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76 HARVARD BUSINESS REVIEW

Breaking Out
the Innovation Box
by John D.Wolpert

A
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. They
launched venture capital arms and new-business incuba-
tors. They recruited freethinking executives who weren't
afraid to rock the corporate boat. They brought in cre-
ativity consultants to spur out-of-the-box thinking.
As long as companies manage And where are those efforts today? Many of them have
innovation as a secretive process, been scaled back, mothballed, or disbanded altogether.
As the economy cooled at the start of this decade, com-
investment will be erratic and panies quickly cut off the flow of funds into innovation ef-
forts. What seemed like a mandatory expense just months
results disappointing. Ifs time before suddenly seemed discretionary. Even the rhetoric
for a new, more open approach. of business took a tum: Executives began to speak less
about "creating the future" and more about "protecting
the core."
What happened over the last few years is not an anom-
aly. It's business as usual. In most companies, investments
in innovation follow a boom-bust cycle. For a time, the
cash fiows. Then, as companies rethink their priorities,
the taps go dry. Annual surveys conducted by the Indus-
trial Research Institute confirm the cyciicality of corpo-
rate innovation. In the early 1980s, surveyed executives
said that innovation was their foremost priority. By
the late 1980s, most executives reported little interest
in innovation. Similarly, in the early 1990s, innovation
didn't rate among the top five corporate priorities, but it
was back at the top ofthe list by the late 1990s. Harvard

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Breaking Out ofthe Innovation Box

Business School professor Henry Chesbrough has iden- ness. It's those efforts that businesses have found hard to
tified a similar pattem in the 1960s. sustain, even though it is now widely acknowledged that
Of course, no business initiative should be immune they have become increasingly critical to companies' long-
to changes in market conditions or company strategies. term viability. In fact, nearly 50% of U.S. economic growth
Corporate innovation programs should be subject to care- at the end ofthe 1990s came from lines of business that
ful, hard-nosed evaluation, and those that don't promise didn't exist a decade before, as a 1999 study in The Econo-
adequate retums should be curtailed or refocused. But mist showed.
that is not what is going on here. Rather, the way corpo- Successful innovation requires what the authors of
rations invest in innovation is fundamentally unreliable. Radical Innovation have called "exploration competen-
When innovation budgets are slashed, strong projects are cies"-the ability to harvest ideas and expertise from a
ahandoned along with the weak. The consequences can wide array of sources.' For a company, that means bring-
be devastating. Promising initiatives are cut off just when ing in insights and know-how not just from outside par-
they are about to bear fruit. Highly touted training pro- ties but from other businesses. The need for external per-
grams are discontinued with little explanation, stirring spectives seems almost self-evident: If a company stays
employee cynicism. Expensive labs are closed, and tal- locked inside its own four walls, how will it be able to un-
ented researchers and designers are reassigned or laid off. cover and exploit opportunities outside its existing busi-
Partnership agreements costing millions in legal fees are nesses or beyond its current technical or operational ca-
thrown away. Worst of all, the perceived failure of the in- pabilities? Yet perhaps even more self-evident to many
vestments often creates organizational skepticism about companies is the need to lock in their innovation initia-
and resistance to future innovation initiatives. Conse- tives to protect them from competitors.
quently, when dismptive changes in the competitive land-
This urge to keep innovation inside is reinforced by
scape come, companies are caught fiat-footed.
both traditional and current thinking on the subject. If
Innovation is always a risky pursuit, with an uncertain
and often distant payoff. But must that fact doom it to
erratic investment? Or can innovation become a staple
corporate 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 retums on investment. But
sustainable innovation requires an entirely new ap- A Network of Intermediaries
proach. Instead of being a largely isolated process-carried
out often with considerable secrecy-innovation needs to
become more open. Initiatives must gain access to and Intermediaries could facilitate the exchange of informa-
leverage from the insights, capabilities, and support of tion about innovation among companies while keeping
other companies without compromising legitimate cor- their secrets. If company A, for instance, needs outside
porate secrets. As counterintuitive as this may sound, in- capabilities to commercialize a technology, it could ask
novation must become part of the ongoing commerce
its intermediary to find ita partner. The intermediary
that takes place among companies. Only then will it be
would share the information with other intermediaries
protected from both the ax of short-term cost reduction
and the faddishness bom of easy money. 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
Trapped Inside one of its new technologies to market by allying with
First, let me explain what I mean by "innovation." I'm not companies Dand E.The intermediaries can be trusted
talking about processes for making improvements to ex- to maintain confidentiality because Ifthey ever violated
isting products and services. And I'm not talking about the terms of an arrangement no company would hire
purely technical invention. Innovation, as I use the term,
them again.
means pursuing radical new business opportunities, ex-
ploiting new or potentially dismptive technologies, and
introducing change into the core concept of your busi-

John D. Wolpert leads IBM's Extreme Blue, an incubator for


talent, technology, and business innovation in Austin, Texas.

78 HARVARD BUSINESS REVIEW


Breaking Out ofthe Innovation Box

you kx>k at the examples of innovation cited in books matter how loudly a CEO proclaims the need to embed in-
and articles, you'll find that almost all of them describe novation and creativity in the corporate culture, the fact
the exploits of a group of employees within a single com- is that such initiatives are cut when times get tough or pri-
pany-how they stumble on a new opportunity, struggle orities change.
to overcome company politics and other intemal imped- Typical is the experience of a large telecom company's
iments, and ultimately either succeed or fail to commer- ill-fated innovation program, which was called the Op-
cialize their discovery. Most theories of innovation are portunity Discovery Department (ODD). Launched in
similarly introspective. Gifford Pinchot III coined the 1995, its mission was to uncover promising ideas in the
term "intrapreneuring" in the 1970s; the very name im- company, spread insights and expertise across the organi-
plies an intemal focus. Rensselaer Polytechnic's Severino zation, and translate technologies from R&D labs into
Center for Technological Entrepreneurship recommends commercial opportunities. The ODD team received gen-
building intemal innovation hubs. Many management erous funding and considerable management support.
gurus suggest that innovation be thought of as a core Lab directors, and even the CEO himself, repeatedly en-
competency-a distinctive capability that a company nur- couraged managers and employees to collaborate with
tures within itself and protectsfromoutside competitors. the group. Nevertheless, the team lost momentum. By
Even the concept of "knowledge brokering," which sounds 1999, the ODD had ceased operations.
like it should involve collaboration between companies Many internal innovation initiatives have shared the
and across industries, is most often described in terms of ODD's fate. They last, on average, about three or four
individuals and groups working within one company. years. In most cases, that is not enough time to discover
But organizing innovation as a purely intemal initia- strong new business ideas and refine, test, launch, and
tive pretty much guarantees that cyclical pressures will nurture them to success. A study of innovation at Xerox
lead executives to cut back or discontinue funding. No that Chesbrough did showed that over a 35-year period its

THE INNOVATIVE ENTERPRISE AUGUST 2002


Breaking Out ofthe Innovation Box

most successful spin-offs took an average of 7.5 years to as innovation is trapped inside individual companies,
generate an acceptable retum on investment. That didn't many promising technologies and business ideas will sim-
include the time spent researching and developing the ply die without ever being exploited.
underlying technologies. However, the innovation pro-
grams that generated those spin-offs survived an average
of only four years before they were shut down and re- Innovation as Commerce
placed by new ones. Often, those initiatives were termi- No company is, of course, hermetically sealed. Outside
nated even though the spin-offs they had generated had perspectives and competencies fiow into and out of or-
notched up substantial financial retums. As one Xerox ganizations through many routes: partnerships with
executive explains: "We are a $20 billion company. To be universities, alliances and acquisitions, external venture
financially interesting to us, an initiative must reach at investments, recruiting and hiring, customers and sup-
least $100 million in revenues within three years." That pliers, and the relationships and curiosity of individual
argument, which will sound familiar to many executives, employees. These sources of external influence are valu-
explains why large companies fail to sustain even lucra- able and important. It could be argued, in fact, that they
tive innovation programs. have played pivotal roles in all instances of corporate
There's another problem with inward-looking innova- innovation.
tion initiatives: They often fail to capitalize on viable But they're not enough. Their informality, haphazard-
ideas because the ideas don't fit with the company's strat- ness, and unpredictability make them unreliable founda-
egy or capabilities. No company is smart enough to know tions for sustained innovation. New hires, for instance,
what to do with every new opportunity itfinds,and no may come into a company with brilliant, radical ideas,
company has enough resources to pursue all the oppor- but they usually find it difficult if not impossible to pro-
tunities it might execute. Internal initiatives routinely mote those ideas in an alien, and often resistant, cul-
leave a trail of orphans- promising ideas that have no nat- ture. Academic cooperation usually centers on basic sci-
ural home within the company. If the numher of orphans ence - one might argue that looking for new business
produced becomes too ideas in academia is like fishing for marlin in a trout
' "Ny large relative to the stream. Customers and suppliers, as Harvard Business
successes - and it al- School's Clayton Christensen has shown, tend to provide
No company is smart limited insight beyond incremental improvements to
most always does at
enough to know what large companies-par- existing lines. Even more formal means for capitalizing
ticipants' interest in on external business ideas, from venture capital arms to
to do with every new the initiative falls. joint ventures to M&A programs, are rarely dependable
opportunity it finds, and Spinning out or- as sources of innovation. They tend to be so determinis-
phans as separate en- tic-so shaped by intemal strategies, politics, and secrecy
no company has enough tities is possible but, concems-that they perpetuate a company's existing busi-
resources to pursue all despite the hype sur- nesses rather than open new opportunities. Moreover, the
rounding spin-offs, it search for outside partners often happens late in the in-
the opportunities it rarely happens. Few novation process, when the business opportunity is well
companies have the defined, so they have little or no influence over the devel-
might execute. opment and refinement ofthe idea. Successful innovation
patience or skills to
'^ do them well and, in depends on involving partners early in the exploration of
any case, companies opportunities.
routinely kill spin-off proposals because they fear losing What we need to do is make innovation a natural ele-
the intellectual property to outsiders. In the past, some ment ofthe commerce that takes place among businesses.
orphans escaped corporate labs, falling into the hands of Finding ways for two or more companies to actively share
others both eager and able to capitalize on them. In the ideas, technologies, and other capabilities early and often
information technology business, for example, break- is the best way to protect projects from the swings in
through technologies like Ethernet, the mouse, and the interest and funding that inevitably occur in individual
graphical user interface were commercialized by com- organizations. If we could find a way to do this without
panies that did not develop them. But with aggressive risking the unauthorized appropriation of intellectual
patenting practices, that will happen much less frequently property, businesses would be able to more quickly spot
in the future. As Bell Labs' new-ventures chief, Thomas and exploit new growth opportunities.
Uhlman, famously said in 1999, "No more Intels are al- In an ideal world, where there is no fear of competitors,
lowed to escape." Unfortunately, that means that as long here's how it would work: If company A develops a great

80 HARVARD BUSINESS REVIEW


Breaking Out ofthe Innovation Box

idea that it can't commercialize, it can more efficiently that die after the original champion leaves, the group has
shift it to company B, which has the right skills, particu- survived several management changes and divisional re-
larly if the two businesses strike a relationship at a very organizations, indeed, it would be hard to kill alphaWorks
early stage of idea development. If company C lacks two because so many people in IBM rely on it to do their jobs,
particular capabilities needed to bring a technology to and nobody would want to sever connections to this
market, it can form a partnership with companies D and large, influential, and involved community. It remains the
E to gain the required resources. If companies F, G, and H best way for many of IBM's engineers to get recognition,
share a common interest in a certain business oppor- feedback, and support for their ideas. It also has the at-
tunity but lack the cash or strategic focus to pursue it tention of IBM's marketing people, who were initially
independently, they can pool their investments. When in- stunned to find current and potential customers asking
novation becomes part of commerce, money and atten- them when alphaWorks technologies would become
tion flow naturally to where they're commercially available. Most of
needed when they're needed. ^ s.^ IBM's strategic sofrware initia-
The case of IBM's alphaWorks, tives since 1996 have started on
which I oversaw for two years in Perhaps the most promising alphaWorks.
the late 1990s, shows the power of Why don't competitors simply
open innovation. In early 1996, pool of potential intermediaries help themselves to these ideas?
IBM's Internet Division realized For one thing, patents and li-
is the rapidly growing population
that the company had developed censes are easy to enforce. Putting
many promising sofrware pro- of baby boomer retirees. the ideas on a popular Web site
grams in research that had yet to (often with significant press cover-
be commercialized. As an experi- '^ ^^ age) means that everyone knows
ment, the division created a public where they came from. Thanks to
Web site called alphaWorks on which it posted the p r o download logs and registration, anyone foolish enough
grams, hoping that outside companies and developers to download a technology and then try to bring some-
would contribute valuable ideas about bringing them to thing similar to market would be caught red-handed in
market. Anyone could download the programs with a violation ofthe license and the patent.
90-day evaluation license from the company. As word IBM's alphaWorks-and similar initiatives like Xerox's
spread that IBM was allowing first-cut versions of its re- newalphaAvenue- have limited applicability, of course.
search technology to be used for free, hundreds of thou- Not every business innovation benefits from public expt>
sands of early adopters, innovators, and entrepreneurs sure as much as software development does. But they
came to tbe site to download the software. Many of these clearly show how a successful innovation marketplace
users were technically savvy developers and business- that crosses the border ofthe firm pjerpetuates itself, gain-
people who had the skills to see the opportunities in that ing increasing attention and support as it delivers real
raw code. economic benefits to many different participants inside
One IBM researcher, who had been trying for years to and outside the company. The broader question is: How
find a compelling use for his program, received ideas from do you break down the barriers to sharing information
a developer at another company through alphaWorks. across companies so you can create more generalized sus-
That helped him take his research in a new direction, tainable innovation markets without giving your com-
eventually leading to the development ofa critical com- petitors an advantage?
ponent for the multibillion-dotlar business integration-
systems market. When thousands of people began to
download that program, an IBM product group quickly A New Kind of Go-Between
decided to develop and release a full-fledged version. The answer, I believe, lies in a practice that has long been
Within eight weeks, the once-ignored program had be- a central element in commerce: the use of independent
come a key IBM product. Without this kind of early ex- intermediaries to facilitate the exchange of sensitive in-
temal support, the researcher's work might still be wait- formation among companies. Since the Middle Ages, busi-
ing to go to market today. nesspeople have drawn on trusted middlemen to share
Launched six years ago, alphaWorks is still a staple of confidential information without revealing tbe principals'
IBM's innovation agenda. Its productivity is high: About identities or motives or otherwise compromising their in-
40% ofthe technologies on the site make it to market as terests. Today, businesses continue to use intermediaries
new offerings, new features in existing products, or new for many kinds of transactions. Executive search firms, for
technical standards. Unlike other innovative programs instance, play a cmcial role in recruiting top managers.

THE INNOVATIVE ENTERPRISE AUGUST 2002 81


Breaking Out ofthe Innovation Box

They allow job seekers to remain anonymous during the ISIS, for example, recently helped the chemical divi-
early stages of a search, and they protect businesses from sion of a major U.S. oil company find commercial appli-
disclosing their hiring plans to rivals. cations for a new molecule it had developed. Although
In a similar way, intermediaries could facilitate the the molecule seemed promising, its potential applica-
exchange of innovation information while protecting tions were not immediately obvious to the division's R&D
companies from divulging their interests and plans to staff. They hired ISIS to search outside the company for
competitors. They could become, in effect, innovation possibilities. ISIS convened a brainstorming summit with
headhunters. A company might, to take a simple example, 12 of its contacts in industries ranging from waste treat-
entmst an intermediary with the details of a particular ment and building materials to cosmetics and household-
technology it has developed as well as its need for outside cleaning products. The panel quickly identified n busi-
capabilities to commercialize it The intermediary would ness opportunities for the molecule, with potential
then share the information with revenues of $150 million. One ofthe
other intermediaries in the hope of /^ "Ny companies represented on the panel
finding appropriate partners. At no went on to pursue a joint project
point - until a formal disclosure Sitting at the intersection with the oil company and intro-
agreement is forged- would any of duced a new consumer product
the information be shared with the of many companies and based on the molecule. Without the
companies the intermediaries rep- industries, a network of catalytic role ISIS played, the project
resent. The intermediaries could be may have been killed before it had
tmsted to maintain confidentiality innovation intermediaries the chance to be successful.
because it is simply in their business
would be in a unique Unfortunately, most consulting
interest: If they ever violate the firms consider sharing perspectives
terms of an arrangement, no com- position to visualize new and competencies among clients to
pany would hire them again. be taboo. Consultants, therefore, are
opportunities.
Using intermediaries for innova- unlikely to be a major source of in-
tion is not without precedent in U.S. '^ •— -"^ novation intermediaries. But there
business. In their book Information are plenty of other players operating
Markets: What Businesses Can Learn from Financial Inno- in and around the innovation process who could function
vation, William j . Wilhelm, Jr., and Joseph D. Downing de- as intermediaries. Lawyers and venture capitalists, for
scribe how intermediaries spurred innovation in finan- instance, often leam about best practices, ideas for new
cial services in the early part ofthe twentieth century. The inventions, and new ways of doing business from compet-
intermediaries, including bankers such as J.P. Morgan, as- ing and noncompetingcompanies. Trade show organizers
sisted in creating markets for financial information. They and trade association representatives frequently conduct
used personal relationships to gather and share informa- high-level meetings between potential buyers, suppliers,
tion discreetly with people in their network who could and partners, and identify opportunities for synergy
help exploit a new opportunity or a new way of handling within and across industries. Investment bankers are
financial transactions. "Innovation flourished," the au- often called upon to find new applications for technolo-
thors write,"in the context of close relationships and pow- gies developed by companies or govemment agencies.
erful intermediaries that tempered competition but pro- But perhaps the most promising pool of potential in-
tected easily copied ideas and products. This protection termediaries is the rapidly growing population of baby
encouraged financial innovation hy more nearly ensuring boomer retirees who have deep expertise in particular
a fair retum on investment in intellectual property." industries and technologies, hold the trust of the com-
Even today, a number of individuals and organizations panies they worked for, and don't want to spend all
play intermediary roles in facilitating innovation. Man- their time playing golf. With the right training in such
agement consultancies like Accenture and Cap Gemini disciplines as knowledge brokering, business develop-
Ernst & Young operate innovation labs, where clients can ment, and law, these former corporate executives, scien-
share ideas and discuss technological advances and other tists, and engineers would make ideal agents. And by
new research. Ideo, the design firm, often creates new using the Intemet to communicate and share information
products by mixing together the ideas and technologies with their clients and one another, they could position
of different clients. As a business development consul- themselves in the idea flow without abandoning their
tancy, ISIS Intemational has for more than 20 years acted other retirement pursuits.
as an intermediary to cross-fertilize business opportuni- Ultimately, I believe we will see the emergence of for-
ties for its clients. mal networks, perhaps even companies of such agents.

82 HARVARD BUSINESS REVIEW


Breaking Out ofthe Innovation Box

Businesses would pay an annual fee to hire a group of in- new Web services that automate some ofthe basic infor-
termediaries with the appropriate backgrounds and con- mation exchange essential to creative partnerships. Or we
tacts, briefing them about their intemal innovation pro- may see companies offer data-mining services that gen-
grams. Bound by nondisclosure agreements, the agents erate new business ideas by analyzing information col-
would share information with other agents representing lected from several companies at once without violating
other companies. The agents would signal their clients privacy or exposing secrets. What's certain is that, in an
when they thought sharing data would be worthwhile, increasingly complex world, the biggest growth opportu-
and they would help stmcture the terms ofthe engage- nities will come more offen at the intersection of multi-
ment. Whenever it was mutually beneficial, intercom- ple companies thanfromsingle visionaries acting on their
pany innovation relationships would fomi early and often own. It's important now that companies break out oftheir
through this relatively safe, controlled network. Sitting at innovation boxes and find ways to link their innovation
the intersection of many companies and industries, a net- efforts. In the years ahead, the greatest corporate innova-
work of innovation intermediaries would be in a unique tion may arise in the innovation process itself. V
position to visualize new opportunities synthesized from
insights and technologies provided by several compa- 1. Richard Leifer, Christopher M, McDermott, Gina Colarelli O'Connor, Lois S.
Peters, Mark Rice, Robert W. Veryzer, Radical Innovation: How Mature Compa-
nies-ideas that might never occur to companies work- nies Can Outsmart Upstarts (Harvard Business School Press, 2000).
ing on innovation programs on their own. (See tbe exhibit
"A Network of Intermediaries.") Reprint RO2O8E
To order reprints, see the last page of Executive Summaries.
Thefinalshape of such intermediation networks is im-
possible to predict In fact, other means of collaboration To further explore the topic of this article, go to
may develop. We may, for instance, see the emergence of http://explore.hbr.org.

SUGGESTIONS

THE INNOVATIVE ENTERPRISE AUGUST 2002 83