In a radical departure from other Internet search engines, Google interprets links on web pages as votes. The more links that point to a page, the higher the search rankings (paid placement s aside) and the more likely it is that page contains what one is searching for.



CDI Is NOT Just Software and Tech: Other Key Business Examples


CDI has attracted many different organizations, not just software and tech. These leverage external talent pools to deliver value in the form of revolutionary improvements for growth in terms of speed, economy and breadth. Some notable examples:

Striking It Rich! – Goldcorp. Just a few years ago, this Canadian mining company increased its market value from $100 million to $9 billion for a mere $575,000 invested in the “Goldcorp Challenge” to anyone who could use its own mining data to find new sources of the precious metal. Company geologists knew there was gold in its properties but did not know exactly where (and it’s expensive to make mistakes). After hearing of the success of Linux, CEO Rob McEwen had an idea to use CDI to find more gold. Industry protocol is to never release geological data. But the challenge was launched and proprietary data made available. A wide variety of people joined the challenge, including students, military people, physicists, and computer graphics experts. An Australian company, Fractal Graphics, won the competition by applying the science of geographic information systems (GIS) to the “flat” Goldcorp data. Fractal in fact never visited the mine.

New Product Development! – Procter & Gamble, Electrolux and Philips Electronics all have used varying styles of CDI to aid product development. All of these companies have experienced consumer demand at a rate that exceeded their ability to develop products in-house. Simply having a fixed product development staff was not enough. To keep up with market demand, each company formed external networks, and either used these in an advisory role or as a means to execute project work directly. Proctor & Gamble posts sub-tasks directly to a public website including the price they will pay for the project to be completed. Members of P&G’s extended development team respond with proposals, and the work is awarded to the best solution. According to Larry Houston, P&G’s VP of Innovation and Knowledge, P&G now counts 1.5 million people in its extended network. The Swiffer® is but one highly successful new product that has resulted. While some may feel P&G takes a chance every time it allows an outsider to develop a product, not developing the next killer is an even greater risk.

Business Growth! – In October 2006, Netflix announced it would give $1 million dollars to whomever created a movie recommendation algorithm that was 10% better than its own, opening up its database in the process. Over 8,000 teams are competing for the prize: University of Toronto, Budapest University, AT&T labs, and Princeton University among them. Gavin Potter (aka “just a guy in a garage”) a British psychologist and his high school senior daughter are currently the winning entrants. Potter claims the key to his success is that the rest of the mathematicians and statisticians in the contest suffer from groupthink. Their models do not take into account human behavior. Netflix has enjoyed tremendous press regarding this contest, and has already improved its recommendation service by 8.5%.

Innovative Promotion! – 3M, the maker of Post-it® Notes, has sponsored a contest where customers can upload videos of the various and sometimes odd ways they use the sticky notes. The grand prize: the video with the highest YouTube rating nets $10,000. Once again a relatively small investment provides Post-it® with an enormous public relations return.
Critical Forecasting! – CDI can be applied to forecasting project results by combining the input of many individuals to arrive at a probable outcome. This is called a decision market. Hewlett-Packard predicts printer sales by forming a group of employees from all around the company and provides financial incentives to make accurate predictions. In the 2004 book “The Wisdom of Crowds,” author James Surowiecki profiled decision markets at HP that outperformed traditional sales predictions six out of eight times during experimental trials. Drug marker Eli Lilly used the same strategy to successfully predict clinical trial outcomes.


Characteristics of Organizations Moving to CDI

There is a spectrum that we can define that is useful for understanding the nature of organizations, from those that have a traditional inward focus to those that truly are moving to, or have already adopted, open innovation. Figure 1 below summarizes the characteristics of these across several dimensions. Of particular note is how an organization’s structure evolves from vertical hierarchies that largely must approve efforts at innovation to those which truly become open to some or all constituents. Innovation is not just focused in certain departments, rather a much broader array of disciplines and employees can contribute.



FIGURE 1


Business structures move from inwardly focused vertical forms to flatter organizations as they become more open in how they operate. Functions are less determined by formal bob descriptions than what people are good at and how they form collaborative teams (think Google). Who innovates can become anyone and everyone!

Some examples of how organizations can fit along this spectrum are provided in Figure 2 below.


FIGURE 2


Ford still relies mainly on internal resources to design and develop its products, while Boeing leverages vendor relationships and P&G taps its consumers. Google thrives on peer production while Wikipedia is still represents a penultimate example of open innovation (CDI).


A New Barometer of Business Development: Total Innovation Value

These characteristics have given rise to a new barometer we have developed that assesses the extent of CDI within an organization. We call this barometer Total Innovation Value (or TIV) to measure how much recent innovation has contributed to a businesses bottom line. For example, has the introduction of new products over say the past three years driving the majority of today’s profits or just a small amount? How much profit should innovation be creating? Does the organization have a defined objective for the value of its innovation and a strategy to get there? If so, is CDI part of that strategy and how big a factor is it? How can the organization systemize CDI rather than just tap it opportunistically to maximize its contribution? By implication, the call to action is to increase the share of innovation value (TIV) driven by CDI as a strategic objective and capability. Is a company driving toward the future (Apple) or trying to survive off of past glory (GM)?

Organizations today should have the ability to identify the value of both their current and recent innovation relative to their products and / or services. This is a critical task for senior management as the need for innovation increases in today’s global and competitive marketplace?

We view innovation much like any other corporate core competency, be it TQM, Six Sigma or CRM. The difference between innovation and TQM or Six Sigma is that you simply cannot Six Sigma a company to the top of its category. No matter how efficiently you make your widgets, the company that can make a better widget will always win. For example, there is only a certain point to which a manufacturing process can be made lean, but there is no limit to the power of innovation. Simply put, TIV is the measure of a company’s overall innovation effectiveness, and CDI is that portion that comes from external resources.
The Opportunity: Tap Constituents as Creators and Leverage CDI to Increase Total Innovation Value

Leveraging CDI as a defined business process requires a different paradigm than traditional product development. The word “consumer” historically has carried the connotation of companies producing and marketing while consumers cheerfully “consume.” CDI blurs the lines between consumers, designers and marketers. The person who contributes to a product design one day can turn around and recommend it to a friend the next. Entering into an open conversation with all your business constituencies is the key first step. Even before that, you must understand who these critical constituencies are and how to measure the opportunity. While the process redesign implications are extensive, we will not treat them right here, rather offer them up in the Expanded Information Sidebar that accompanies this paper.



We have cited a number of examples where CDI has been successful in driving new business. Oftentimes though these ventures have been opportunistic, and not part of a concerted strategic effort by companies to leverage CDI to drive forward Total Innovation Value. CDI, according to our recent survey discussed earlier, is seen by senior executives to be as effective as internal processes and more efficient! So why not adopt a strategy to increase not only CDI as a competitive weapon, but set objectives to increase CDI’s share of TIV? We firmly believe that CDI cannot simply be “cherry picked” as a series of individual, disconnected events. It must be installed as a strategic capability to be truly maximized.

For many organizations, the falling price of quality information will act as a major catalyst for change. How successful organizations faced with this challenge are at making necessary changes depends on their willingness to respect the ideas and opinions of all of their relevant constituents. The CDI model can exist within a traditional business. As with any other change agent, it requires the understanding, assessment of opportunity and championing of by senior management.

If your organization lacks this barometer, then you have little or no ability to assess the untapped opportunities that may lie before you! If your competitors do in today’s environment, you risk getting left behind.


A Call to Action

What does all this mean? Is the future mob rule? No! CDI takes advantage of the changing environment via the collective knowledge of many thousands of talented, networked people, accessible with a speed and efficiency that can be truly astounding.

CDI has clearly arrived and is here to stay. Corporate executives should seek to explore ways to leverage an untapped treasure trove of knowledge from all available sources: outside subject matter experts, employees, trade customers, consumers/end users, and even the general public, and not only for new product and service development, but also for optimizing channel management and customer satisfaction.

If your company is not yet considering CDI, you may be missing out. Beyond that, leading-edge companies will next be seeking ways to build CDI as a genuine business process and strategic capability for competitive advantage.

Sidebar: History of CDI

Historical examples of crowdsourcing date back to the 1714 Longitude Prize, a reward offered by the British government through an Act of Parliament for a simple and practical method for the precise determination of a ship's longitude. The prize was up to ₤20,000 for a method that could determine longitude within 30 nautical miles. An unknown inventor by the name of John Harrison ultimately won ₤14,315 for his work on innovative chronometers over a period from 1737 to 1764.

As incredible but in a different way was the 1847 Niagara Falls Suspension Bridge contest. In 1847 Charles Ellet Jr. of Philadelphia, an engineer, was awarded the contract to construct a bridge at the chosen site. Ellet was about to begin construction in January of 1848 when he was faced with his first obstacle. The building of a suspension bridge was commenced with the stretching a line or wire across the chasm. Ellet himself proposed the use of a rocket. A bombshell hurled by cannon was also suggested. Some thought a steamer might navigate the rapids, knowing that the Whirlpool Rapids would devour any smaller craft and that ferries were too far upstream. A local ironworker, Theodore G. Hulett, suggested offering a cash prize to the first boy who could fly his kite to the opposite bank. Area youngsters were invited to a kite-flying contest. There was a tremendous turnout for the contest held in January, 1848. The kites began appearing on the Canadian side of the gorge, taking advantage of prevailing winds from West to East. The first to succeed in spanning the gorge with his kite, was a 15-year-old American, Homan Walsh. His cash prize was either five or ten dollars. Imagine solving this enormous problem with something as simple as a kite and a few bucks!


Sidebar: Process Implications for CDI

Let’s look at CDI both within a traditional framework of new product development, from idea generation through to marketing and distribution, and also point out how CDI differs. The implications for process redesign are clear:

* Idea Generation

Opening up the new product design process to the “crowd”, i.e., your customers, vendors, employees, consumers, outside subject matter experts, and even the general public (all of your current and potential business constituencies) places a greater demand on the company to know exactly what it wants and what it is willing to pay for a functioning product. Many companies enter the process hoping consumer studies and focus groups will provide the right product definition. This inevitably leads to a greater risk of failure due to: a) the limited size and breadth of these groups, and b) focus groups for example capture opinion but not actual behavior.

Examples from the past and present clearly demonstrate the value of casting the broader net: the British “product” definition said, “Deliver a device capable of locating a ship at sea to within 60 nautical miles and we will pay £20,000.” Today Netflix is running a contest to improve its movie ratings service: “Deliver a ratings service 10% better than our current system and we will pay $1,000,000.”

* Idea Screening

If you believe the best screeners are customers themselves, then you believe in a key aspect of CDI. Many of today’s CDI techniques came from the world of open source computing. If you use the Firefox web browser or visit web sites in general, you are an open-source product consumer. Open-source software products, consumer and financial products following open-source design principles, allow product creators and related communities to perform idea screening via a more democratic process that more accurately reflects what people will do. Cambrian House is a Canadian firm that encourages members of its online community to submit product ideas and vet them through an open system of voting called “Idea Warz”. Winning ideas are matched with financing and put into production. Prosper, an online bank, allows its members to bid on loans they wish to fund. Loan proposals with the best ideas are funded regardless of underwriting risk.

* Concept Development and Testing

Lego uses CDI for its concept development and testing by sponsoring the online Lego Factory. Here anyone can design virtual Lego scenes, customizing blocks and colors. Rules built into the system prevent customers from building blocks that cannot be reproduced in the physical world. Lego product people now have a lab running 24/7 where they can observe customers developing and purchasing products.

Threadless is a T-shirt company that produces shirts created by members of its online community. Every week, member’s vote on which shirts will be produced and the company follows the group’s recommendation. In a business where companies are lucky to sell 20% of their production at full retail, Threadless has never failed to sell out of its shirts.

* Marketing and Distribution

Following the primary tenants of CDI: community, inclusion, and democracy of ideas, marketing and distribution is a breeze right? Right, because companies that take the time to include their customers, vendors, employees and anyone else who would listen in their development process, now have an army of loyal people willing to help market and distribute the products they helped create. Proctor & Gamble, record companies and milk producers all use committed groups of their customers to go out and evangelize their products. You might think mobilizing forces large enough to make a difference would be cost prohibitive, but most of their brand evangelists work for free or supply product samples. It is the uniqueness of a company asking for help that makes the company-to-customer bond stronger and sets the stage for real grass-roots marketing.

Where to Begin We see three essential steps to get started: 1. Education – with the latest research and new learnings about CDI, we help educate senior executives on this growing phenomenon and its implications and opportunities. The Crowd Forum is a critical gathering point of our ongoing research. 2. Assessment – we help organizations assess the potential for their business to increase TIV more effectively and efficiently, and drive the share of innovation value by instituting CDI. We utilize key assessment tools to measure both TIV and CDI and paint a vivid picture of business opportunities. 3. Project Identification – we work with functions within a company as well as external partners to identify (a) specific projects that implement CDI capabilities, and (b) prioritized programs to use CDI to develop and launch new products and services. The cost of undertaking these learnings and assessment is not high. The potential return is huge. From there, companies can decide what are the critical priorities to pursue, the investment required, and who can best help to develop new business strategies, organizational processes and identify specific opportunities to action Contact us at info@microengagement.com or the Crowd Forum (www.crowdforum.org) and we will be excited to discuss this further!

Once Upon A Time There Were Producers and Consumers

What started as social media is disrupting traditional producer/consumer roles
By Tim Gilchrist, Microengagement Co-founder

Analog TV, Records, Cassettes, drive-in movies, and trans fat are all artifacts of our recent past. For one reason or another, things that were once mainstays were replaced or eliminated because they did not fit anymore, people moved on to do things differently, changed their rituals, or without ceremony, simply forgot. Soon 35 mm film, VHS, small newspapers, CDs, network television and the big three automakers may go the same way. This is not a revolution, it is a natural a process and we just happen to be at a time when a combination of factors working together makes things change more rapidly than before.

The next step in this evolution is actually a positive step backwards, to a time when there were no “producers” or “consumers”, rather only peers engaged in mutually beneficial commerce. Purchases started with conversations. Imagine how fast products developed in the ancient marketplace/agora. Feedback was instantaneous; there was no room for vendors who were “too big to fail.” If a customer did not like a product, they had a conversation with the vendor or went to the other side of the street and purchased a superior product. The hamburger and ice cream cone are both products of just these types of conversations where someone with money in their hand wanted something different and a quick-thinking vendor met their needs. Over the years, the natural process of connecting with and fulfilling consumer needs has been “corporatized” and sanitized into a disconnected, dislocated process called product development where consumers are examined like bacteria in a Petri dish. Focus groups and customer probes do nothing to directly strengthen brand loyalty, but this is all changing. What customer wants to be “probed” anyway?

Mass production led us into an age of the producer/vendor as a “cathedral”. The ability to produce outweighed conversations with customers in the marketplace. We drove in our cars to giant stores and if you did not like what they were selling, just try and tell the clerk with a cell phone to her ear you are not satisfied.

The Perfect Storm

The recent economic meltdown accelerated change in consumer behavior that was well underway with the widespread adoption of the Internet. Consumers may not be as addicted to consumerism as we thought. They have found a new marketplace in the form of the Internet, and that has allowed consumers to revive the old conversations, make smarter decisions and do something totally new. Create important products and services without going to the traditional producer-cathedral or the agora! It’s called open innovation or crowdsourcing, and three market realities make it a growing economic force:

1. The Internet allows people to freely associate, form groups and publish on a scale never seen before. Individuals and groups have the power to get their ideas across at a level once enjoyed only by large organizations, corporations and government’s.
2. Most corporations categorize people into divisions of labor the same way they did during the industrial revolution. This is contrary to human psychology and is the only known antidote to innovation. People can and will find ways to express themselves outside corporate walls and these expressions rapidly turn into competing products e.g., Linux.
3. The price of knowledge is falling to zero. Anything from powerful server software to how to become a six-sigma black belt can be found on the Internet. A child in India can monitor classes at MIT for free. The quality of this information is getting better all the time.

These three factors contribute to a new parallel economy that few companies have been smart enough to harness. Welcome to the post-consumer, post-producer? era:

• 50% of all web sites are brought to you by open source software, built and maintained by volunteers.
• Google, the world’s most popular search engine and an economy unto itself, relies primarily on the recommendations of web page authors to drive its search engine .
• A 2006 Forrester Research study shows 27% of consumer’s research products online before making an offline purchase, up from 19% in 2004. Conversely, the influence of advertising is falling at a similar rate.
• IBM now makes twice as much money servicing its Linux open source software customers than it does selling intellectual property and patents ($2 billion in 2003) .

Enter Social Networking

In 1994 Seinfeld and ER were the most dominant shows on TV since I Love Lucy. Advertising and supply chains were effectively targeting and delivering massive amounts of products to waiting consumers who had no effective way to voice their opinions on brands, save the Better Business Bureau or an editorial in the local paper. Consequently, the voice of the consumer was at an all-time low. Along came the web browser and now the web has matured into a medium where average people can broadcast. We call it social media / social networking. Through social networking consumers have a new and powerful voice in their collective conversations:

• Conversations are breaking out everywhere. Find a dead mouse in your "luxury" hotel, have the picture, and your experience ready for millions to see in minutes on tripadvisor.com.
• Open a Kryptonite lock with a pen, put it on YouTube and millions may pay attention.
• If Motrin makes a condescending commercial towards new mothers, moms will strike back in ways the advertising media elite never dreamed of.

Everywhere you look businesses, services and governments are becoming more transparent. This is not to say they did so willingly. Many are dragged kicking and screaming into this new world and some have refused to move at all. We are seeing the rebirth of the bazaar, right in front of our eyes. Only this time, there is a twist. The Internet serves two roles, it is the platform for conversation between customers and producers and it takes the place of the physical marketplace itself. What’s old is new again and people can have conversations sell things and leave a permanent record of these activities all in one place. And now the twist, there is nothing stopping consumers from developing products and services themselves. The line between producer and consumer is eroding and so with it have fallen many tenets of traditional business rules.


The Next Iteration of Social Networking: Open Innovation

How will companies develop products for consumers who increasingly are: able to instantly connect with their friends to complement, complain about or redesign your product; discover your most closely held trade secrets; or influence thousands of people with one click more effectively than a corporation can with a million dollar TV commercial?


The Social Media Landscape


The above chart depicts how social media is evolving and where it intersects with organizations ability to innovate. Starting with news and delivery of entertainment in the mid 90’s, the Internet has matured to deliver increasingly more value in the form of community and commerce and now is moving towards an open innovation delivery model. Online communities reached a tipping point when enough members were willing to write code, make comments, and organize data to the point where they became market forces. Wikipedia, Linux, YouTube, Facebook, and MySpace are all examples of communities using social media to become market forces. Now these communities are creating products, often with the cooperation of formerly proprietary companies such as Sun Microsystems, Google and IBM. Therein lies the intersection between traditional, vertical, publicly traded companies like IBM and the open source, open innovators such as Linux and Mozillia. They can coexist!

A rough time line of this progression is as follows:

• The early web delivered news entertainment and commerce in a one way, broadcast.
• The addition of community allowed people to start conversations with each other and the merchants they patronized.
• The community then organized, developing high value products (Wikipedia & Google).
• Using the tools and accumulated knowledge from the community accelerated creative endeavors (Linux, Swiffer).
• All components of the system working together make prediction possible (Intrade, Consensus Point). The result: a parallel economy with unlimited potential.

Case Study: The TechCrunch Web Tablet

We all know that computer companies make money by pushing speed, memory and operating systems as points of differentiation. Macs are widely regarded as more intuitive than PCs, Dells often are easier to order than Gateways. Most of these points don’t matter as much as they used to. A growing majority only uses computers to surf the web, with online competitors to Microsoft Office available for document creation (e.g., Google Docs). These market realities are lost on the major computer manufacturers whose paradigms and organizational structures compel them to make computers that run faster, consume more energy, and store more data.

Now a technology blog is spearheading the first open consumer product. TechCrunch proposed to its readership in July of 2008 that they should get together and build a web surfing tablet for $200. It's an interesting idea. How many people use more expensive laptops to do nothing but surf anyway? This tablet could fill an interesting niche as computer manufacturers shy away from inexpensive products that don't need the latest processors. Many people want a device to surf the web while they watch TV.


How Can a Blog Make a Computer? Thought Only Computer Companies Could Do That?

Four points mentioned above in the “Perfect Storm” allow a blog to make a computer:

• Software: The operating system for the tablet is Linux, an open source (or free) system with rock-solid dependability, created and supported by millions of volunteers all over the world. BMW automobiles also run on Linux.
• Hardware: Advancements in manufacturing and supply chain management created a new class of manufacturing-on-demand companies who will make computing products to your specification at rock-bottom prices.
• Distribution: TechCrunch has 1.25 million daily subscribers with many more visiting their site every day. Not surprisingly, TechCrunch achieved this sizable reach using the open source blog software Wordpress to power its web site.
• Service: In the open source community, users help each other out via online bulletin boards. Compaq is now running a pilot using this same open service model. This peer-to-peer service model scales perfectly, and keep millions of open source customers happy all over the world. Peer-to-peer customer service is open 24/7/365, and there are no phone queues or automated voice attendants.

Transforming Existing Business Models to Accommodate Open Innovation

For many organizations, the falling price of quality information will be enough to act as a catalyst for change. How successful organizations faced with this challenge are at making necessary changes depends on their willingness to respect the ideas and opinions of all of their constituents, including their: employees, customers, consumers, end users and vendors.

The open innovation model can exist within traditional business. As with any other change agent, it requires the support and understanding of top management. The majority of organizations embrace open innovation gradually through pilot programs, or are forced into the practice because they have exhausted all other alternatives. The chart below, taken from Microengagement, data, shows the continuum of organizational types from those that are inwardly focused to those embracing open innovation, and characterizes the traits of each type by major corporate functions.



After management commitment, self-selection plays the greatest role in transforming a business from inwardly focused to open innovation. Employees already familiar with the organization’s customers, vendors, employees and trade customers (the company’s constituent base) will be best suited to optimize these networks. There is a very good chance that someone in your organization is willing to take on the job of organizing and nurturing customer ideas. Self-selection is a key ingredient to the success of the open source software movement because it is a superior way to match people and tasks. Have you ever heard of someone volunteering for a task for which they were incompetent?


Open Vs. Closed Management Styles

TechCrunch risks much in the traditional view by announcing their web tablet idea and specification before having a viable product. However, the massive advantage of thousands working on the project who will no doubt become customers, and their combined range of expertise and experience, will prevent many gaps left open by the smaller development teams of their competitors. This open strategy flies in the face of most traditional product development models that depend on secrecy. Companies like Google, Intel, and P&G understand the value of their constituents and will continue to thrive because the critical mass of constituents built up behind them will not allow them to fail. Most companies suffer not as victims of corporate espionage but under the weight of their own secrecy. If a business never takes a chance and engages its: experts, customers, shareholders, or any other constituency, mediocrity is almost certain. In short, "You can't win if you don't play."

It is a natural human trait to be proud of our achievements. All too often the achievements are part of an organization’s value chain: software code, business processes, products in development, i.e., all things an organization is afraid to share with the competition. It is this unwillingness to share and be open that prevents many organizations from achieving their goals. Value chain analysis is critical in a hyper-connected "flat" world:

• The secrets most businesses think are safe, probably are not.
• A competitor, dumb enough to steal and replicate a business process, will likely commit errors in the execution and end up helping the originator (e.g., Microsoft Zune).
• The effort expended in developing a value chain such as: a call center, subscription knowledge bank, or, digital rights management system, may end up handicapping the value chain owner as less expensive, disruptive technologies emerge or the manager’s pride of ownership distorts their judgment.

Many public companies such as P&G, Merck, Kimberly-Clark, and The New York Times realized the threat secrecy represented in the form of protected value chains and disposed of them. P&G takes a chance every time it allows an outsider to develop a product, but it realizes not developing the next killer product is an even greater risk. In all of these examples, company employees saw the value of open processes and worked with consultants such as Microengagement to execute pilots and later integrate open innovation to their core business.



Where to Begin

We see three essential steps to get started:

1. Education – with the latest research and new learnings about open innovation, we help educate senior executives on this growing phenomenon and its implications and opportunities. The Crowd Forum is a critical gathering point of our ongoing research.
2. Assessment – we help organizations assess the potential for their business to increase their total innovation value via open innovation.
3. Project Identification – we work with functions within a company as well as external partners to identify (a) specific projects that implement open innovation capabilities, and (b) prioritized programs to use open innovation to develop and launch new products and services.

The cost of undertaking these learnings and assessment is not high. The potential return is huge.

From there, companies can decide what are the critical priorities to pursue, the investment required, and who can best help to develop new business strategies, organizational processes and identify specific opportunities to action. Contact us at info@microengagement.com or the Crowd Forum (www.crowdforum.org) and we will be excited to discuss this further!

Endnotes

1. Louis Lassen 1900, New Haven, Connecticut. Louis' Lunch. This small establishment, which advertises itself as the oldest hamburger restaurant in the U.S., is credited by some with having invented the classic American hamburger when Louis' sandwiched a hamburger between two pieces of white toast for a busy office worker in 1900.
2. The ice cream cone was invented in St. Louis, Missouri in 1904 at the Louisiana Purchase Exposition-- not in New Jersey. According to one legend, a Syrian pastry maker, Ernst Hamwi, who was selling zalabia, a crisp pastry cooked in a hot waffle-patterned press came to the aid of a neighboring ice cream vendor (perhaps Arnold Fornachou) who had run out of dishes; Hamwi rolled a warm zalabia into a cone that could hold ice cream.
3. Netcraft December 2008 Web Survey http://news.netcraft.com/archives/web_server_survey.html
4. Google’s page rank technology explained http://www.google.com/technology/
5. Yochai Benkler, The Wealth of Networks, P. 47 http://cyber.law.harvard.edu/wealth_of_networks/Main_Page
6. YouTube video on kryptonite locks http://www.youtube.com/watch?v=t8XxcOj3Seo
7. Controversial Motrin Moms Commercial http://www.youtube.com/watch?v=BmykFKjNpdY