“In many industries today, the logic supporting an internally oriented, centralized approach to research and development has become obsolete,” declares Henry Chesbrough, Director of the Center for Open Innovation at the University of California, Berkeley. “Competitive advantage now often comes from leveraging the discoveries of others.” He coined the term “open innovation” to describe this process and defines it as “a paradigm that assumes firms can and should use external ideas as well as internal ideas, and internal and external paths to market.” Open innovation has become a hot topic since the 2003 publication of Chesbrough’s book Open Innovation: The New Imperative for Creating and Profiting from Technology, (Harvard Business School Press). Chesbrough observes, “Useful knowledge is widespread in many industries and ideas must be used with alacrity if they are not to be lost.”

Open innovation is becoming more widely practiced in R&D as companies realize that simply hiring more scientists and increasing research budgets may not accelerate innovation. Two days after becoming president of Lucent Technologies’ Bell Laboratories, Jeong Kim commented, “We must innovate innovation.” Open innovation provides a means of doing this and enables organizations to increase both their innovation imports and exports thereby increasing the pace of innovation and new product introduction.

The open innovation R&D model

Chesbrough’s model of industrial R&D eliminates traditional boundaries between businesses, universities, start-ups, and other sources of innovation. By eliminating these boundaries and collaborating with other organizations including customers, suppliers, university researchers, and even competitors, companies can import lower cost, higher quality ideas from the best sources in the world, and do so more rapidly than independently inventing their own, which often involves “reinventing the wheel.” Doing this enables companies to focus their own innovation efforts on areas where they have clear competitive advantages. This reduces R&D risks and increases funds available for the most promising opportunities. In addition, achieving this focus can assist companies in identifying innovations to sell or license to other firms that could put them to more profitable use. This can raise cash for additional innovation investments in the firm’s core areas.

One firm that is using open innovation, what it calls its “Connect and Develop” strategy, is Procter & Gamble. P&G has announced a goal of accessing 50% of its new ideas, technologies, and products from outside organizations. A key element in this open innovation strategy is effective utilizing the Internet to match technical needs with the innovators around the world who have technology solutions and “ready-to-go” products that P&G can utilize.

Open innovation requires firms to identify relevant innovative ideas to complement their own innovation advantages. Meanwhile, effectively exporting innovations means selling patents and other intellectual capital to increase profits. To accomplish this, firms can work with a variety of open innovation enablers. Scientists can be actively involved in both importing and exporting innovation.

Open innovation enablers

R&D is increasingly performed in smaller firms and academic laboratories that are often difficult to identify. A National Science Foundation study indicated that U.S. companies with 25,000 or more employees accounted for 39% of total 2001 R&D spending or $75.7 billion. Of this, more than $5.3 billion (7%) was spent on outsourced R&D. Other companies receive 92% of these funds, universities 6%, and non-profit laboratories 2%. In addition, 180 companies spent $4 billion on collaborative R&D with 98% of these funds going to other firms.

Companies with fewer than 1,000 employees accounted for 23% of total R&D spending. Paul Stiros, President and CEO of NineSigma, notes that in 1972, companies with fewer than 1,000 employees received 5% of new U.S. patents. By 2000, they were receiving 30% of new patents. Technology suppliers also include academic researchers who are increasingly developing and patenting intellectual property.

To identify firms seeking to buy or sell technology, a new type of firm that uses Internet Web sites to aid potential partners in finding each other has developed. These firms offer a variety of services and include yet2.com, NineSigma, and InnoCentive.

YET2.COM

In 1999, an investment consortium of Procter & Gamble, Dupont, Bayer, Honeywell, Caterpillar, Siemens, and NTT Leason founded yet2.com. The Web-based firm offers services that bring buyers and sellers of technology together enabling each to maximize the financial return on their intellectual assets. The firm’s clients are said to represent over 40% of the world’s R&D capacity and include companies in the chemical, pharmaceutical, and biotechnology industries.

NineSigma and Accelovation

“I founded NineSigma with the belief that the Internet could be used to match technology innovators with the companies best positioned to exploit those innovations,” said Mehran Mehregany, Chairman and Founder of NineSigma. “Using its proprietary Internet-based Managed Exchange process, NineSigma delivers connections to sources all over the world to meet its clients’ technology needs.”

Projects include applied research, design and development, process improvements, finished products, and both new applications and markets for existing technologies. NineSigma matches technology seekers with unobvious or disruptive innovations using knowledgeable qualified program managers (some of whom are chemists), Web-based tools, and a global database of solution providers.

“We’re managing strategic open innovation programs for more than 40 industry-leading companies,” says Paul Stiros, President and CEO of NineSigma. Clients include UOP, DuPont, PolyOne, AveryDennison, Kraft, Abbot Laboratories, Case, Unilever, Kohler, Battelle, and Case Western Reserve University. Clients fall into two categories, technology buyers called innovation managers and technology suppliers called solution providers. Small businesses are often technology suppliers.

Miles Drake, Vice President and Chief Technology Officer for Air Products, explains the logic of his firm becoming a NineSigma customer, “We believe that working with NineSigma will amplify our internal R&D efforts and will expand our ability to access external resources and capabilities globally.”

According to Milan Jevtitch, P&G’s e-R&D leader, “By utilizing NineSigma’s unique process, we can be more proactive in accessing the tremendous innovation assets and ideas that exist outside of Procter & Gamble.” Jevtitch goes on to say, “NineSigma’s experience and access to researchers and companies will expand our ability to tap into new, breakthrough technologies and product opportunities around the globe.”

Another firm, Accelovation, was founded at the MIT Media Lab and provides software that uses text mining and natural-language processing to enable innovators to mine the Web for insights into unmet needs, trends, innovations and market activity.

Working with independent inventors

Web-based InnoCentive was founded in 2001 by Eli Lilly’s Ventures unit. “InnoCentive’s mission is addressing the R&D challenges of leading, global companies by connecting them to the world’s brightest scientific minds,” explains Darren Carroll, Director of New Ventures at Eli Lilly and former CEO of InnoCentive. Eli Lilly founded the company and maintains a majority ownership position. Among the users are chemical firms, such as DuPont.

According to Carroll, when starting InnoCentive, “We picked synthetic organic chemistry instead of biology because we were better able to frame questions and thus test the viability of open innovation.” Now the problems posted on InnoCentive include more than 40 different fields of chemistry, biology, life sciences, and other disciplines. The customer case has expanded from its initial focus, pharmaceutical companies, to a variety of industries including consumer products, petrochemicals, basic chemicals, specialty chemicals, polymers, and other industries. More than 30 companies have posted problems on InnoCentive.

Through the InnoCentive website, http://www.innocentive.com, “Seeker” companies can post their toughest R&D challenges to more than 120,000 scientists and researchers in 150 countries worldwide. These “Solvers” can submit solutions to challenges and earn a financial reward of up to $100,000 if their solution is chosen. Overall, the solution rate for problems posted on InnoCentive is about 40%. More than a third of the over two-dozen requests P&G has submitted to InnoCentive’s network have yielded viable solutions.

One doesn’t need to be a research chemist with a vast amount of experience to solve problems posted on InnoCentive. A 19-yearold senior undergraduate chemistry student, Drew Buschhorn of the University of Texas at Dallas, solved one problem, a replacement for cyclododecane for use in art restoration projects. (Buschhorn is now a chemistry graduate student at the University of Indiana at Bloomington.) Cyclododecane worked well but is expensive and accumulates in the environment. Buschhorn proposed using glycerin, biodegradable and much less expensive, as an alternative.

YourEncore

YourEncore was founded in 2003 when “P&G and Eli Lilly recognized the need to utilize the expertise of their retirees,” says Mike Burns, Chief Technology Officer of P&G. Fourteen other companies have joined YourEncore. An account executive works with a client company to identify their technology needs and identify experts in the YourEncore database that meets these needs. Currently YourEncore databases have more than 1,500 experts, not all retirees, listed. The experts describe their experience and qualifications in a keyword-searchable database. Also, they check off categories of jobs called service offerings for which they are qualified and in which they would like to work.

Eli Lilly’s Carroll notes, “Over the past 21⁄2 years more than 80 projects have been completed using YourEncore personnel. The 80 projects utilized about 110 people. The overwhelming majority of YourEncore people working for Lilly are from other companies. This helps enhance the diversity of solutions. One of the big advantages of open innovation is the increased diversity of the thought processes used and the solutions arrived at. By using retirees from other companies, we are taking full advantage of what YourEncore has to offer.”

Open innovation at Procter & Gamble

Larry Huston, Procter & Gamble’s vice-president for innovation and knowledge, explains, “Connect & Develop is really all about turbo charging our innovation output, turbo charging our innovating. …It’s about recognizing that there are a lot of bright people outside P&G and developing methods of working with them…To do so we have to build discipline into our organization, build networking capability and build processes to discuss deals and negotiate intellectual property agreements.” He observes, “Every aspect of R&D, strategy and vision to rewarding people to what skills we give them, had to be revamped for Connect & Development to work.”

Chemist Ed Getty was P&G’s first technology entrepreneur (TE) and currently runs the network of TEs within P&G. The TEs identify technologies of interest to P&G from other companies, government labs, and universities. Dr. Getty explains, “It’s really important to not try to replace researchers’ skills but to make them more capable of building new, productive connections outside P&G…This requires new skill sets particularly understanding in depth the problems we’re trying to solve and being able to discuss the problem in language that researchers in other industries will relate to. The objective is to link their research to P&G needs.” Getty’s responsibilities include developing the capabilities to increase the scope and speed of making outsider connections. Organizations providing these capabilities to P&G include yet2.com, NineSigma, InnoCentive, YourEncore, and other firms.

Case histories

In August 2004, Procter & Gamble entered into a technology transfer agreement with AMCOL International Corporation under which it will license polymer technology to AMCOL’s Health & Beauty Solutions Group. This technology enables the use of polymer particles to deliver active ingredients in wet wipe applications. AMCOL HBS already produces polymeric microparticle delivery systems for cosmetic, personal care, and pharmaceutical applications.

The licensing created a win-win situation for the two participants. Larry Washow, AMCOL president and chief executive officer, says, “This license complements the intellectual property portfolio that we have developed in-house. The significance of this license is that it opens the door for the use of our polymeric delivery systems in wet wipes applications — a growing business area.” Kevin Cureton, AMCOL HBS managing director, notes, “In addition, AMCOL HBS is looking forward to applying these technologies to new markets such as household products and surface cleaning applications.” Meanwhile, Lisa Nalpolione, director, baby care research and development, P&G observes. “This licensing agreement is a perfect example of extracting additional value from our R&D investment.”

Huston cites a recently commercialized product, Olay Regenerist, as another open innovation success story. First, research at the U.S. National Institutes of Health (NIH) indicated that certain proteins could promote faster healing of cuts with less scarring and were useful for wound treatment. Then a French company, Sederma, discovered five proteins that include penetrate elastin and collagen in wounds to promote wound healing. P&G thought these properties also would be helpful in anti-wrinkling creams, made a connection with Sederma, licensed the technology and applied their formulation expertise to develop Olay Regenerist. The overall development program combined P&G formulation capability with basic science developed by Sederma and NIH. Huston estimated that P&G saved at least 50% in time compared with doing the research entirely in-house.

In 2004, NineSigma identified two solutions providers for adhesives manufacturer Fasson Roll North America, a division of Avery Dennison. Fasson Roll North America signed joint development agreements and arranged a joint development agreement for new adhesive systems for use in automotive, building and construction, electronics, and medical device applications. “The NineSigma process was very successful in uncovering companies and technologies that we would not have identified otherwise,” said James Macuga, New Business Development Leader for Fasson Roll North America.

Impacts of open innovation on chemists' careers

Even when importing ideas and technology, Chesbrough notes that companies need to maintain adequate internal R&D activities to turn these external ideas into profitable products and processes. Thus traditional career opportunities for chemists will continue. Moreover, open innovation also creates the opportunity for chemists to engage in a broader range of activities and assume new responsibilities.

Researchers need to link internal activities to the surrounding value network that creates and delivers that value to customers. Building this network means establishing processes for buying and selling intellectual property as well as mechanisms such as corporate venture capital, licensing, spin-off firms, external research projects, and intellectual property management. Each of these processes and mechanisms requires chemists and business managers to help design agreements between the internal organization and external suppliers and to administer contracts once they are signed.

For open innovation to succeed, the corporate culture must change to emphasize teamwork and network building outside the organization. In particular, researchers need to overcome the “not invented here” mindset and both welcome and use ideas from outside their own organization. Carroll explains, “Open innovation involves a willingness to restate the role of scientists from problem solvers to innovators identifying innovative solutions. One of the real values of scientists is defining questions that need to be answered and find solutions no matter where they are. In other words, one must be agnostic about the source of innovation.”

Carroll says, “We have changed the job content of people around the company, including R&D, so that people are more externally facing (interacting with others outside the company) than a few years ago. “We are trying to understand how to properly incentivize research staff behaviors to encourage open innovation.”

“Open innovation will continue to be valuable because the pace of innovation is so great that it will be exceedingly hard for companies that don’t work in an open environment to keep up,” states Carroll.