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Wednesday, March 31, 2010

Misconceptions about Transactional Open Innovation

by Debbie Goldgaber

Misconceptions about Transactional Open InnovationOn the Harvard Business Review blog, John Hagel III, John Seely Brown and Lang Davison, recently wrote a thought-provoking piece on the future of open innovation. They make many keen observations about the limitation companies currently face in making effective use of "Transactional Open Innovation" (TOI), defined below. However, they wrongly conclude that this is an inherent limitation of the TOI tools themselves, instead of a limit related to the way that enterprises presently organize R&D practices and processes.

Where Hagel et al., are most astute is with respect to identifying the drivers of open innovation, e.g rapid depreciation of "information stocks" and an Internet ecology rapidly evolving to facilitate the flow of information. These are the reasons that forward-looking companies like General Mills and P&G launched their often-cited open innovation experiments. Other companies, the authors of the HBR piece suggest, are following suite, at least in part, as a result of the pressure to appear au courant with the latest management trends.

These authors suggest, however, that it would be a disservice to executives considering OI programs to focus unduly on what they term transactional OI - i.e. defined, "short term transactions" that seek to source ideas and solutions from outside the corporate fence. Most typically, the TOI process would involve the following steps: "problem posted, solution offered, payment made, transaction completed, all parties move on." This model is great, they explain, as far as it goes; while the successes of this model have been well-documented and plentiful, there are several reasons why TOI is essentially limited in its impact. It is limited:
  • to a certain sub-set of problems
  • in its ability to transmit "tacit" knowledge
  • in its ability to enable effective execution
  • in its ability to solicit the long-term engagement of either party of the transaction

For all these reasons, we are urged by the authors of this study to move beyond TOI tools to a more integrative approach that, in focusing on long-term knowledge transfer relationships, is capable of overcoming these limitations. The problem is whether this imagined "overcoming" of TOI does not instead imply a return to a more traditional consulting model, even if it would possibly involve more players. But TOI tools seemed to be so attractive exactly because they held out the promise of eliminating the knowledge middleman, directly tapping diverse sources of knowledge without necessitating the long-term commitments.

In fact, the first 3 reasons offered are really aspects of a single challenge that faces TOI: how to broadcast an internal problem, one which might be difficult for those unfamiliar with the problem's context to "get," and how to evaluate a solution that may either not look like what you might have expected or might not include all the information that you need in order to understand and execute the solution. If this aspect of the transaction were not a problem than TOI's failure to solicit long-term engagement wouldn't be presented as a fault, since what you wanted from TOI in the first place is actionable information at the ready, and not long-term, costly commitments.

TOI is so limited as an OI model, according to these authors, because the issue of "tacit knowledge" in enterprise problem-solving looms so large. If tacit information is by definition what cannot be made explicit, recorded or presented, and therefore included in any problem formalization, then tacit knowledge would mark the limit of the effectiveness of transactional OI tools in particular. Where tacit knowledge or 'know-how' rules, TOI cannot get a grip for the simple reason that there's no effective way to transmit crucial information from one party to another. But this kind of internal limit to the fluidity or "transactibility" of knowledge is belied by the very forces that the authors admit are driving OI in the first place.

For one reason or another it seems that knowledge is becoming more of a transactional affair than ever before. However, just after affirming this, the author's seem to say that many of the most interesting and pressing problems a company faces are those that involve a decisive component of tacit-knowledge, and it is for this reason that the authors recommend that long-term relationships and engagements remain the focus of OI programs.

As I see it, the problem with the argument of Hagel et al, is just that they seem to consider the amount of tacit knowledge in a problem-solving situation as a constant - as if the ratio of tacit-to-explicit-knowledge were something that was not amenable to change. In fact, the importance of tacit-knowledge in a problem-solving situation varies according to concrete practices adopted within a problem-solving community. Looking to specific cases, most notably in software development, we see that this ratio is subject to significant modification. It is, in other words, the adoption of certain practices and norms (the wide use of wikis being one specific tool) that can increase the 'transactibility' of knowledge and therefore transform the way problems get solved and the way that work gets done.

To my knowledge, it is Michael Nielsen that first formulated this thought with his concept of "conscious modularity." According to Nielsen, open source software projects, like Linux, didn't manage to effectively divide work across a large number of people due to some "natural" modularity of the project, or to the natural modularity of software development in general. On the contrary, according to Nielsen, the people engaged in these projects consciously worked to keep tasks modular. And contrary to common perception, achieving and sustaining this modularity took an "enormous effort." This heavy-lifting is undertaken in the first place so that work "can be divided up, making it easier to scale the collaboration, and so get the benefits of diverse expertise and more aggregate effort."

If we take Nielsen's suggestion here, we can conclude that before we herald the limits of TOI, we should first ask how much effort companies have made to make their processes, problems, research and development modular. The sort of effort Nielsen describes will allow companies to make effective use of TOI tools, and thereby offer enterprises an economically efficient way to maximize their exposure to innovative ideas and expertise. Furthermore, we can expect that level of modularity would vary across industries and problem-type.

It is probably unrealistic to think that without doing this kind of internal work companies can effectively integrate TOI tools in their own workflows, creating the kind of culture where ideas "proudly found elsewhere" can be executed internally. Sure ideas that are selected from the outside need to be adapted with an eye towards internal specifications, but with the development of more modular processes, it seems likely that more and more problems will be amenable to TOI, the opposite conclusion to the one reached by Hagel et al.

If that's true, then far from needing to "overcome itself," TOI is still something aspirational (at least for most companies). This is something that hypios, an OI ecosystem that includes a TOI platform, has learned from innumerable conversations with clients and partners. It is for this reason that we strongly encourage companies we work with to make sure they do the prep work. The best prep work is of course to work hard to capture knowledge internally, through tools like intrapreneurship and other forms of intra-firm knowledge-capture. So perhaps what each executive embarking on an OI experiment should ask him/herself is "am I prepared to do the kind of long-term work that will ultimately make TOI an effective tool in my OI portfolio?"


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Debbie GoldgaberDebbie Goldgaber is Deputy VP of Concepts + Communciations @ hypios which provides enterprises with open innovation ecosystems. She is also a PhD candidate @ Northwestern University.

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