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!