1. Innovation Services
The Market for Open Innovation
Frank T. Piller,
based on joint work with Kathleen Diener
RWTH Technology & Innovation Management Group, RWTH Aachen
MIT Smart Customization Group, MIT, Cambridge, MA, USA
www.open-innovation.com

2. 2
About us
tim.rwth-aachen.de

3. The RWTH-TIM Group is a large group of researchers, and
many of them have contributed to the research providing
the basis for this presentation.
With about 18 full time
research positions plus
many graduate student
assistants, tutors, and
research affiliates,
RWTH-TIM is one of the
largest groups of its kind
in the German-speaking
academic landscape.
© tim.rwth-aachen.de 3

4. 4
RWTH-TIM Group: Facts and Figures
Established in 1990 as one of the first dedicated chairs in technology & innovation
management in Europe
Part of RWTH's School of Business & Economics, with strong links to the RWTH Engineering
Schools
Core student body of industrial engineering students ("Wirtschaftsingenieurwesen")
Ranked #1 in our school's faculty ranking w/r to research output (publications), and
#2 w/r to external funding. Awarded "RWTH Price for Teaching Excellence 2009/2010".
Interdisciplinary team of about 18 full time positions for researchers plus about 25 support
positions and student researchers (strong growth since 2007)
Successful acquisition of about 500,000 Euro research funding annually for the group out
of peer-reviewed funding schemes ("Drittmittel"); in addition industry-funded projects
Strong industry partnerships, yet focus on scholarly research, not consulting.
Dedicated to research, but excellent in participant-centered learning on graduate student
and executive education level.
Network of affiliated companies & consultancies for direct project cooperation.
November 2009: Moving to new building in RWTH Aachen Research Park next to Research
Centers of, e.g., Microsoft, Sony Ericson and Ford (part of "RWTH Campus Project")

5. 6
RWTH-TIM Group: Selections of Recent Research Project Clusters
Open Innovation: Increasing the productivity of technical problem
solving by external search
Customer Co-Creation: Integration of customers and users in the
innovation process in form of a firm-initiated strategy. Focus on toolkits
for customer innovation, user innovation contests, and innovation
communities
Technology transfer : Absorptive capacity, managing ambidexterity,
and preventing "NIH" (not invented here)
Customer Co-Design in Mass Customization Environments:
Strategies to profit from heterogeneities in the customer domain
Modeling the contingencies of the innovation process: Database of
300 methods for the innovation process and marching tool to corporate
challenges of managing innovation
Managing the ramp-up: Connecting the new product development
process with scaling up the manufacturing system

6. Objective of my talk
Addressing the advent of a new class of service firms.
Innovation as a service?
• Introduction into the idea of open innovation – and how it builds
on crowdsourcing as an underlying principle
• Central role of intermediaries and brokers for open innovation
• Results of recent study on global landscape of (open) innovation
service providers
• What will be next?
=> Focus is on advise for management practice!
© tim.rwth-aachen.de 7

7. 8
Two problems that
make new product
development difficult

8. 10
Every innovation process requires two kinds of information,
influencing the efficiency and effectiveness of the process.
Solution Need
Information Information
ef ea
In
sticky
s
fic sin
cr
sin nes
e
th
ie g
information
nc th
ea e
g
cr ctiv
y e
I n fe
ef
market
Ideation
launch
Doing things Doing the right
right Realization things
concept
("R&D",
service / development
Inc ffici
es e
product
en th
rea enc
e
s
iv g
local develop.)
sin y
ct i n
fe s
ef rea
gt
search
he
c
In
bias

9. 13
Netflix is the world's largest online movie
rental service
More than eight million subscribers.
Members can choose from >100,000 titles
Total subscribers have grown at a
compound annual rate of 70 percent.
Total estimated rental revenue of over $1.5
billion at the end of 2007 -- DVD rental
totals approximately $8 billion annually --
still a lot of growth potential
At the same time, Blockbuster's revenues
continue to decrease at a rate of 5 to 9
percent / quarter.

10. 15
Objective: get root mean
square error (RMSE)
<= 0.8563 (Netflix's own
algorithm Cinematch has
RMSE of 0.9525, this
equals to one point of
error of recommendation
on their 5-point scale of
"hate-love" movie
evaluation)

11. What is open innovation?
The formal discipline and practice of engaging the world for
problem solving ...
Licensing out
External technology (knowledge) acquisition and sourcing
Consortia and other cooperative ventures
Lead user innovation
Co-creation with customers
( Today also: Inter-functional / inter-divisional knowledge exchange
and idea generation within large corporations )
... using new forms of organizing the collaboration with external
actors.
Crowdsourcing / commons-based peer production
Beyond formal contracts and networks
Beyond autonomous user innovators
© tim.rwth-aachen.de 25

12. 26
Crowdsourcing (Interactive Value Creation)
"Crowdsourcing represents the act of a company or
institution taking a function once performed by
employees and outsourcing it to an undefined
(and generally large) network of people in the form
of an open call. This can take the form of peer-
production (when the job is performed
collaboratively), but is also often undertaken
by sole individuals.“ (Howe 2006)
Other terms, same idea: Commons-based Peer-Production of Innovation (Benkler 2002;
Lakhani 2006); Open Innovation (Chesbrough 2003, Piller 2002); Interactive Value Creation;
(Reichwald & Piller 2006; Piller 2004), Wikinomics (Tapscott 2007)

13. The term "open innovation" has been made
popular by Henry Chesbrough, UC Berkeley
Open innovation: A system where innovation is not solely performed internally within a firm, but in a cooperative mode
with other external actors. Companies are using external ideas as well as those from their own R&D departments, and
both internal and external paths to the market, in order to advance their technology. Open innovation is characterized
by cooperation for innovation within wide horizontal and vertical networks of customers, universities, start-ups,
suppliers, and competitors.
Open innovation is opposed to closed innovation, in which companies use only ideas generated within their boundaries,
characterized by big corporate research labs and closely managed networks of vertically integrated partners.
© tim.rwth-aachen.de Figure from: Chesbrough 2003. Definition building on Lausen & Salter 2006; 27

14. 30
Increasing the productivity
of problem solving

15. 31
31

16. 33
Broadcast Search at InnoCentive.com
Firm R&D Labs
Firm R&D Labs
InnoCentive.com
Firm R&D Labs
Firm R&D Labs
R&D Labs of large firms
Knowledge Broker 160,000 independent scientists
Context:
1. R&D Labs inside of major multinationals are not able to solve certain
scientific problems
- Their own internal and external experts cannot obtain solutions
2. Hope to get solution by going to distributed scientists that they do not
know who may have an answer

17. 34
Karim Lakhani (HBS) found that Innocentive has
a VERY efficient mechanism for technical problem solving
• Context for posting problems
– Firms spent 6 months to 2 years trying to solve problems
internally
– Offer on average $30,000 for solution
– Solutions need to be submitted within ~6 months of initial posting
• How many problems that had not been solved internally were
solved (n=166)?
– 49 problems (29.5%) were solved
– 75 solution awards given
• Participation Patterns:
– Average 240 individuals examine detailed problem statement
– Average 10 solution submissions per problem
– Average time spent ~74 hours by winning solvers
and ~36 hours by non-winning solvers

18. 35
Efficiency in problem solving is based on
re-use of knowledge
Leverages distributed and preexisting knowledge
(72.5% reuse)
Interest diversity and solver specialization attracted
helps solves problems
Solvers solve problems that are outside of their own field
of expertise (65% have PhDs in scientific disciplines)
Motivation: Intrinsic motivation (challenge to work on
scientific problems, “proof myself”) and monetary incentive
(award) go together for winning solvers
And this is highly profitable for companys:
And this is highly profitable for companys:
Seekers’ cost (per challenge): $60,000
Seekers’ cost (per challenge): $60,000
Value generated for firm: $10,300,000 -- ROI: 2175%
Value generated for firm: $10,300,000 -- ROI: 2175%
© tim.rwth-aachen.de Source: Lakhani 2009

19. 37
Would Innocentive work in your industry?
What is your Netflix Challenge?
What are the hurdles when you move from
chemistry or software to other domains?
Can you sketch the basic parameters for such
an approach in your industry? What information
would you have to open to the crowd?

20. InnoCentive is not alone: NineSigma and Yet2 are seen as
core competitors, but have a slightly different business model
Network Size 2m+ 160K+ Solvers, 175 120,000 registered users,
650K+ individuals Countries, 40 Disciplines 70+ brokers, 200+
120+ Affiliates consultants
How they make money Posting Fee Posting Fee Membership fee $4,000 to
$12-20,000 $6,000 to $20,000 posting $30,000
Success fee = % of final fee* Consulting service fee
contract or fixed amount Success fee = 40% of $30,000 to $40,000
(Retainer) contract or award Success fee = % of value
of the deal
Solver/Solution Provider $5,000 to $50,000 plus $5,000 to $1m Contract or licensing value
awards follow-on contract value ($1.5m average)
Growth 500 RFPs to end 2006 2008 postings nearly 25+ deals in 2008
400 RFPs in 2007 double 2007 postings Expansion of broadcasting
large growth in 2008 and Opening of European office services
2009 in 2010
© tim.rwth-aachen.de 38

21. Piloting open innovation via broadcast search in
German industry association among SMEs
Starting situation
FVA, research consortium of approx. 150 German SMEs in
mechanical engineering related technologies (driving systems) as part of VDMA
(one of Germany's largest industry associations with 2000+ members)
FVA funds own research program (contract research, pre-competitive, shared IP)
Need to improve productivity of R&D spending on consortium and firm level
Idea to pilot open innovation: Research contract to RWTH-TIM
First stage
Getting of commitment of members and corporate education (took 12+ months !!!)
Evaluation of legal situation of working with problem solving platforms in Germany
Second stage
Piloting of six challenges (two company challenges, one that failed on the consortium
level before, one that just had been contracted externally, two from up-coming research
agenda)
Decision to partner with NineSigma
RFP drafted, search ongoing ... (today)
Third stage
If evaluation of pilots is positive, establishment of OI platform as membership service
for association on VDMA level
© tim.rwth-aachen.de 39

22. VDMA Project to Pilot Open study of
Explorative
Innovation:
Research Agenda existing applications of Identification of suitable
OI in domain
problem statements
Comparing different tools
and methods Piloting: Contracting of
platform and formulation
Legal constraints and of RFPs
requirements 2.
1.
1. Identification of
Evaluation of results
Evaluation and open innovation platform of approach
Development
modification of OI to measure efficiency of OI
methods for industry Definition of incentives
domain
Market study and
comparison of OI
platforms ("beauty 3.
contest" of OIAs)
Recruiting "problems"
Piloting of platform and
4. evaluation of efficiency and
Development of effectiveness of approach as
Final reports to executive
business model compared to conventional
board and "checklist" for
SME members means of organizing R&D
for future operation
of platform on the Development of
operating & pricing
FVA level model for association
("NineSigma inside")
© tim.rwth-aachen.de 40

23. 41
Open innovation with
customer: Co-Creation

24. 42
Co-creation is an active,
creative and social process,
based on collaboration
between producers (retailers)
and users, that is initiated by
the firm to generate value for
customers.

25. 43
Idea contests

26. Recent research project:* "Open Senior Innovation": A new
approach to reduce the NPD risk and increase NPD efficiency
Picture: Age Simulator by duke HealthCare Communication
Objective: To develop a method which enables senior citizens
to directly transfer their needs into an artifact that highly
corresponds with their needs. This means to shift some
specifications of the product into the domain of the user.
The idea is to isolate the source of uncertainty, i.e. sticky
information about user needs, and to place it entirely outside
the boundary of the manufacturer. This is a fundamental
break with the current understanding of the innovation
process (Piller & von Hippel, 2007).
The idea is not to try to understand what older consumers may
think and want, but to enable them to co-design exactly what
they want.
Open Senior Innovation Platform: Provide platform and
supporting infrastructure so that senior consumers can
participate in defining fitting products for their needs, but also
in solving technological problems along the innovation
process.
* More info: senior.open-innovation.com 44

27. Objective of project is a feasibility study to build our
understanding of senior innovation platforms.
Main objectives of project:
(1) Create proof of feasibility for internet
platforms for open senior (service) innovation
(2) Understand technical and economic
principles.
(3) Build an exploratory prototype of platform
and pilot it.
(4) Generate business model how to operate
platform sustainable.
Stay tuned ... project has start in Jan 2010 ...
First idea contest online since March 10, 2010:
Design the best cell phone for senior citizens
(www.einfachtelefonieren.de)
46

28. Such a platform promises a broad set of benefits and
advantages – their realization however still has not been
shown.
Overcoming the sticky information problem of accessing need information.
Providing direct access of older users to manufacturers and service
providers (firm partners).
Initiation to innovation project can be user community, but also firm.
Ideas can be generated by individuals or groups of users
Utilizing resources of experienced contributors with heterogeneous
set of experiences
Transfer of idea to (offline) senior expert networks.
Utilization of large untapped labor source (matching requirements on
corporate level).
Special requirements of designing platform with regard to usability
and incentive structure
Special focus on service development
47

29. 48
Case example BtoB idea contest: Fujitsu Siemens Computers

30. Web2.0 technology delivers the technological background
Crosslinking
Active cross
linking of ideas
and knowledge
Wiki Principle
Evaluation
Allows Web2.0
collaborative Community
working on ideas Technology evaluates and
discusses
Look&Feel
Enhances
pleasure and
motivation on the
idea generation
Source: HYVE AG Net. www.hyve.de. Contact: johann.fueller@hyve.de 50

31. Overview: Elements of an idea competition
Employees Customers Combined
Idea entry
Describe, categorize, evaluate and
submit the ideas
Reporting Screening
Measure and proof Canalize and
Idea objectives preselect ideas
Structured
realization of ideas
Idea portfolio Idea evaluation
Compare and sort Evaluators / experts
ideas and take evaluate and publish the
decisions ideas
Idea list
Search, print and comment ideas
Source: HYVE AG Net. www.hyve.de. Contact: johann.fueller@hyve.de 51

32. 52
Open Innovation
Accelerators (OIA):
Brokers and
intermediaries facilitating
open innovation

33. The Challenge [of doing open innovation alone]: Or why
firms often face difficulties in going outside for innovation
Global
Industry x Global Innovation Community
Large / small companies
Universities
Private / Government Labs
WHY Individuals
Venture Capital
• Knowledge disaggregation
• Tacit Knowledge
• IP Considerations (protection/pollution)
• Leading Edge Knowledge Not in Public Domain
• Need for translation and Disguise
• Leakage of Competitive Information
• Culture/Policies/Authority
• Processes Efficiency
Source: Zynga 2009
© tim.rwth-aachen.de 53

34. Open Innovation Accelerators (OIAs) defined
Innovation Intermediaries are actors specialized in the articulation and
selection of new technology options; in scanning and locating of sources
of knowledge; in building linkages between external knowledge providers;
and in developing and implementing business and innovation strategies
(Bessant & Rush 1995; Howells 2006; Lopez-Vega 2009).
Open Innovation Accelerators (OIA) are innovation intermediaries that
operate on the behalf of organizations seeking to innovate in cooperation
with external actors from their periphery. Their mission is to bridge
structural disconnected knowledge pools caused by the lack of
diversity within a firm.
OIAs offer one or several methods of open innovation (e.g. idea contests,
broadcast search, co-creation toolkits etc.) and complementary services
for the innovation process.
© tim.rwth-aachen.de 54

35. Open Innovation Accelerators (OIAs) offer value-added
services from their client perspective
The mediating position allows agents to create a shared and stable
syntax to ensure reliable communication between sources and
destinations in knowledge management – they establish a common
language of reference as a template for knowledge management
activities.
In order to achieve common interpretations, intermediaries align different
styles of thinking and incongruent understandings (Dougherty 1992).
Intermediaries are making localized and embedded “knowledge stock”
actionable (Choo 1998) because they operate across multiple clusters of
specialization and practice to transform interpretations through innovation
and its diffusion.
Or, in short:
Scanning and gathering information,
Facilitating communication and knowledge exchange.
© tim.rwth-aachen.de 55

36. RWTH-TIM Study comparing open innovation intermediaries
(Diener / Piller 2010)
Strong growth of special
intermediaries for open innovation
We coined them "open innovation
accelerators"
First study comparing these
intermediaries
65 companies identified, 43 met
our definition
Extensive analysis and profiling of
these 43 OIAs
Self reports, interviews, survey,
secondary sources, client
interviews
study.open-innovation.com
© tim.rwth-aachen.de 56

37. Research Design and Sample
Explorative data gathering by questionnaire and interviews
Questionnaire consists of 5 parts
referring accelerators positioning
referring applied methods / services to accelerate open innovation at clients
company
referring the users and actors for integration
referring work environments and markets
Mixture between pre-defined answer sets and free answer space
Follow up interview to clarify answers and gather further information (duration
between 40-60 min)
Confirmation by internet research, client interviews, expert interviews
© tim.rwth-aachen.de 57

38. The number of OIAs is increasing strongly since 2000
© tim.rwth-aachen.de Source: Diener & Piller 2010 59

39. How do the intermediaries differ?
We find three core elements which "define openness"
The most
distinguishable Open Search Open Call
Initiation
difference of open Facet I
Contracting
innovation seems to be to Task
Self selection
avoiding the active assignment Constitution
search for information /
solutions with a clear
presumption about its
location and Informalized
composition Facet II formalized Collaboration (self
organization)
Along the dimension of
openness, companies
give away the ‘control’
over parameters of
Facet III IP Exploitation Open license
knowledge acquisition
processes, and, (partly)
about the exploitation of
the generated results.
© tim.rwth-aachen.de Source: Diener & Piller 2010 60

40. Conceptual Framework of Openness
in the Innovation Process
© tim.rwth-aachen.de Source: Diener & Piller 2010 61

41. We found three core characteristics to structure the
market of open innovation providers
© tim.rwth-aachen.de Source: Diener & Piller 2010 63

42. Services offered by OIAs can be structured into three
different clusters
(1) Community Managers: Managing a (online) community
that is used as a source for problem solving and idea
generation, but also to generate open problems at a first
place.
(2) Software Providers: Providing dedicated software for
open innovation, often in form of a web-service.
(3) Consultants: Acting as an open innovation consultant to
provide a customized and integrated service for the client's
innovation process.
© tim.rwth-aachen.de 66

43. OIAs offer a broad range of services
(often combining several services)
© tim.rwth-aachen.de Source: Diener & Piller 2010 67

44. Using the services of an OIA is surprisingly affordable
– strong competition of providers is even driving
prices down
Typical figures:
- Open Innovation platform for broadcast search: Fixed fee of $12-20K; Success fee of
about the same amount, plus about $200K set-up / consulting / education cost
recommended
- Idea contest: $50-100K plus awards for winners
- Netnography study within existing online communities: $30-50K
- Lead user study: $100K plus internal cost of team (3-4 people, 4-6 months)
- Online brainstorming: $5000
© tim.rwth-aachen.de Source: Diener & Piller 2010 69

45. Observations from the market study
• Very young market far before consolidation
• Dominated by new players / outsiders / start-ups
• A few established players like InnoCentive, NineSigma, Yet2,
CommuniSpace, Hyve ...
• ... but the majority is still in the early stages
• Lack of coherent business models (take "boradcast search" / problem
broadcasting providers as an indication: How to profit from value
generated for clients)
• How to scale business without increasing cost proportionally?
• Strong education and training element required, client field
characterized by "piloting" rather then "contracting practice"
• Low price level, strong competition in a few market segments
• Expect strong "competition" from public bodies / "tech transfer"
© tim.rwth-aachen.de 70

46. The client perspective:
Success factors of selecting an OIA (and working with them)
• Determine the objective of your open innovation venture!
• Decide about the control you want to keep on the open knowledge
transfer process (and the exploitation opportunities of the results)
• Decide about your resource allocation: Do you want to outsource or to
co-create the innovation process with the OIA? Hint: Much "open
innovation" today is inside the firm
• Consider what's next in the short term: Shall the OIA provide support
before and after the open task? (e.g., generating thousands of ideas is
one thing, evaluating them another)
• Consider what's next in the long term: Think of, e.g., community
management
• Look on your budget (especially if you are piloting)
© tim.rwth-aachen.de 71

47. Conclusions
• Innovation is taking place also in the periphery of the firm
• A firm-perspective on open innovation is required to supplement
(but not to substitute) conventional practices in TIM
• The "new" in open innovation are new open forms of initiating and
facilitating the collaboration.
• Firms need to establish mechanisms (“interaction competence”) to
access input from their periphery and to manage the collaboration.
• Increasingly, this "bridging" is done by a new breed of innovation service
providers: the Open Innovation Accelerators (OIAs)
• The market is still in the making and its early stages: Very little
academic research and shared experiences from companies are
existing
• PS: There is only very little research on open innovation of service
offerings.
© tim.rwth-aachen.de 81

48. More information ...
Prof. Frank T. Piller
RWTH Aachen University, TIM Group
Kackertstraße 15-17
52072 Aachen, Germany
Tel.: +49 (0)241-809-3577
piller@tim.rwth-aachen.de
tim.rwth-aachen.de/piller
open-innovation.com
mass-customization.blogs.com
scg.mit.edu
Diener / Piller: The Market for Open Innovation:
The first market study comparing the brokers,
platforms, and intermediaries for open innovation,
Feb. 2010, Lulu Inc. €795.00*
study.open-innovation.com
* Please contact me for an academic version.
© tim.rwth-aachen.de 83