The Benefits of “Not Invented Here”

Not all the smart people work for you. By leveraging the discoveries of others, companies can produce spectacular results. A Q&A with professor Henry Chesbrough on his new book.
by Sean Silverthorne

The best ideas and innovations are probably not invented by your company. But learning to find and work with leading partners in R&D calls for a massive cultural change, beginning with getting past the "not invented here" syndrome. Harvard Business School professor Henry Chesbrough talks about "open innovation" and his new book.

Silverthorne: What's the one take-away you would like your business reader to walk away with from the book, Open Innovation: The New Imperative for Creating and Profiting from Technology?

Chesbrough: Innovation used to be managed in a closed, internally focused manner. Innovation today must be managed as an open system, with a far greater external focus.

Q: Which companies today are the best examples of open innovation, and why?

A: IBM, Intel, and Procter & Gamble all search externally for useful ideas to leverage their business. IBM invests significant resources in software such as Java and Linux that IBM does not own in order to integrate many companies' products and services for IBM's customers. Intel invests significant resources in university research (which it does not own) and in start-ups (as a venture capitalist), to fuel its own business. P&G has set a stretch goal of having 50 percent of its new project portfolio come from outside its own four walls. And IBM and P&G also allow others to license their ideas for their own business. IBM reported royalty receipts of $1.9 billion in 2001, which was 15 percent of its operating income, while P&G has a policy of licensing any patented technology not in use in one of its own businesses within three years.

Q: What are the benefits for a business actively following an open innovation paradigm?

A: There are direct and indirect benefits. Direct benefits include higher growth for one's own business, through incorporating additional ideas into the business. Another benefit is higher profits from one's ideas, through licensing and spin-off ventures that turn underused technology into additional royalties and equity. Indirect benefits come from injecting competition into one's own innovation system. Internal researchers must compete with external sources to meet the demands of the business, and business units must compete with outsiders to make use of available technologies. The net result of this competition is faster transfer of technologies and more rapid learning from internal and external use of those technologies.

Q: In days gone by, the great R&D labs were affordable only to the largest companies. Can smaller companies use the concept of open innovation to boost their own R&D efforts without breaking the bank?

A: Yes. In fact, this is already happening. According to the National Science Foundation, in 1981 companies of less than 1,000 employees accounted for just over 4 percent of all R&D spending in the U.S., while companies of more than 25,000 employees supplied over 70 percent of spending in that year. By 1999, those small companies accounted for over 22 percent of all industrial R&D spending, while the largest companies' share of spending declined to just over 40 percent. These data reflect the changing reality in almost every industry: great technology and ideas can be found in companies of all sizes. Put differently, there appear to be fewer economies of scale in R&D than there used to be.

The way companies define, measure, and reward excellent research has to change.
—Henry Chesbrough

So what specific things are small companies doing to exploit open innovation? One thing they do is to recruit experienced scientists, engineers, and managers from large organizations. These people take their knowledge and experience with them into the small company. Another thing they do is to work closely with universities and one or more of their faculty. University research is quite good, and is highly accessible to companies of all sizes. In fact, small companies typically have less of a "not invented here" attitude, so they can absorb a good university project faster than a large company with such an attitude.

Q: How does a company get past the "not invented here" (closed innovation) syndrome?

A: The way companies define, measure, and reward excellent research has to change. Accessing a valuable external technology is a useful research activity. Companies today seldom reward this activity, though, in the same way that they would recognize someone who discovered a valuable technology on the inside. Some companies are converting internal researchers into external technology scouts, so that the external searching is being conducted by some of the same people who have worked inside within the labs. That also helps break down resistance.

Q: From an organizational standpoint, who should be responsible for an open innovation program? Does it call for the creation of a new executive-level position?

A: Yes and no. It certainly calls for a changed orientation for the chief technology officer. It might also elevate the importance of what I would call the "chief business officer," who manages the business model within the company, looking for additional ways to grow the current business and ways to identify and execute a new business for the company. Throughout the company, people should recognize that new innovations are hard to measure, such that "false positives" and "false negatives" can occur. While most companies screen their portfolio of projects to eliminate false positives, few have processes to identify and profit from false negatives in their company.