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 and Its Impact on New Product Development

Two Crowdsourcing Stories

In 1714, British Parliament established a prize of £20,000 to anyone who could accurately determine the position of a ship by longitude. Today, we can look at low cost GPS device and know exactly where we are at any time. However, in 1714 sailors only had a rough idea of their position north and south, and an even foggier idea about east and west. It is certainly difficult to build an empire this way. John Harrison, a working class joiner from Lincolnshire who had scant forma l education built and repaired clocks in his spare time. Mr. Harrison won the longitude prize by producing the first portable and reasonably accurate chronometer. He took on the scientific establishment of his time and won the prize through his gifted mechanical insight and pure determination.

While £20,000 was a fortune in those days, the government received exactly what it wanted and risked nothing in return. The value of the prize drew the best minds in the world to the challenge and Harrison’s chronometer was quickly improved. The tiny chronometer allowed for accurate navigation and map-making giving the British supremacy of the seas that lasted for decades.

A more recent and extraordinary example is the 1999 case of GoldCorp, a Toronto-based gold mining outfit whose 50-year old Red Lake, Ontario mine was declining in production. In an unprecedented move, CEO Rob McEwen released all geological records to the public through the “Goldcorp Challenge”, offering $575,000 to anyone who could find more gold.

The contest drew about 1,200 people from 50 countries. The results were but another example of the power of crowdsourcing: 110 sites were identified of which 50% were new, and 80% of these produced gold. Over 8 million ounces were found, and Goldcorp’s value soared from $100 million to over $9 billion. The cost was a pittance compared to the value generated – over $1,500 generated for every dollar invested in the contest winnings!

Crowdsourcing in the Modern Age

Today, there is a confluence of communication technologies and social networking that makes the practice of crowdsourcing even more potent than it was in 1714, or even in the case of GoldCorp. Many companies such as Procter and Gamble, Netflix, Hilton Hotels, Boeing and Dell are also taking advantage of this open form of product development.

So what is crowdsourcing really? As it applies to product development, crowdsourcing is the process of accessing groups of people with known or defined characteristics, and tapping their knowledge to create something of value. In the case of new product development, it 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.

The days of internal teams working in secret, designing carefully controlled products in the hopes of appealing to their target audiences are being challenged by breakout companies that are looking to crowds for help in product design, i.e. crowds of employees, customers, vendors, external subject matter experts, consumers and the even the general public. The rewards can be impressive indeed. Just consider the success of these crowdsourcing pioneers:

• Proctor & Gamble
• Hewlett Packard
• Netflix
• Google
• Boeing
• Dell

If we look at the decades leading up to the internet age as a period of satisfying supply, with limited media outlets to market products and consumers making purchasing decisions independently. Now contrast that with the demand economics of today. Consumers are customers with ready access to many products, other customers, and the ability to broadcast their love or hatred of products to the world. It becomes clear that many aspects of traditional product development, while no means yet obsolete, are being superceded by leading-edge companies that recognize and leverage a consumer culture that is:

• More inter-connected than ever
• Increasingly fragmented in media consumption
• “Prosumer” in their ability to hack into, mix and match products and technologies (just look at what’s happened with Apple’s iPhone!)
• Carrying more “man in the street” clout or “streetcred” in the way people interact with products, share dirty little secrets, and provide feedback to manufactures
• More democratic in how ideas are shared and filtered across organizational boundaries, and willing to give away proprietary information of tremendous value (e.g., open source software, Goldcorp mining data)

Crowdsourcing’s Role in New Product Development: Consumers as Creators

Leveraging crowdsourcing as a defined business process of competitive value 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.” Crowdsourcing 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.

Let’s look at crowdsourcing within a traditional framework of new product development, from idea generation through to marketing and distribution.

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 crowdsourcing. Many of today’s crowdsourcing 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 crowdsources 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 crowdsourcing: 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.

Conclusion and Call to Action

Crowdsourcing 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, customers, consumers, 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 crowdsourcing, you may be missing out. Beyond that, leading-edge companies will next be seeking ways to build crowdsourcing as a genuine business process and strategic capability for competitive advantage.