Breaking out of the Innovation Box - Wolpert

by John D. Wolpert

s the economy boomed in the late 1990s, cor-porations went on an innovation binge. They poured money into programs for generating fresh

ideas, pioneering new technologies, and promoting en-trepreneurship and creativity among employees. Theylaunched venture capital arms and new-business incuba-tors. They recruited freethinking executives who weren’tafraid to rock the corporate boat. They brought in cre-ativity consultants to spur out-of-the-box thinking.

And where are those efforts today? Many of them havebeen scaled back, mothballed, or disbanded altogether.As the economy cooled at the start of this decade, com-panies quickly cut off the flow of funds into innovation ef-forts. What seemed like a mandatory expense just monthsbefore suddenly seemed discretionary. Even the rhetoricof business took a turn: Executives began to speak lessabout “creating the future” and more about “protectingthe core.”

What happened over the last few years is not an anom-aly. It’s business as usual. In most companies, investmentsin innovation follow a boom-bust cycle. For a time, thecash flows. Then, as companies rethink their priorities,the taps go dry. Annual surveys conducted by the Indus-trial Research Institute confirm the cyclicality of corpo-rate innovation. In the early 1980s, surveyed executivessaid that innovation was their foremost priority. By the late 1980s, most executives reported little interest in innovation. Similarly, in the early 1990s, innovationdidn’t rate among the top five corporate priorities, but itwas back at the top of the list by the late 1990s. Harvard

A

As long as companies manage

innovation as a secretive process,

investment will be erratic and

results disappointing. It’s time

for a new, more open approach.

Breaking Outof the Innovation Box

Copyright © 2002 by Harvard Business School Publishing Corporation. All rights reserved. 3

Business School professor Henry Chesbrough has iden-tified a similar pattern in the 1960s.

Of course, no business initiative should be immune to changes in market conditions or company strategies.Corporate innovation programs should be subject to care-ful, hard-nosed evaluation, and those that don’t promiseadequate returns should be curtailed or refocused. Butthat is not what is going on here. Rather, the way corpo-rations invest in innovation is fundamentally unreliable.When innovation budgets are slashed, strong projects areabandoned along with the weak. The consequences canbe devastating. Promising initiatives are cut off just whenthey are about to bear fruit. Highly touted training pro-grams are discontinued with little explanation, stirringemployee cynicism. Expensive labs are closed, and tal-ented researchers and designers are reassigned or laid off.Partnership agreements costing millions in legal fees arethrown away. Worst of all, the perceived failure of the in-vestments often creates organizational skepticism aboutand resistance to future innovation initiatives. Conse-quently, when disruptive changes in the competitive land-scape come, companies are caught flat-footed.

Innovation is always a risky pursuit, with an uncertainand often distant payoff. But must that fact doom it to erratic investment? Or can innovation become a staplecorporate priority as, for example, quality has become?My belief is that stability can be brought to corporate in-novation and that the result will be much greater strate-gic gains and much stronger returns on investment. Butsustainable innovation requires an entirely new ap-proach. Instead of being a largely isolated process–carriedout often with considerable secrecy–innovation needs tobecome more open. Initiatives must gain access to andleverage from the insights, capabilities, and support ofother companies without compromising legitimate cor-porate secrets. As counterintuitive as this may sound, in-novation must become part of the ongoing commercethat takes place among companies. Only then will it beprotected from both the ax of short-term cost reductionand the faddishness born of easy money.

Trapped InsideFirst, let me explain what I mean by “innovation.” I’m nottalking about processes for making improvements to ex-isting products and services. And I’m not talking aboutpurely technical invention. Innovation, as I use the term,means pursuing radical new business opportunities, ex-ploiting new or potentially disruptive technologies, andintroducing change into the core concept of your busi-

ness. It’s those efforts that businesses have found hard tosustain, even though it is now widely acknowledged thatthey have become increasingly critical to companies’ long-term viability. In fact, nearly 50% of U.S. economic growthat the end of the 1990s came from lines of business thatdidn’t exist a decade before, as a 1999 study in The Econo-mist showed.

Successful innovation requires what the authors ofRadical Innovation have called “exploration competen-cies” – the ability to harvest ideas and expertise from awide array of sources.1 For a company, that means bring-ing in insights and know-how not just from outside par-ties but from other businesses. The need for external per-spectives seems almost self-evident: If a company stayslocked inside its own four walls, how will it be able to un-cover and exploit opportunities outside its existing busi-nesses or beyond its current technical or operational ca-pabilities? Yet perhaps even more self-evident to manycompanies is the need to lock in their innovation initia-tives to protect them from competitors.

This urge to keep innovation inside is reinforced byboth traditional and current thinking on the subject. Ifyou look at the examples of innovation cited in booksand articles, you’ll find that almost all of them describethe exploits of a group of employees within a single com-pany – how they stumble on a new opportunity, struggleto overcome company politics and other internal imped-iments, and ultimately either succeed or fail to commer-

4 harvard business review

Breaking Out of the Innovation Box

John D. Wolpert leads IBM’s Extreme Blue, an incubator fortalent, technology, and business innovation in Austin, Texas.

A Network of Intermediaries

Intermediaries could facilitate the exchange of informa-

tion about innovation among companies while keeping

their secrets. If company A, for instance, needs outside

capabilities to commercialize a technology, it could ask

its intermediary to find it a partner. The intermediary

would share the information with other intermediaries

in its search for an appropriate collaborator – like com-

pany B. In the same way, innovation intermediaries can

help company C find the resources it needs to bring

one of its new technologies to market by allying with

companies D and E. The intermediaries can be trusted

to maintain confidentiality because if they ever violated

the terms of an arrangement no company would hire

them again.

cialize their discovery. Most theories of innovation aresimilarly introspective. Gifford Pinchot III coined theterm “intrapreneuring” in the 1970s; the very name im-plies an internal focus. Rensselaer Polytechnic’s SeverinoCenter for Technological Entrepreneurship recommendsbuilding internal innovation hubs. Many managementgurus suggest that innovation be thought of as a corecompetency–a distinctive capability that a company nur-tures within itself and protects from outside competitors.Even the concept of “knowledge brokering,”which soundslike it should involve collaboration between companiesand across industries, is most often described in terms ofindividuals and groups working within one company.

But organizing innovation as a purely internal initia-tive pretty much guarantees that cyclical pressures willlead executives to cut back or discontinue funding. Nomatter how loudly a CEO proclaims the need to embed in-novation and creativity in the corporate culture, the factis that such initiatives are cut when times get tough or pri-orities change.

Typical is the experience of a large telecom company’sill-fated innovation program, which was called the Op-portunity Discovery Department (ODD). Launched in1995, its mission was to uncover promising ideas in thecompany, spread insights and expertise across the organi-zation, and translate technologies from R&D labs intocommercial opportunities. The ODD team received gen-erous funding and considerable management support.Lab directors, and even the CEO himself, repeatedly en-couraged managers and employees to collaborate withthe group. Nevertheless, the team lost momentum. By1999, the ODD had ceased operations.

Many internal innovation initiatives have shared theODD’s fate. They last, on average, about three or fouryears. In most cases, that is not enough time to discoverstrong new business ideas and refine, test, launch, andnurture them to success. A study of innovation at Xeroxthat Chesbrough did showed that over a 35-year period itsmost successful spin-offs took an average of 7.5 years togenerate an acceptable return on investment. That didn’tinclude the time spent researching and developing theunderlying technologies. However, the innovation pro-grams that generated those spin-offs survived an averageof only four years before they were shut down and re-placed by new ones. Often, those initiatives were termi-nated even though the spin-offs they had generated hadnotched up substantial financial returns. As one Xeroxexecutive explains: “We are a $20 billion company. To befinancially interesting to us, an initiative must reach atleast $100 million in revenues within three years.” Thatargument, which will sound familiar to many executives,explains why large companies fail to sustain even lucra-tive innovation programs.

THE INNOVATIVE ENTERPRISE august 2002 5


There’s another problem with inward-looking innova-tion initiatives: They often fail to capitalize on viableideas because the ideas don’t fit with the company’s strat-egy or capabilities. No company is smart enough to knowwhat to do with every new opportunity it finds, and nocompany has enough resources to pursue all the oppor-tunities it might execute. Internal initiatives routinelyleave a trail of orphans– promising ideas that have no nat-ural home within the company. If the number of orphansproduced becomes too large relative to the successes–andit almost always does at large companies–participants’ in-terest in the initiative falls.

Spinning out orphans as separate entities is possiblebut, despite the hype surrounding spin-offs, it rarely hap-pens. Few companies have the patience or skills to dothem well and, in any case, companies routinely kill spin-off proposals because they fear losing the intellectualproperty to outsiders. In the past, some orphans escapedcorporate labs, falling into the hands of others both eagerand able to capitalize on them. In the information tech-nology business, for example, breakthrough technologieslike Ethernet, the mouse, and the graphical user interfacewere commercialized by companies that did not developthem. But with aggressive patenting practices, that willhappen much less frequently in the future. As Bell Labs’new-ventures chief, Thomas Uhlman, famously said in1999, “No more Intels are allowed to escape.” Unfortu-nately, that means that as long as innovation is trapped in-side individual companies, many promising technologiesand business ideas will simply die without ever being exploited.

Innovation as CommerceNo company is, of course, hermetically sealed. Outsideperspectives and competencies flow into and out of or-ganizations through many routes: partnerships with universities, alliances and acquisitions, external ventureinvestments, recruiting and hiring, customers and sup-pliers, and the relationships and curiosity of individualemployees. These sources of external influence are valu-able and important. It could be argued, in fact, that theyhave played pivotal roles in all instances of corporate innovation.

But they’re not enough. Their informality, haphazard-ness, and unpredictability make them unreliable founda-tions for sustained innovation. New hires, for instance,may come into a company with brilliant, radical ideas,but they usually find it difficult if not impossible to pro-mote those ideas in an alien, and often resistant, cul-ture. Academic cooperation usually centers on basic sci-ence – one might argue that looking for new businessideas in academia is like fishing for marlin in a trout

stream. Customers and suppliers, as Harvard BusinessSchool’s Clayton Christensen has shown, tend to providelimited insight beyond incremental improvements toexisting lines. Even more formal means for capitalizingon external business ideas, from venture capital arms tojoint ventures to M&A programs, are rarely dependableas sources of innovation. They tend to be so determinis-tic – so shaped by internal strategies, politics, and secrecyconcerns–that they perpetuate a company’s existing busi-nesses rather than open new opportunities. Moreover,the search for outside partners often happens late in

the innovation process,when the business op-portunity is well de-fined, so they have little or no influenceover the developmentand refinement of theidea. Successful inno-vation depends on in-volving partners earlyin the exploration ofopportunities.

What we need todo is make innovationa natural element ofthe commerce that

takes place among busi-nesses. Finding ways for two or more companies to ac-tively share ideas, technologies, and other capabilitiesearly and often is the best way to protect projects fromthe swings in interest and funding that inevitably occurin individual organizations. If we could find a way to dothis without risking the unauthorized appropriation of intellectual property, businesses would be able to morequickly spot and exploit new growth opportunities.

In an ideal world, where there is no fear of competitors,here’s how it would work: If company A develops a greatidea that it can’t commercialize, it can more efficientlyshift it to company B, which has the right skills, particu-larly if the two businesses strike a relationship at a veryearly stage of idea development. If company C lacks twoparticular capabilities needed to bring a technology tomarket, it can form a partnership with companies D andE to gain the required resources. If companies F, G, and Hshare a common interest in a certain business oppor-tunity but lack the cash or strategic focus to pursue itindependently, they can pool their investments. When in-novation becomes part of commerce, money and atten-tion flow naturally to where they’re needed when they’reneeded.

The case of IBM’s alphaWorks, which I oversaw for twoyears in the late 1990s, shows the power of open innova-

tion. In early 1996, IBM’s Internet Division realized thatthe company had developed many promising softwareprograms in research that had yet to be commercialized.As an experiment, the division created a public Web sitecalled alphaWorks on which it posted the programs, hop-ing that outside companies and developers would con-tribute valuable ideas about bringing them to mar-ket. Anyone could download the programs with a 90-day evaluation license from the company. As wordspread that IBM was allowing first-cut versions of its re-search technology to be used for free, hundreds of thou-sands of early adopters, innovators, and entrepreneurscame to the site to download the software. Many of theseusers were technically savvy developers and business-people who had the skills to see the opportunities in thatraw code.

One IBM researcher, who had been trying for years tofind a compelling use for his program, received ideas froma developer at another company through alphaWorks.That helped him take his research in a new direction,eventually leading to the development of a critical com-ponent for the multibillion-dollar business integration-systems market. When thousands of people began todownload that program, an IBM product group quicklydecided to develop and release a full-fledged version.Within eight weeks, the once-ignored program had be-come a key IBM product. Without this kind of early ex-ternal support, the researcher’s work might still be wait-ing to go to market today.

Launched six years ago, alphaWorks is still a staple ofIBM’s innovation agenda. Its productivity is high: About40% of the technologies on the site make it to market asnew offerings, new features in existing products, or newtechnical standards. Unlike other innovative programsthat die after the original champion leaves, the group hassurvived several management changes and divisional re-organizations. Indeed, it would be hard to kill alphaWorksbecause so many people in IBM rely on it to do their jobs,and nobody would want to sever connections to thislarge, influential, and involved community. It remains thebest way for many of IBM’s engineers to get recognition,feedback, and support for their ideas. It also has the at-tention of IBM’s marketing people, who were initiallystunned to find current and potential customers askingthem when alphaWorks technologies would becomecommercially available. Most of IBM’s strategic softwareinitiatives since 1996 have started on alphaWorks.

Why don’t competitors simply help themselves to theseideas? For one thing, patents and licenses are easy to en-force. Putting the ideas on a popular Web site (often withsignificant press coverage) means that everyone knowswhere they came from. Thanks to download logs and reg-istration, anyone foolish enough to download a technol-



No company is smart

enough to know what

to do with every new

opportunity it finds, and

no company has enough

resources to pursue all

the opportunities it

might execute.

ogy and then try to bring something similar to marketwould be caught red-handed in violation of the licenseand the patent.

IBM’s alphaWorks – and similar initiatives like Xerox’snew alphaAvenue – have limited applicability, of course.Not every business innovation benefits from public expo-sure as much as software development does. But theyclearly show how a successful innovation marketplacethat crosses the border of the firm perpetuates itself, gain-ing increasing attention and support as it delivers realeconomic benefits to many different participants insideand outside the company. The broader question is: Howdo you break down the barriers to sharing informationacross companies so you can create more generalized sus-tainable innovation markets without giving your com-petitors an advantage?

A New Kind of Go-BetweenThe answer, I believe, lies in a practice that has long beena central element in commerce: the use of independentintermediaries to facilitate the exchange of sensitive in-formation among companies. Since the Middle Ages,businesspeople have drawn on trusted middlemen toshare confidential information without revealing theprincipals’ identities or motives orotherwise compromising their in-terests. Today, businesses continueto use intermediaries for manykinds of transactions. Executivesearch firms, for instance, play acrucial role in recruiting top man-agers. They allow job seekers to re-main anonymous during the earlystages of a search, and they pro-tect businesses from disclosingtheir hiring plans to rivals.

In a similar way, intermediaries could facilitate theexchange of innovation information while protectingcompanies from divulging their interests and plans tocompetitors. They could become, in effect, innovationheadhunters. A company might, to take a simple example,entrust an intermediary with the details of a particulartechnology it has developed as well as its need for outsidecapabilities to commercialize it. The intermediary wouldthen share the information with other intermediaries inthe hope of finding appropriate partners. At no point –until a formal disclosure agreement is forged –would anyof the information be shared with the companies the in-termediaries represent. The intermediaries could betrusted to maintain confidentiality because it is simply intheir business interest: If they ever violate the terms of anarrangement, no company would hire them again.

Using intermediaries for innovation is not withoutprecedent in U.S. business. In their book Information Mar-kets: What Businesses Can Learn from Financial Innovation,William J. Wilhelm, Jr., and Joseph D. Downing describehow intermediaries spurred innovation in financial ser-vices in the early part of the twentieth century. The in-termediaries, including bankers such as J.P. Morgan, as-sisted in creating markets for financial information. Theyused personal relationships to gather and share informa-tion discreetly with people in their network who couldhelp exploit a new opportunity or a new way of handlingfinancial transactions. “Innovation flourished,” the au-thors write,“in the context of close relationships and pow-erful intermediaries that tempered competition but pro-tected easily copied ideas and products. This protectionencouraged financial innovation by more nearly ensuringa fair return on investment in intellectual property.”

Even today, a number of individuals and organizationsplay intermediary roles in facilitating innovation. Man-agement consultancies like Accenture and Cap GeminiErnst & Young operate innovation labs, where clients canshare ideas and discuss technological advances and othernew research. Ideo, the design firm, often creates newproducts by mixing together the ideas and technologiesof different clients. As a business development consul-

tancy, ISIS International has formore than 20 years acted as an in-termediary to cross-fertilize busi-ness opportunities for its clients.

ISIS, for example, recentlyhelped the chemical division of amajor U.S. oil company find com-mercial applications for a newmolecule it had developed. Al-though the molecule seemedpromising, its potential applica-

tions were not immediately obvi-ous to the division’s R&D staff. They hired ISIS to searchoutside the company for possibilities. ISIS convened abrainstorming summit with 12 of its contacts in industriesranging from waste treatment and building materials tocosmetics and household-cleaning products. The panelquickly identified 11 business opportunities for the mole-cule, with potential revenues of $150 million. One of thecompanies represented on the panel went on to pursue ajoint project with the oil company and introduced a newconsumer product based on the molecule. Without thecatalytic role ISIS played, the project may have beenkilled before it had the chance to be successful.

Unfortunately, most consulting firms consider sharingperspectives and competencies among clients to betaboo. Consultants, therefore, are unlikely to be a majorsource of innovation intermediaries. But there are plenty

THE INNOVATIVE ENTERPRISE august 2002 7


Perhaps the most promising

pool of potential intermediaries

is the rapidly growing population

of baby boomer retirees.

of other players operating in and around the innovationprocess who could function as intermediaries. Lawyersand venture capitalists, for instance, often learn aboutbest practices, ideas for new inventions, and new ways ofdoing business from competing and noncompeting com-panies. Trade show organizers and trade association rep-resentatives frequently conduct high-level meetings be-tween potential buyers, suppliers, and partners, andidentify opportunities for synergy within and across in-dustries. Investment bankers are often called upon to findnew applications for technologies developed by compa-nies or government agencies.

But perhaps the most promisingpool of potential intermediaries isthe rapidly growing population ofbaby boomer retirees who havedeep expertise in particular indus-tries and technologies, hold thetrust of the companies they workedfor, and don’t want to spend alltheir time playing golf. With theright training in such disciplines asknowledge brokering, business de-velopment, and law, these formercorporate executives, scientists, andengineers would make ideal agents.And by using the Internet to com-municate and share information with their clients andone another, they could position themselves in the ideaflow without abandoning their other retirement pursuits.

Ultimately, I believe we will see the emergence of for-mal networks, perhaps even companies of such agents.Businesses would pay an annual fee to hire a group of in-termediaries with the appropriate backgrounds and con-tacts, briefing them about their internal innovation pro-grams. Bound by nondisclosure agreements, the agentswould share information with other agents representingother companies. The agents would signal their clientswhen they thought sharing data would be worthwhile,

and they would help structure the terms of the engage-ment. Whenever it was mutually beneficial, intercom-pany innovation relationships would form early and oftenthrough this relatively safe, controlled network. Sitting atthe intersection of many companies and industries, a net-work of innovation intermediaries would be in a uniqueposition to visualize new opportunities synthesized frominsights and technologies provided by several compa-nies – ideas that might never occur to companies work-ing on innovation programs on their own. (See the exhibit“A Network of Intermediaries.”)

The final shape of such intermedi-ation networks is impossible to pre-dict. In fact, other means of collabo-ration may develop. We may, forinstance, see the emergence of newWeb services that automate some ofthe basic information exchange essen-tial to creative partnerships. Or wemay see companies offer data-miningservices that generate new businessideas by analyzing information col-lected from several companies atonce without violating privacy or exposing secrets. What’s certain isthat, in an increasingly complex

world, the biggest growth opportuni-ties will come more often at the intersection of multiplecompanies than from single visionaries acting on theirown. It’s important now that companies break out of their innovation boxes and find ways to link their inno-vation efforts. In the years ahead, the greatest corporateinnovation may arise in the innovation process itself.

1. Richard Leifer, Christopher M. McDermott, Gina Colarelli O’Connor, Lois S.Peters, Mark Rice, Robert W. Veryzer, Radical Innovation: How Mature Compa-nies Can Outsmart Upstarts (Harvard Business School Press, 2000).

Reprint r0208eTo place an order, call 1-800-988-0886.



Sitting at the intersection

of many companies and

industries, a network of

innovation intermediaries

would be in a unique

position to visualize new

opportunities.

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Breaking out of the Innovation Box - Wolpert