Open Innovation, or is Business War?

The catchphrase of Henry Chesbrough’s work on innovation (a doctrine called “open innovation” and described in Open Innovation, 2003, and Open Business Models, 2006), is “not all the smart people work for you.” The key operational message that corporations seem to take away from it though, is “buy and sell intellectual property vigorously and throw some money at universities.” Somewhere along the way unfortunately, a sophisticated reconstruction of the logic of innovation becomes reduced to quick-money recipes. Part of the blame rests with Chesbrough himself, for raising and framing a very important subject, but then being somewhat timid about running with the idea to some daring conclusions. In this article, I am going to rush in foolishly where, apparently, Henry Chesbrough fears to tread. I’ll interpret the idea of open innovation as business is not war, and you’ll see where that line of reasoning takes us.

Open Innovation

Let’s do a quick review first. Here is the idea in pictures. We start with the mental model many people and companies have of innovation (which recall, is usually defined today as an invention successfully taken to market). The model is both descriptive and normative, in that many corporations, especially large ones, organize their processes and organizational structures around it. The model looks like a narrowing funnel, with the R&D function at the wide mouth and the market, protected by defensive and offensive IP barriers, at the other end. In between, we get a series of stage-gate review processes, whose job it is to filter good (green) ideas from bad (red ones), thereby reducing risk.

Pipeline

In this picture, called closed innovation, progress is slow, and occasionally good ideas break out of the funnel walls and leak out as renegade startups into the desolate interstices of the economy. Gatekeepers ask very different questions than, say, venture capitalists. This is the underlying model that informs the notion of disruptive innovation. My employer, Xerox, being the favored case study for all innovation researchers, is often interpreted within this model, as having fumbled the future (the most common interpretation of the story of the invention of personal computing at PARC, though alternate views are also extant, for instance the one in Dealers of Lightning, which favors a more disruption-style “why bad things happen to good companies” explanation).

The problem with this model is that it is not only descriptively wrong (the world doesn’t work this way), it is also normatively flawed (the world shouldn’t work that way). The right way to think of innovation, according to Chesbrough (and I largely buy his viewpoint) is as an active trading of ideas among entities with different sorts of strengths in bringing inventions to market as successful innovations that benefit the whole economy. The interpretation of the story of Xerox PARC under this model is that the management didn’t fumble the future — they just traded away ideas they couldn’t successfully bring to market. At best, under this model, Xerox can be blamed for undervaluing the ideas that came to life at PARC. This model makes sense (and not least because most of the ideas that left PARC to grow outside Xerox did so with the blessings of Xerox management, rather than via a fumble). Here is a picture illustrating what the ideal Open Innovation economy looks like: a bunch of leaky-by-design funnels of varied permeabilities, existing in an environment of fairly frictionless flow of ideas from wherever they are born to wherever they can best find a path to market. In between is a rich interstitial soup of small startups, innovation intermediaries and other mechanisms for transporting ideas between companies. Hardly a desolate wasteland where lone renegades must fight for sustenance, detached from the maternal love of larger corporations.

Open Innovation

What the Model Dictates

The open innovation model dictates several things:

  • You should buy and sell IP, and in general view it as a trading asset rather than territory to protect
  • You should ally with universities and innovation intermediaries
  • You should set up your processes to gracefully let ideas enter and leave your systems
  • Use new technologies to build an innovation ecosystem within and outside your company

The most obvious imperative from the model is that you should actively buy and sell intellectual property, because your company may or may not be the right path to market for every idea that is born in your research labs, and also because not every idea that would benefit your business will necessarily be born in your labs. The catchphrase for the idea (“not all the smart people work for you”) comes from this imperative. Companies operating with a closed model delude themselves into thinking they can invent all the ideas they need, and that anything they can’t use is useless. In short, you get the Not Invented Here syndrome and its complement, Not Usable Here.

What is new is the idea that you don’t necessarily want to treat intellectual property as a piece of real estate to go to war over. Rather, you participate in trading pieces you cannot use for pieces you can (or sharing pieces everybody can use). Much more of a baseball cards trading game than war.

But while open innovation legitimizes IP trade, where closed innovation would demonize it as a dubious practice (“what, don’t you trust our own labs?” or “why are you helping your rival?”), the truth is that IP trade has existed since before Chesbrough legitimized it. Most mature industries (including mine) are a complex web of cross-licensing, not a patchwork of closely-guarded pieces of IP turf. Generating IP becomes a cost of doing business, since outright cash licensing or buying of IP, as opposed to cross-licensing or bartering it, is prohibitively expensive.

But legitimizing IP trade does boost its volume: IBM and Proctor and Gamble, poster children of open innovation, trade on the order of a billion dollars in IP each. Cisco is now as famous for not running research labs as its rival, Lucent, is for running a famous one (Bell labs) — Cisco operates largely on a acquire-don’t-invent model. Companies that haven’t bought into the doctrine are likely to be wary about trading, engaging only when forced to, and letting good IP rot on internal shelves.
Of the other three pieces of open innovation, partnering with universities is not particularly unique to open innovation, since even the logic of closed innovation dictates this (universities may be viewed as extra-market players, like the government). But the idea does get more emphasis, to the point where some companies like Intel have designed their entire research strategy around partnerships with key universities.

The third and fourth ideas are probably the signature feature of the open innovation model: it requires the presence of innovation intermediary companies, that specialize in easing the generation and trading of ideas, and encourages adoption of any tool that could increase the circulation of ideas in the interstices of the economy. In this, the model joins a chorus of support for virtual collaboration technologies which includes the Wikinomics doctrine. Open Business Models contains a large variety of examples of companies that have recently sprung up, serving as innovation intermediaries. These include Nine Sigma, Innocentive, Intellectual Ventures and Imaginatik, among others. In a closed model, such players would be viewed as part of an unsavory underground market, if not declared outright illegal.

Of course, spin-offs, acquisitions, startups designed from the beginning to be acquired, mature capital markets, and venture capitalists who apply different sorts of logic to ideas than corporate pipelines, all belong in this picture in obvious ways as well.

So that’s as far as Henry Chesbrough is willing to go. I argue that is not far enough.

Business is Not War

I am going to ramble a bit now — these are thoughts in beta. You’ve been warned.

Here is the obvious conclusion that Chesbrough is unwilling to draw from his own theory: if intellectual property moves around in an economy through the clumsy and cumbersome process of trade, things get drastically slowed down. The solution isn’t just more trade. It is faster trade, and sometimes, free sharing. While he accepts the value of open source, somehow he seems uncomfortable with it, swinging uncertainly between labeling it as something that fits his model, and dismissing it as unpragmatic. It could be that Chesbrough is preaching to the choir, since his audience comprises corporate managers. But it seems to me that his ambivalence is much more honest. He truly has doubts about open source. I suspect this is because he takes the movement at its own estimation, as articulated by the spectrum ranging from Richard Stallman to Eric Raymond.

This ambivalence leads to his dismissing the unique features of open source as trivial and focusing on the least important part of the open innovation model: buying and selling patents. Companies jump at this idea as “free revenue”, but that doesn’t mean it is the most important aspect of the model. So what is the key aspect? Here is how I would reframe Chesbrough’s thesis in a more radical way:

  1. Competition is the most pressing reality for individual companies, but is not the most fundamental dynamic in an economy. The most fundamental dynamic is growth, or the creation of new wealth, via a process of creative destruction, a la Schumpeter.
  2. This creative destruction is a Darwinian struggle, but a Darwinian struggle, in turn, is not like war. Darwinian systems are as much about creating new and more complex structures as they are about lions eating gazelles and companies driving their competitors out of business. Creative destruction tends to create more than it destroys. War by contrast, is primarily about destruction (even if some industries and technologies grow rapidly as an indirect result).
  3. The business-as-war zero-sum model, paradoxically, is socialist rather than capitalist in origin (factoid, the game of Monopoly was originally designed to communicate a communist message about land being the primary source of wealth. While modern economists like Hernando de Soto preach a superficially similar doctrine, this view is more about land acting as security in managing risk, rather than as the primary manifestation of wealth).
  4. Information being eventually free is the only way to maximize overall economic growth. Intellectual property rights therefore are reduced in stature from moral rights to something more like a macroeconomic control measure. In fact, an argument could be made that central banks ought to vary copyright and patent protection awarded as a function of the performance of the economy, the way they do interest rates (how you would do this is a mystery though — varying protection durations wouldn’t work, and you can’t legislate trading prices).

If you accept this framing, then suddenly the pattern of emphases changes dramatically. The picture is still as Chesbrough describes it, but open source and defensive disclosure mechanisms like IP.com start to take center stage as central to the idea, rather than peripheral elements.

The central idea isn’t to buy and sell IP to make more money in a competitive world. The idea is to buy and sell (or give away) IP to fuel the fastest growth the economy can sustain within fundamental environmental constraints. In this picture, companies performing well can afford to be more altruistic in their contribution to growth, while companies that are hurting can be more tightfisted. How much you protect your IP is an indication of your contribution to growth. It is a model where cooperation is highlighted. The reason managers are still skeptical of cooperation as the foundational axiom of the economy is, I think, due to the fact that they identify it with New Age silliness. The true nature of cooperation is vastly richer, as Robert Axelrod has shown in The Complexity of Cooperation and the Evolution of Cooperation.

And the catchprase of “not all the smart people work for you?” It should perhaps be reinterpreted as “all the smart people are cooperating to create wealth; they only incidentally work for one entity or the other.”

Add a dash of pragmatism and suppress any urges towards socialist daydreaming (which still continues to haunt the open source movement) and you get the beginnings of a humane conceptualization of economics that gets away from the ugly and unnecessary reliance on the metaphor of war.

About Venkatesh Rao

Venkat is the founder and editor-in-chief of ribbonfarm. Follow him on Twitter