Driving the process to develop a new product vision into a final solution delivering value to customers is a process more likely to fail than succeed. According to Wikipedia, “Research findings vary: From fifty- to ninety-percent of innovation projects are judged to have made little or no contribution to organizational goals.”

An approach gaining momentum to increase the customer value created and the success rate of product development is to combine open innovation with external product prototyping.  This model expands the internal team’s access to new ideas from a broad pool of technologies and design concepts from other industries.    

For example, a global food products company acquired a manufacturing solution from the automotive industry that dramatically reduced product defects and a home appliance manufacturer acquired a dispensing technology from a food vending machine manufacturer. 

Similarly, an external product prototyping team brought the convenience and cleanliness of home detergent pour spouts and closure solutions to the paint can famous for spills and wasted product.

One thing is clear; a more holistic approach to product development is needed in order to achieve increasingly aggressive organizational goals for growth and profitability.

At some point in each of our careers we have learned Michael Porter’s Value Chain approach to understanding the movement of materials and information from early stages of inbound logistics to customer-facing services.  While the Value Chain model served us well over the years by providing an understanding of the various functions within a company, it has done little to represent the flow of ideas and information that lead to new innovations.  In fact, I would go as far to say that a company’s complete buy-in to the Value Chain model to represent organizational design and process flows can actually stand in the way of collaborative innovation.  Allow me to explain.

The Value Chain model portrays an organization as a segmented, linear flow of business functionality.  Many companies have designed their various departments to enable this flow, believing that they were conforming to best business practices – and the flow works fine within a typical operational cycle.  But this is only a part of what companies do.  When it comes time to innovate (i.e., stretch beyond the current bounds of the organization), people have a tendency to generate isolated solutions that are relevant only to their department, and not thought through or tested in a systemic manner.  Ever wonder why most organizations today suffer under the silo effect that inhibits the transparency of ideas and information?  A case in point is the proverbial gap between Marketing and R&D.  While ERP systems can help to alleviate some transparency issues, this does not address the core issue, and has little to no effect on innovation. 

If we were simply to take the linear Value Chain model, and bend it around the edges to create a circle (or cycle), it would have an entirely different effect within the company.  In the center of the new “Value Cycle” could be cross-functional teams, processes and social media systems that enable the introduction of new ideas from anywhere within the company, while allowing people from other departments to contribute their perspectives, thus building on and improving the original idea.  Around the outside of the new Value Cycle are the company’s suppliers, business partners, and even regulatory bodies who, if plugged into the process (i.e., the inner circle), can bring yet another perspective to what is now emerging as a new innovation that has been tested and vetted from within.  This merging of internal and external sources into a central innovation process, or cycle, must not be thought of as temporary – it has to become the norm.

If a company is still faced with what appears to be an insurmountable innovation challenge, it can reach out to yet another tier of innovation resources – the global innovation community.  Companies typically do this by instituting a technology scouting function, or simply by engaging an open innovation intermediary like NineSigma, that maintains a global network of solution providers representing virtually every technology category.  This next tier of innovation reach provides yet another perspective that comes from individual inventors, companies and universities from around the world, and often outside the company’s industry.  When new technologies and partnerships are forged from this tier, they too can become part of the inner circle of the company’s Value Cycle.  It is at this point that the company experiences the true essence and value of collaborative innovation.

Developing and then measuring the benefits from an OI program can be a challenging exercise. We have coined the term Benefits Case to differentiate this from a more formal Return-On-Investment (ROI) analysis. The Benefits Case has financial elements, but also has “softer” measures as well.

Benefit cases all have the core elements of:

•          Quantifying major improvement opportunities

•          Ensuring that OI resources are allocated to the areas of highest leverage

•          Establishing the range of benefits to be achieved through OI implementation activities

•          Providing the basis for assessing the OI return and tracking benefits during the OI program implementation

•          Developing the rational basis for an OI program

Overall the OI Benefits Case identifies areas of opportunity and quantifies the improvement potential as a result of OI activities. The figure at the bottom of this post shows the components of a OI Benefits Case.

The OI Benefits Case will have both Measureable and Non-Measureable components. Measureable benefits may include revenue projections from new products and services as a result of OI activities, increased revenue impact from improved manufacturing operations due to OI projects, reduced costs due to improvements in speed-to-innovation or time-to-market, increased innovation productivity and other potential measureable impacts. Non-financial impacts may include increased customer satisfaction due to enhanced product features or improvement in product quality as a result of OI project impact.

Non-measurable benefit impacts include clearer roles & responsibilities, the impact of external knowledge gained through OI on decision making, enhanced innovation skills, improved leveraging of internal knowledge and other “soft” or non-quantifiable measures.

In addition to the positive financial benefits, we must subtract the cost side of an OI program. The cost side will include both internal personnel costs and external costs such as training, OI consultants, OI project costs and technology costs. This then provides the top left quadrant of the Benefits Case which is the OI program breakeven point and anticipated return.

The development of a Benefits Case at the start of an OI program provides both guidance in terms of areas of focus and a tool to use during the implementation of the OI program to guide the implementation team. One of the challenges in OI programs is the eagerness to jump right to a ROI, when in fact the full financial impact of an OI program can take significant time to develop due to time-to-market consideration in product development and launch. This is why capturing some of the “soft” benefits and then tracking these as leading indicators can be very valuable to both guide the implementation team and to assure senior management that progress is being made.

Indicators such as early stage innovation portfolio impact from OI, number of projects with a significant OI component, decisions impacted as a result of external knowledge gained through OI activities are all leading indicators of the future ROI as the result of either revenue or cost impacts to the business.

As an early adopter of consumer electronic gadgets far and wide, I am constantly reading and absorbing everything I can in print and online when it comes to technology.  Recently, I caught the announcement that Microsoft pulled their Kin phones just 45 days after product launch.  This is as fast as the closing of a bad play on Broadway (but way more expensive - one estimate says the failure cost Microsoft at least $240 million after selling possibly only a few thousand devices).

This got me thinking about the challenge in balancing the drive to be "first to market" with the mantra of "fail early and fail often", and how our work with clients fits into this.  A critical element to open innovation is that although these new skills can enable a robust product devleopment funnel (by combining internal activities with enabling external components, subsystems, platform technologies, ideas, products for acquisition, etc.), but it is critical to have metrics in place to evaluate projects at every step of the way (even after product launch).  Many companies have "stage-gate" type processes, but often these processes are not strictly adhered to. 

For example, one thing I've learned in working closely with CPG and Food and Beverage companies, is that product development activities have to be closely aligned not only to the corporate/business strategy, but also to consumer insights.  Consumer insights are not only useful for test marketing products and driving marketing and brand development, but with solid integration of Open Innovation practices, gaps in the product features/performance can be identified and then rapidly filled via external innovation. 

By the way, before you count Microsoft down for the count, the entire Kin team has already been reassigned to enable them to focus exclusively on the Windows Phone 7 mobile platform, so you can bet Microsoft will learn from their mistake and come back stronger.

Let NineSigma help you launch an open innovation program.  Contact us to learn more about open innovation.