Chapter 7
Rule 4: Accelerate through Innovation Networks
It’s rare that originality comes from insiders. —Neil Blumenthal, Warby Parker cofounder As you’ve worked through the first three rules of Goliath’s Revenge, you have almost certainly committed your company to deliver more innovations on a faster timeline than your current capabilities make possible. The wrong answer to this mismatch is dialing back on your goals. You are in a race with other established companies, as well as with your industry’s digital disruptors, to bring step-change customer outcomes to market. Instead, learn from best-practice innovators such as NASA, Procter & Gamble, UnitedHealthcare, GlaxoSmithKline, and Under Armour. Put open innovation on equal footing with your internal efforts to achieve more in less time with lower risk. The payoff from orchestrating a network of innovation instead of building it all yourself can be profound. In research by Wharton’s Jerry Wind and IBM’s Shanker Ramamurthy, network orchestrators that tap into the value of external partners enjoy market valuations of eight times revenue, versus five times revenue for technology creators and three times revenue for service providers. For perspective, the S&P 500 has historically valued large companies in the United States at a multiple of one and a half times revenue. In spite of the attraction of open innovation networks, less than a third of large companies and less than half of smaller companies in our survey have fully embraced the concept. The shift from “only invented here” to “let the best ideas win” is not an easy one. It requires action on four fronts: overcoming the curse of “we know everything” (WKE), opening up innovation channels, becoming easy to innovate with, and expanding your corporate development toolkit. WKE is a terminal illness for established companies and a natural byproduct of sustained commercial success and the adulation that follows it. You might recognize it by its dismissive cousin NIH (not invented here). Your first task in pivoting your organization to an open innovation strategy is having a dispassionate discussion with your peers about which of the following eight inhibitors your company faces: Be honest. How many of these inhibitors are representative of your team, division, or company today? If it is just one or two, then you are in good shape to move ahead and address those inhibitors as you scale up your innovation ecosystem. If three or more of these inhibitors are active within your organization today, then you need to resolve them before proceeding with an open innovation model. In 2000, P&G CEO A. G. Lafley realized his internal R&D output was not delivering the growth shareholders expected. P&G needed to create the equivalent of a new $4-billion business every year. To understand the scale of that growth challenge, $4 billion is roughly the annual revenue of industry-leading companies such as ADT, Barnes & Noble, Boise Cascade, Symantec, Hyatt Hotels, and NASDAQ. P&G made an aggressive shift toward open innovation. Its program, called Connect+Develop, amplified the innovation of P&G’s 7,500 internal R&D employees with the efforts of 1.5 million scientists and inventors from around the world. The results were dramatic. The proportion of externally led innovations jumped from 15% to 45% and included breakthrough products such as Swiffer and Crest SpinBrush, while R&D productivity yield improved by 60%. In 2004 P&G reported a 19% increase in sales, a 25% jump in earnings, and a total shareholder return of 24%.1 If your company is like the others in our research, you already have some channels through which external innovations can enter your company. Once you have addressed the inhibitors above, it is time to dramatically broaden your innovation channels to achieve an outcome like the one P&G accomplished. As you can see from Figure 7.1, there are eight specific innovation channels that can add Big I and Little I ideas to your innovation funnel: research universities, strategic suppliers, strategic customers, private equity firms, startups, corporate venture groups, business incubators, and open innovation platforms. Figure 7.1 Channels of Open Innovation. Note that activating an innovation channel is not the same as committing your company to adopting a specific innovation that channel might offer. Think about each of these channels as buying an option to evaluate new ideas that can augment your internal R&D efforts. (In Chapter 5, you put in place the capability to filter out the best ideas and act on them through either your Big I or Little I process.) In theory, having an innovation ecosystem looks like a no-brainer. Why wouldn’t all of these innovative organizations want to partner with you? Well, there is no free lunch here. The more innovative a potential participant is, the more other companies will be lining up to work with them. Developing a consistent flow of high-quality ideas requires being clear about what you are willing to give to get that kind of access. The more you give, the more likely your company is to get a preferential first look at that channel’s innovative ideas before your competitors even get a chance to see them. This is a little like getting in early to a fantastic buffet so that you can fill your plate before the masses descend and pick it over. You might remember the lyrics of a song from that popular kids’ cartoon called Barney: “I love you, you love me, we’re best friends like friends should be. . . .” Well, you want to avoid what some call “barney” deals: that is, hollow announcements of professional admiration that lack the substance to produce any material advantage for either party. See Figure 7.2 for a summary of what it takes to activate each of the open innovation channels and ensure that they deliver the idea flow you expect over the long term. Figure 7.2 The Gives and Gets of Open Innovation None of those gives may appear to be showstoppers. In fact, most have only limited up-front costs. However, you should sequence your efforts to open up these eight open innovation channels based on your readiness to make the unique commitment that each one requires. Open innovation is like having your cake and eating it too. You want the maximum amount of innovation to be available to your team, group, division, or company in the minimum amount of time. You also want to keep your job by delivering on your near-term operational and financial goals. You can do both. Getting ecosystem partners to do some of the work serves to both amplify your returns and reduce your risks from the Big I and Little I process you installed back in Chapter 5. External innovators bring a sense of urgency, risk tolerance, and appropriate irreverence to your biggest opportunities. However, most established companies struggle to ramp their innovation ecosystem up to a material scale before their attention shifts to the next important project. In dealing with startups, in particular, they fail to address the misaligned goals, mismatched resources, inconsistent stakeholder support, and corporate risk aversion that stands in the way of success. The beautiful music you were intending to play together ends up sounding as if AC/DC and the New York Philharmonic are on the same stage at the same time. Make better music together by following these eight best practices from companies that are winning with open innovation: demonstrate commitment, set clear objectives, dedicate resources, empower an investment committee, adopt a lean process, minimize legal friction, build an innovation sandbox, and install a culture of exploration. Be clear up front about the percentage of your new product, service, and process innovations that you expect to come from startups. For example, General Mills’ Connected Innovation Program was launched with a top-down mandate to boost the number of new innovation opportunities coming from outside innovators. The company went from 15% of its new product innovations coming from outside the company to 35% in just six years. “Nice to meet you—let’s do a pilot.” Startups can die in pilot hell—working with established companies but failing to gain enough production deployments before their venture funding runs out. Don’t engage in these open-ended pilots. Instead, define clear objectives up front for the business results your pilot must demonstrate and provide a provisional commitment to roll out the innovation if the startup delivers. This weeds out startups that are not yet ready to work with external customers. It also establishes your company’s reputation in the venture community as worthy of first looks at future startups. Dedicated resources across areas such as technology, product management, operations, sales enablement, and channels are needed to support your company’s work with startups. If this effort is only a part-time job, startups are going to move on to other companies willing to commit the resources needed to run at startup pace. Establish an investment committee with internal and external perspectives. Empower it to make investment and resource allocation decisions without multiple levels of syndication and signoffs. Internally, include business units, functional heads, R&D, corporate development, and strategy. Externally, look for technology leaders, market experts, and venture capitalists to make sure you don’t pass on a potential breakthrough opportunity that falls within one of your corporate blind spots. Install a lean process to test, learn, pivot, and decide on the most valuable impact a given startup can make on your company. A large media company’s innovation lab uses 30-, 60-, and 90-day sprints to cut through corporate inertia and focus engagements with startups. The innovation foundry of a global telecom company conducts monthly TelePresence meetings where vetted startups pitch how they can solve critical issues for the company, reducing the time-to-decision for both sides. Every startup has horror stories of 40-page contracts being imposed on them by established companies for $50,000 pilot deals. Without an in-house legal team, a big chunk of the value to the startup can be consumed by external lawyers negotiating corner-case scenarios. Be like a major Canadian bank, which cut its contract from 20 pages to 2, protected pre-engagement IP within the startup, and provided a clear path for handling joint IP. Develop a centralized innovation sandbox in which ecosystem partners can conduct research, test concepts, and pilot solutions on your infrastructure and de-identified data. For example, AT&T’s Foundry provided access to a network test bed via APIs that represented the latest version of its communication network, but which was safely separated from its production systems. Data.gov is an example of how the US government is opening up its data to citizens and innovators alike. Initiated by former US CIO Vivek Kundra and President Obama, Data.gov now has over 100,000 data sets available in machine-readable format. It has already delivered innovations such as integrating product recall and health risk information into consumer shopping apps. If the federal government can stand up an innovation sandbox, what’s stopping your company? We left this one for last because it takes the longest to achieve. That means you should start immediately but plan for success in pockets of the organization. Pick the teams within your organization that are most change ready and try to get every employee on those teams to spend some part of their time exploring new ideas and the external partnerships that can deliver them. It does not have to be a major time commitment—even 10% would be half a day per week for each employee. Celebrate the successes in these early-adopting teams to spread the open innovation bug like a beneficial virus—quickly and organically. This approach is far better that some big announcement without enough action at the front lines. So, you have prioritized the new innovation channels you are going to open up and have action plans in place for the eight areas above that are going to make your open innovation investments pay off. Now let’s turn our attention to the unsung heroes of your open innovation program—your corporate development team. Every strategic initiative needs a focal point. Put your head of corporate development in the hot seat to coordinate open innovation across your company. If your organization is too small to have a corporate development team, then expanding your corporate development toolkit will ultimately be your CEO’s responsibility. Your toolkit should include some combination of six main structures: corporate venturing, IP licensing, corporate incubation, spin-outs, joint ventures, and acquisitions. For each one, we have included an example of a company using that particular tool effectively in its open innovation efforts. In 2017, corporate VC teams deployed $37 billion of fresh capital to 1,268 deals. That represented 44% of all VC investments. Your corporate VC team must balance its focus across two mandates—achieving a competitive internal rate of return on the funds invested and accelerating innovation within your core business. This can pay off handsomely. Research from Touchdown Ventures shows that the stock prices of companies that put corporate VC teams in place grow 50% faster than the overall market. Intel Capital represents the benchmark for how to leverage this aspect of your corporate development toolkit. Over the past 25 years, Intel Capital has invested $15 billion across 1,500 companies, run 325 technology days to match startups with businesses, and had almost 500 exits (selling to realize gains/losses) through IPOs and acquisitions. Intel Capital delivers accelerated learning around new technologies, markets, and business models. Small checks in early funding rounds buy Intel a first look at a broad swath of disruptive innovations. Those real options can later be exercised through other aspects of the corporate development toolkit below. Established companies often have IP that could be more profitably commercialized by ecosystem partners than through internal investments. Start this process by hosting hackathons, sponsoring challenges, and standing up foundries that expose selected IP to your innovation ecosystem. Some have taken the next step by open sourcing their IP as a way to attract the maximum possible innovation around it. Examples include Google (TensorFlow) and IBM (Watson and Hyperledger). Many engage in a form of the freemium business model with respect to their IP—open source a key portion of the IP with the option for ecosystem partners to step up to a full license over time. Internal business incubation is important for the most sensitive areas of your business, in which you need to retain absolute control of trade secrets and IP rights. Put an internal business incubator in place if your industry has these dynamics. Your incubator will simulate how a Big I idea might grow within an external venture capitalist’s portfolio. UnitedHealthcare is a good example. Back in 1996 it founded a subsidiary called Ingenix to incubate new analytic offerings from its massive claims records data set. That business delivered step-change customer outcomes through health insights and became a massive success. Now branded as OptumInsight, it is a $7 billion data and analytics powerhouse growing 20% per year. Talk about using your data as currency! Sting wrote the lyric, “If you love someone, set them free.” Spin-outs are the commercial equivalent. Some Big I ideas are too risky, expensive, or distracting to pursue internally, yet your company will want to participate in the upside if they are eventually successful. Pushing those Big I opportunities into arm’s-length companies allows them to tap into new sources of funding and talent while giving them the strategic flexibility required to prosper. If you really love them, you can buy them back later, once they are more mature. Based on a decade of research in advanced microelectromechanical systems, GE spun out its high-reliability switch technology into a new venture in 2016. Yes, you just read the longest word in the book. These MEMS innovations are tiny machines less than a millimeter in size. Backed by $19 million in capital from GE Ventures, Corning, Microsemi, and Paladin Capital, the new venture (called Menlo Micro) is helping makers of medical equipment, wireless network devices, and Industrial IoT solutions design in MEMS-based switching systems. GE continued to add value by recruiting electronics industry veteran Russ Garcia as CEO and serving as an important Menlo Micro customer in the medical equipment and IoT markets. For Rabobank, the “spin-out” was actually resisting the urge to spin in. In 2012, Rabobank bought 80% of a mobile app startup called MyOrder instead of acquiring the entire company. MyOrder’s step-change customer outcome was helping consumers order and pay with their smartphones at over 11,000 restaurants, bars, cinemas, and car parks in the Netherlands. By leaving the venture structure in place, MyOrder’s startup culture remained vibrant. New capabilities, such as shopkeeper analytics tool Sidekick, came quickly. Rabobank has continued to add value by aggressively selling the MyOrder solution to its business banking customers. Joint ventures have a simple goal—combine crown jewels from two established companies to do something neither could do on its own. In math terms, add one plus one and get three. However, joint ventures require substantial effort to align objectives, create shared incentives, value respective contributions, negotiate IP rights, agree on ownership splits, and finalize governance rules. Without all of these, joint ventures are not worth the effort as Verizon + Redbox and Tiffany + Swatch have discovered. The joint venture between pharma leader GSK and race car innovator McLaren is firing on all cylinders. During a Formula 1 weekend, McLaren analyzes one billion data points from 200 sensors placed on the car and driver. Through their joint venture, GSK has applied McLaren’s unique predictive analytics and biotelemetry capability to everything from high-volume production efficiency to remote patient monitoring during clinical trials. It has produced a win-win— innovation acceleration for GSK and an entirely new line of business for McLaren. The statistics on the benefits from acquisitions are sobering—over 70% fail to achieve the objectives of the acquiring company. So, you should be using this tool in your corporate development toolkit under just two scenarios. One: you have been working with a target company using one of the structures above and it has matured to a point at which it can contribute substantial business value to your organization. Or two: a target company has unique, defensible, valuable assets or capabilities that could add to your crown jewels inventory and take you into multiple new businesses. Under Armour provides an example of both scenarios playing out in parallel. In 2013, Wall Street analysts were scratching their heads when the company acquired MapMyFitness, MyFitnessPal, and Endomondo for a total of $560 million. Confusion reigned about what digital fitness apps had to do with being a world-class apparel company. However, Under Armour used those acquired companies as new crown jewels to launch an integrated fitness, nutrition, and sports apparel platform. The bold strategy paid off in two ways. In the near term, Under Armour made hyperpersonalized athletic-wear offers to its newly acquired 200 million users. Longer term, Under Armour is becoming an important part of the massive shift toward consumer-driven health decisions. Under Armour CEO Kevin Plank has identified digital fitness as a critical driver of future growth. Wall Street now gets it—the company’s stock price has tripled in the three years following the acquisitions. With these new corporate development tools ready, let’s look at an organization that has successfully pivoted to open innovation: NASA. NASA’s Space Life Sciences Directorate—now called the Human Health and Performance Directorate (HH&P)—is charged with keeping astronauts healthy and productive in space. Back in 2005, its R&D budget was cut by 45%. Necessity being the mother of invention, leader Jeff Davis decided to reshape HH&P’s innovation culture and actively embrace external collaboration. This meant overcoming years of internally focused R&D. To chart a new course, Davis and his team embarked on a visioning exercise to decide on a new path for HH&P. Sometimes breakthroughs rely on being in the right place at the right time. In 2008, Davis attended an executive education class at Harvard Business School that included a session on open innovation taught by Karim Lakhani. Sitting in on that session convinced Davis to make open innovation a part of the newly developed HH&P ecosystem strategy. NASA’s HH&P engaged Dr. Lakhani to educate its workforce about this new approach to external innovation and demonstrate the viability of crowdsourcing platforms. The HH&P team identified 12 challenges to test the open innovation approach. After an open competition, HH&P selected InnoCentive and yet2. HH&P proved it could use NASA’s brand and cool factor to attract innovators from around the world. In just a few months, HH&P’s first seven challenges drew 2,900 responses from 80 countries. One of the challenges demanded an algorithm that could predict solar events up to one day in advance with 50% accuracy—something internal NASA scientists had yet to achieve. The winning solution came from a retired radio frequency engineer and was 85% accurate up to eight hours in advance, a massive improvement. This open innovation success has come full circle with NASA@work—a global platform for internal challenges. It now has over 15,000 solvers working on new challenges, which are announced every two to four weeks. NASA@work has also energized internal employees to get involved in innovation efforts that go beyond their current roles. Along the way, HH&P has worked hard to win over NASA employees who feared losing their identity as problem solvers and innovators in the pivot toward open innovation. Davis made sure employees recognized that crisply defining problems and evaluating potential breakthroughs are just as important to HH&P’s success as inventing solutions. The interactive Solution Mechanism Guide was developed to teach employees about open innovation and empower them to make decisions on when and how to use crowdsourcing platforms. In parallel, NASA hatched new recognition and reward programs that were proposed and ranked by employees. NASA’s openness to external innovation has both contributed to and benefited from the rapid growth of private space companies globally. NASA partnered with the XPRIZE Foundation to spur innovation for its lunar lander and space apps. The overall space-sector shift from a closed invention to an open innovation model has also helped open the floodgates of private sector investment into companies such as Elon Musk’s SpaceX, Jeff Bezos’s Blue Origin, and Richard Branson’s Virgin Galactic. NASA’s leadership in harnessing both external and internal innovation has been widely recognized. In 2011, the US Office of Science and Technology Policy tapped NASA to establish a federal open-innovation capability called the Center of Excellence for Collaborative Innovation. Despite Davis and many members of the core team retiring or moving on, the engine they built around open innovation continues to thrive.2 It is time to understand how prepared your company and career are for Rule 4: Accelerate through innovation networks. To complete your company readiness self-assessment, thoroughly read the grid in Figure 7.3, then identify the level of capability that your company has demonstrated for each cell in each row. Figure 7.3 Rule 4 Company Self-Assessment Grid. Repeat the exercise above with your career in mind. What roles are you playing in helping your company open up its innovation model? Mark your self-assessments on the grid shown in Figure 7.4. Figure 7.4 Rule 4 Career Self-Assessment Grid. Take a moment to fill in your Rule 4 readiness assessment, with your company results on the left side and career results on the right side of Figure 7.5. If you are completing your self-assessments online at www.goliathsrevenge.com, then this summary will be automatically generated for you. Figure 7.5 Rule 4 Readiness Summary. Just two rules to go. Let’s move on to the most important element that will propel you toward Goliath’s Revenge—your talent.
Overcome the Curse of We Know Everything
Inhibitors of Open Innovation
Procter & Gamble Makes the Pivot
Open Up Innovation Channels
The Gives and Gets of Open Innovation Channels
Become Easy to Innovate With
Demonstrate Commitment
Set Clear Objectives
Dedicate Resources
Empower an Investment Committee
Adopt a Lean Process
Minimize Legal Friction
Build an Innovation Sandbox
Install a Culture of Exploration
Expand Your Corporate Development Toolkit
Corporate Venturing: Intel Capital
Intellectual Property Licensing: Google and IBM
Corporate Incubation: UnitedHealthcare
Spin-Outs: GE and Rabobank
Joint Ventures: GlaxoSmithKline and McLaren
Acquisitions: Under Armour
NASA Opens Up
Rule 4: Company and Career Readiness
Company Readiness Self-Assessment
Career Readiness Self-Assessment
Rule 4 Readiness Summary
Notes