1. technology and computing

What is open innovation (OI) and why is this emerging
trend important to businesses and creative minds?
MBA 585
North Carolina State University
Table of Contents
Open Innovation & Trends....................................................................................................................... 2
Success Criteria and Key Measures of Performance ................................................................................. 9
Performance Metrics of Open Innovation .......................................................................................... 13
Measuring Performance of Open Innovation at Proctor & Gamble .................................................... 14
Current Open Innovation Models and Best Practices ............................................................................. 15
Eli Lilly: Office of Alliance Management ............................................................................................. 15
Alliance Health Scorecard .............................................................................................................. 17
InnoCentive ....................................................................................................................................... 18
Procter & Gamble (P&G) Company: Connect and Develop ................................................................. 18
Identification of Needs at P&G ....................................................................................................... 19
P&G Networking ............................................................................................................................ 20
When to Engage ............................................................................................................................ 21
The Future of Open Innovation in Pharmaceuticals ................................................................................ 22
The Pharmaceutical Shift ................................................................................................................... 22
From managing a business deal to creating an effective collaboration ............................................... 22
Cloud Computing: The next big thing ................................................................................................. 23
Challenges ......................................................................................................................................... 24
Conclusion............................................................................................................................................. 24
1
Open Innovation & Trends
What is open innovation (OI) and why is this emerging trend important to businesses and creative
minds? Brilliant ideas that are also feasible are difficult to come by with limited resources. Very
generally, the term “open innovation” describes a move away from sole reliance on internal
resources and capabilities to include vast external resources during the process of product and
service development. Examples of such resources are ideas, technology, intellectual property, and
skill. Internal resources are those owned or controlled by a business entity, whereas external
resources are those whose access requires consent or voluntary participation by other entities.
The Linux operating system provides an example of an open-innovation product. Tens of thousands
of volunteer software engineers have contributed to the Linux code base, a freely available
operating system. This mass participation has resulted in an OS widely regarded as superior to
others with respect to reliability, configurability, and security.1 Linux has surpassed the Mac OS to
become the second most-used operating system for personal computers and in 2007 accounted for
13 percent of worldwide server revenue. Corporate beneficiaries of Linux include IBM and HP who
have developed a business around the OS by providing hardware, add-on software, and services for
the operating system. As a result of this open innovation approach to Linux development,
companies like IBM and HP have bypassed hundreds of millions of dollars in OS development costs
while leveraging volunteer talent and effort.
Yet another example of open innovation is Procter & Gamble’s (P&G) acquisition of what is now
Crest SpinBrush, a battery-powered toothbrush from a small start-up company. That move, along
with another new product, grew sales for the Crest brand by more than 50% in two years, an
outcome that has been called a “category killer.”2
In both the case of Linux and of P&G’s SpinBrush, the respective businesses capitalized on groundbreaking developments by expanding their field of search beyond their own walls. We now provide
an overview of open innovation with regard to how it is a valuable approach to business
development and with regard to ongoing trends. Other sections of the report will explore open
innovation practices in greater depth.
Many businesses are engaging in various forms of open innovation because it provides important
advantages. As mentioned previously, open innovation is centered on capturing value from the
wide-ranging knowledge and capability that exist outside an organization. The range of this
external knowledge and capability is far beyond what any organization can afford to create through
its own internal research and development, hence the impetus for open-innovation initiatives like
Connect & Develop.3 Connect & Develop is an effort on the part of P&G to create high-value
partnerships with external entities (researchers, inventors, design companies, etc.) that lead to
innovative ideas, technologies, products, and processes. Sage (sagebase.org), an open-access
platform for building diagnostic and therapeutic disease models, is another example of open
innovation driven by a need to capitalize on the efforts of external contributors.4 Sage was
sponsored by the drug company Merck based on the recognition that analyzing tremendous
2
volumes of bioinformatics data for solving biochemistry problems would require resources well
beyond what could be offered by one or a few organizations. Sage makes available software tools
and high-powered cloud-computing to researchers worldwide via the internet. Through openinnovation initiatives like Sage and P&G’s Connect and Develop, the results of ordinarily costprohibitive R&D activity become available to seeking organizations.
An even more important incentive for businesses to participate in open innovation is competition.
As competitors upgrade their product lines through OI, businesses are increasingly under pressure
to pursue new methods, knowledge, technology, and talent.5 Large increases in the number of
external resource contributors coupled with their ease of mobility between business customers is
driving a decline in the value of operating solely on the efforts of internal R&D.3
However, though a company like P&G finds that the cost of internal R&D is rising faster than sales
growth in the absence of OI, P&G management points out that it is important for a firm to maintain
its own R&D capability because doing so enables the firm to learn from others. Without having its
own practicing researchers, P&G would be unable to interface effectively with external problem
solvers.3
Open innovation is being applied towards achieving a variety of goals including maximizing R&D
returns, managing false negatives in opportunity identification, revamping old products, and
driving growth by synergy rather than only in an organization’s original area of focus. Maximizing
R&D returns is about generating value from an organization’s R&D investment. An organization’s
R&D efforts often results in intellectual property (IP) that does not fit with its preferred portfolio.
P&G’s approach to this situation was to either find new applications for this IP for its own use or to
out-license it. P&G set a specific goal of increasing utilization of its technologies from 10% to 50%
in order to receive a larger return on its investment.3 Level of successful utilization has also been
referred to as hit rate. Through OI practices, P&G was able to increase its hit rate at one point from
30% to 80%.6 Dutch State Mines (DSM) is another company that applies similar OI strategies. DSM
is involved with several start-up companies. Those that develop along the areas that benefit DSM
are spun-in to DSM. DSM gives up its stake in other companies that are not poised to contribute to
its strategy.7 In essence, through open innovation, both P&G and DSM maximize their R&D returns
by increasing the number of applications for their IP, whether inside the company or outside.
OI is useful for managing false negatives in opportunity identification. Businesses are vigilant about
quickly ending ventures that do not appear to have a success path (false positives). However, they
tend to eliminate risky opportunities at the expense of accruing false negatives, that is,
opportunities that later demonstrate strong viability, often in the hands of another entity.5 These
lost opportunities can be sizable. An example is XEROX’s PARC technologies (laser printing,
Ethernet, graphical user interfaces, etc.) that were abandoned for more promising projects. With
the advent of personal computers, however, XEROX’s technologies became the foundation of highly
valuable companies. One other example is compound UK-92480, which failed as a treatment for
hypertension, but later became Viagra, Pfizer’s most profitable drug. Thus, while a risk-averse
mindset is appropriate for mature businesses, it is not for innovative work. Good management style
3
takes this difference into account.7 Some approaches for managing false negatives through OI have
been suggested as follows.5 Instead of blindly eliminating risk,

Accept that not all risks can be known and risk is not sufficient reason to avoid an opportunity;
experimentation is required.

Invest gradually on a project based on incoming results.

If results warrant terminating a project, observe any continued interest in the project by other
parties after it is terminated. Continued interest and development may signal a false negative.

Re-assess potential false negatives for opportunity.

A terminated project may be out-licensed in order to derive maximum value from investments
in the project.

As an alternative to out-licensing, a spin-off venture may be started. Should the venture mature,
it will provide value from equity.
OI is also important for revamping old products. P&G CEO A.G. Lafley turned around P&G’s decline
by investing in innovation for established products, not just new categories of products. As
examples, shampoo products were reclassified by customer-preferred styles (curly, straight, thick)
rather than by condition (normal, dry, oily). Screening stations were introduced in chains like WalMart to generate demand for Actonel, an osteoporosis drug. Other P&G brands like Tide and
Pampers offered new and improved versions.2
Synergy is yet another method to apply OI to create growth. Here, synergistic growth means
expanding a company’s portfolio into apparently disparate areas that actually complement one
another and thus enhance the company’s market position. DSM exemplifies this approach. DSM
initially started as a coal-mining company, but has evolved with market demand to become a
manufacturer of both life-science products and performance materials.7 The company does not
restrict its innovation to familiar territory, but seeks out opportunities that are synergistic with its
current operations.
Open innovation can take a number of forms. Two broad categories are transaction-based and codevelopment OI. Acquiring a start-up company or IP are examples of transaction-based OI. Codevelopment, on the other hand, is a partnership over whose duration the company and external
contributors work together on innovation goals. The Connect & Develop (C&D) program at P&G is
an example of co-development. One C&D process is for P&G staff to modify requests for proposals
based on the solutions received for the original requests. P&G and external problem solvers may
iterate through this process a number of times until P&G arrives at optimum solutions.7 The
CreateInnovate group at P&G practices co-development OI by gathering people from a variety of
fields to brainstorm together. Encouraging researchers to be involved in one or more communities
of practice is another way that P&G facilitates open innovation. Some of P&G’s communities of
practice are bleach, polymers, and analytical chemistry. Merck-sponsored initiative Sage provides
4
tools that bring researchers together from around the world and allow them to co-explore biomarkers for identification and drug development.4
Industry-academic collaboration is a trend in open innovation, one often encouraged or facilitated
by governments. In Europe, the Lambert Agreements are expected to make it easier for not only
large companies to engage with academia, but small companies as well. Small companies are wary
of legal fees in contract negotiations; the Lambert Agreements are partly aimed at small companies,
providing them with pre-negotiated deals that they can then tailor. These contract templates are
designed to accelerate negotiations by providing a widely recognized standard that is considered to
be fair. Prior to the Lambert Agreements, companies wanted all IP rights upfront and universities
were reluctant to give them away, thus hindering collaborations. Development of the Lambert
Agreements was sponsored by the UK Treasury.
Another OI infrastructure, the Responsible Partnering initiative, is endorsed by the European
Commission and aims to provide information and tools to enable open innovation between industry
and academia.9 The Responsible Partnering initiative operates on two main principles. The first is
that collaboration should strongly demonstrate the value of publicly funded research so as to
attract more funding. Secondly, it is important that partners apply measures and practices that
lower the cost of collaborations. Examples of such measures include developing long-term
relationships, diligence in implementing results, fairness, and working in the public interest.
In the United States, open innovation is central to NIH’s efforts to emphasize and fund translational
science.10 The aim of the new NIH National Center for Advancing Translational Sciences is to
facilitate greater collaboration between academia, pharmaceutical companies, and the FDA so as to
increase output of new therapies and diagnostics. Through the center, NIH seeks to reduce the
business risks of investing in new therapies in order to encourage more private investments. The
plan is to invest in new therapies through institutions to the point where they attract commercial
interest, then turnover the development to pharmaceutical and biotech companies. NIH is also
collaborating with the FDA to ensure that research results will support new drug applications.
We now briefly survey the role of technology in OI. Utilization of technology in open innovation is
maturing from simply allowing faster and more efficient communication of ideas to providing tools
for co-developing the ideas. These new tools include simulation capability that allow customers to
provide feedback on products before they are made; technology to integrate product design with
service and process design; marketing and customer management systems; data-mining
technology; and interfaces with makers of rapid-prototyping tools.3 These co-development tools
have been termed “innovation technology.”
Use of OI technology may impact staffing profile. With P&G’s CreateInnovate center, instead of
hiring mostly chemists, biochemists, and chemical engineers as was done in the past, P&G is now
also hiring industrial designers and mechanical engineers. IT also has an important role to play. The
table below highlights the role of information technology and various tools provided by IT for OI,
depending on the end user.6
5
Table 1 Open Innovation Tools from IT
Companies actively practicing open innovation frequently gravitate to running one or more
innovation centers. At Eli Lilly, the Office of Alliance Management supports partnership contracts
by ensuring that the necessary commitments and capabilities are available for a successful
relationship.11 P&G developed the Technology Entrepreneurs Network (TEN) externally, consisting
of scientists, entrepreneurs, and specialists in P&G’s technology needs.3 DSM formed the DSM
Venturing & Business Development group to engage in open innovation.7
External organizations dedicated to providing OI services have also been emerging with the rise of
OI.12 NineSigma, for example, was founded in 2000 and ranked in the top 20 percent of Inc. 5000
fastest growing companies in 2008. NineSigma connects innovation seekers (clients) with solution
providers (typically other companies). Clients of NineSigma come from a variety of industries
including automotive, food and beverage, chemicals, medical, and consumer goods. InnoCentive,
founded by Eli Lilly in 2001, matches a community of over 140,000 engineers, scientists, business
people, inventors, and research organizations to clients seeking innovative solutions. Another OI
organization is the USA National Innovation Marketplace, an online registry where inventors and IP
owners can describe their ideas to solution seekers.
Retirees are a sought talent pool for open innovation projects, another trend in OI. Eugene Steuerle,
senior fellow at the Urban Institute, believes that retirement-age adults are the largest untapped
6
pool of human talent.13 However, tax and pension laws make it difficult for older adults to take the
path of partial retirement with reduced hours, forcing them to either completely retire or find parttime work with another company. Valerie Paganelli, consultant with Watson Wyatt, says that the
idea of partial retirement is popular with employees: a Watson Wyatt survey found that two-thirds
of older workers would like to reduce their hours before completely retiring; and one-third of these
workers would agree to postpone their full retirement if reduced hours were available.
IRS has made a proposal that might encourage phased-retirement: workers that are 59 or older
may voluntary cut back hours and be allowed to receive partial-payment from their pension. This
rule would allow workers to stay with their current employer. People like Sam Johnson, a member
of the House Ways and Means Committee and the Education and Workforce Committee, believe that
Congress needs to act to give employers full flexibility to orchestrate phased-retirement. Procter &
Gamble and Eli Lilly, among others, have not waited for this to happen. They have gotten around the
current rules by starting separate companies like YourEncore through which retirees can continue
to work for them indirectly. YourEncore was founded in 2003 by P&G and Eli Lilly as a way to tap
into the talent pool of retirees; it matches retirees with short-term projects from client companies.14
Workers enlisted by YourEncore are not limited to working with their former employer. In fact,
there’s great value in cross-pollination. P&G, for example, can use the virtual modeling skills of an
engineer from Boeing to explore designs for its diapers.
Various strategies are being developed to capture value from OI initiatives. Open strategy is about
balancing value creation in open innovation with value capture: how a company can derive value
from an externally-created resource without alienating the external community.1 Linux, MySpace,
Wikipedia, and YouTube exemplify organizations that benefit from a community of contributors.
Traditional business views such as Porter’s model focus on ownership and control of resources. A
modification of this model is required to practice open innovation because resources like volunteer
contributors and innovation communities are not owned or controlled by the company. These
differences require new strategies for success.
Figure 1 illustrates a continuum between closed and open innovation with regard to value creation
and capture. At one extreme are Microsoft and Google, who employ a closed-innovation approach,
creating value in-house and owning all of it. On the other extreme are YouTube and MySpace whose
values are almost entirely created by external communities, with resulting content belonging to the
companies. Linux is at an intermediate node where the externally-created value is not owned by
business beneficiaries but is used by them to generate profit. These examples demonstrate the
variety of possibilities for creating and capturing value in open innovation.
7
Figure 1 Continuum from Closed to Open Innovation13
Finally, implementing open innovation requires a mindset that is conducive to the process. Some of
the important characteristics of an “intrapreneurial mindset” are a willingness to do whatever is
required for project success, regardless of job description, and an ambition that may require asking
for forgiveness rather than permission.7 Internal motivation on an individual level is more
important than external incentives and simple recognition of contributions by an individual can
create internal motivation.15
Nabil Sakkab, P&G’s senior vice president for Corporate R&D, describes the characteristics of great
players in open innovation: they are comfortable with collaboration, have both a technical and
business mindset, are entrepreneurial, are quick to identify opportunity, and are able to run
experiments to assess the deal and close it, if possible. They also need to be open-minded toward
new ideas at all times.3 P&G’s CEO, Lafley, exemplifies other qualities that foster an innovation
culture. His approachability, easygoing demeanor, and good listening skills are credited for his
success in transforming what has been described as a closed, arrogant culture to one of ideasharing, both inside and outside of P&G.2 His methods are contrasted to that of his predecessor who
is described as demanding and authoritarian. P&G is now striving to move its innovators away from
a perfectionist mentality to one that encourages people to fail early and often in order to speed up
experiments and eliminate non-viable projects, thereby improving R&D efficiency.
However, even with the right corporate culture and motivation, success is not guaranteed. The
health of the open innovation process must be continuously monitored to ensure that the process is
receiving adequate inputs to generate effective solutions. Thus, a set of metrics and criteria is
critical to the success of the OI process.
8
Success Criteria and Key Measures of Performance
In this section, we will examine the success criteria and key measures of the performance of open
innovation. However, before getting to open innovation, we will review success criteria and
performance measures of innovation itself. Economic studies during the past several decades have
concluded that technology innovation (and related capital and human investment) contributes
nearly half of the nation’s productivity, economic growth and standard of living.16 Today more than
ever before, companies must exploit their innovative capabilities to develop new businesses if they
are to successfully confront the disruptive effects of emerging technologies, empowered customers,
new market entrants, shorter product life cycles, geopolitical instability, and market globalization.
Indeed, the development of innovative capabilities is the only means by which companies can
sustain a competitive advantage.17 In every industry, the leading companies are the innovators.
Nevertheless, the leadership position of a company is only short lived, not due to the lack of
innovation but due to the lack of sustained innovation. The lack of sustained innovation at
companies suggests that the management either does not pay attention to innovation or it does not
have the right information about the ‘health’ of innovation. It is thus imperative that business
leadership pay the utmost attention to the role of innovation in market growth, and
competitiveness. However, sound decision making regarding innovation at a company requires
credible, timely and relevant measurements, as per the saying “what you get is what you measure.”
Whereas having no metrics can lead to ‘shooting in the dark,’ bad metrics can lead to bad diagnosis,
improper decisions and unintended consequences to the company.
Despite the importance of innovation as an engine of growth, and the need for innovation metrics to
make informed decisions, it is surprising that many companies do not measure their
innovativeness. Among companies that measure their innovativeness, most use productdevelopment metrics only, such as annual R&D budget as a percent of annual sales, number of
patents filed in the past year, percentage of sales from products introduced in the past year, and
number of ideas submitted by employees. According to a 2005 article, the top five metrics used by
most companies were R&D spending as a percent of sales; total patents filed, pending, or awarded;
total R&D head count; number of products or projects in active development; and first year sales of
new products.18 Such metrics can be useful for a product driven company such as a biotechnology
or pharmaceutical company, which is the concern for this paper.
However, these metrics offer a limited view of a company’s innovativeness (and sustained
innovation capability), and neglect business-concept innovations. In order to measure the
company’s overall (360o) innovation capability, Muller, Valikangas and Merlyn have built a
framework for the selection of metrics that managers can customize to track innovation success in
their companies. Figure 2 provides the Innovation Framework for the selection of metrics.17
9
Figure 2 Innovation Framework17
The framework combines three views on innovation, resource, capability and leadership. The
resource view addresses the allocation of resources to tactical investment in the existing business
and innovation (strategic investment in new business). The resources are capital, labor and time,
and output is the return on investment in strategic innovation. The capability view measures the
company’s competencies, culture and conditions to support the conversion of innovation resources
into opportunities for business renewal. The inputs of the capability view are preconditions for
innovation, such as the extent to which a company’s skills, tools, culture and values are adapted to
innovation. Outputs include the development of new skills and knowledge domains that cover
innovation and strategic options. The leadership view evaluates leaders’ involvement in innovation
activities, the establishment of formal processes to promote innovation, and dissemination of
innovation goals. Innovation process provides yet another element of the framework by measuring
organizational structures and innovation incentives. The innovation process interlinks the resource
view and the capability view. Table 2 lists sample metrics for each of the views.
It is not necessary to measure all the metrics listed in Table 2 to measure a company’s
innovativeness. However, it is recommended to choose at least one metric for each of the six
elements listed in the framework. Such metrics have to be simple, meaningful and intuitive.
The metrics related to input and leadership views measure the company’s level of engagement with
innovation, whereas the metrics related to output and processes measure the success of company’s
innovation platform. The metrics suggested in Table 2, based on the framework of Figure 2, are
important for measuring the innovativeness of a company. Even though these metrics can be used
10
to measure the performance of open innovation, the emphasis is on in-house R&D. Some examples
of how these metrics and more others have been used by companies such as Proctor & Gamble to
measure open innovation will be discussed later.
Table 2 Sample Metrics
Resource
view
Inputs- capital, talent, time:
 % of capital that is invested in innovation activities such as submitting
and reviewing ideas for new products and services, and developing ideas
through an innovation pipeline
 Number of entrepreneurs in the company, i.e., individuals who have
previously started a business
 % of workforce time that is currently dedicated to innovation projects
Output- return on investment
 Number of new products, services and businesses launched in the past
year
 % of revenue from products or services introduced in the past three
years
 Share of wealth, i.e., the change in the company’s market value during the
past year divided by the change in the total industry’s market value
during the same period
Capability
View
Inputs- preconditions
 % of employees for whom innovation is a key performance goal
 % of employees who have received training in innovation
 Number of innovation tools and methodologies available to employees
Output- renewal
 Number of new competencies measured as a simple count among a
threshold proportion of employees
 Number of strategic options (i.e., newly created opportunities to
significantly advance an existing business)
 Number of new markets entered in past year
Leadership
View



Processes




% of executives’ time spent on strategic innovation rather than day-today operations
% of managers with training in the concepts and tools of innovation
Number of times during the past 5, 10 and 20 years in which senior
management has redefined the company’s core business
Number of ideas submitted by employees in the past 3, 6 and 12 months
Ratio of successful ideas to ideas submitted
Number of ongoing experiments and ventures
Average time from idea submission to commercial launch
11
As mentioned above, short lived innovativeness does not provide companies with lasting revenue
growth. Therefore, companies have to engage in sustained innovation. To this end, Innovation
Management Maturity Assessment (IMMA) developed by Center for Innovation Management
Studies (CIMS) at North Carolina State University not only diagnoses the innovation maturity of a
company but also suggests a path for improvement. According to Paul C. Mugge, Innovation
Professor, CIMS Director, College of Management, NCSU “Our assessments provide companies
powerful insights into their innovation proficiency. They also lay out a roadmap for change."
The IMMA is based on 25 years of CIMS research into the best practices of leading corporations. The
tool requires the company to rate organization's performance across the five core competencies
and five management dimensions of innovation as presented in Figure 3. CIMS helps identify
potential IM 'gaps' and provide the tools and programs to close them. The results are 'heat mapped'
to illustrate organization's strengths and weaknesses. This easy-to-read display guides
management on where to focus on the areas that need the most help.
Figure 3 North Carolina State University’s CIMS Innovation Management Maturity Assessment
The assessment is divided into two parts: core competencies and management dimensions. The 10
components are rated using a scale from 1 to 5. The entire assessment takes about 5 minutes to
complete. In some aspects, CIMS IMMA incorporates capability view, leadership view and resource
12
view from the framework presented by Muller, Valikangas and Merlyn. However, CIMS IMMA is
more comprehensive, forward looking and easy to implement.17
Open innovation business models can exist in different levels of maturity. As the paradigm of open
innovation has evolved over the past decade, many models have been developed to describe the
maturity of open innovation within a company. Figure 4 presents a model developed by Dr.
Chesbrough and PRTM Management Consultants to describe the evolution of open innovation.19 His
model consists of three levels of maturity. The first level is a state of external awareness in which
the company regularly looks outside for new ideas and technology. The second level is a business
model which fully integrates internal and external activities. The third and final level is the
establishment of an open innovation “ecosystem”. In this stage of evolution, the business is fully
integrated into an interconnected network. There is no longer a central hub and all partners share
risks and rewards. Innovating the company’s business model also becomes a key focus of the
strategy.
Figure 4 Evolution of Open Innovation – Three Levels of Maturity19
Performance Metrics of Open Innovation
It is beyond doubt that companies need to measure the success and sustainability of innovation to
justify a budget for R&D. Measurement of performance is even more essential for open innovation.
First, as a new model for innovation, there is some upfront cost to set up open innovation in a
company. The upfront cost can only be justified if there is expectation of higher return than the
totally-invented-here (TIH) innovation. Second, there are plenty of skeptics and fence-sitters of
open innovation even in companies that are at the forefront of implementing open innovation. Only
13
hard data generated by measuring the performance of open innovation and proving that open
innovation can work better than TIH can change the mind-set of such people in a company.
Here we describe some of the metrics that Proctor & Gamble (P&G) has used to measure the
performance of open innovation. A literature survey indicates that P&G is one of the best and
earliest to adopt the process of open innovation.20
Measuring Performance of Open Innovation at Proctor & Gamble
In 2000, P&G went through a challenging period; it missed its growth target two quarters in a row.
Then, it was clear to P&G executives that their ‘invent-it-ourselves’ model was not capable of
sustaining high levels of top-line growth. For a company the size of P&G, the required organic
growth of 4-6% meant about $4 billion each year. The R&D productivity had leveled off, and the
innovation success rate–the percentage of new products that met financial objectives–had
stagnated at about 35% at P&G. Squeezed by nimble competitors, flattening sales, lackluster new
launches, and a quarterly earnings miss, P&G lost more than half its market cap when the stock slid
from $118 to $52 a share in 2000. That was a wake-up call for P&G. In 2000, only 15% of P&G’s new
products incorporated elements from outside of P&G. The newly appointed CEO of P&G, A. G. Lafley
made it a goal to acquire 50% of innovations from outside the company. In 2002, P&G implemented
an open innovation model, called Connect & Develop (C&D). By 2007, a little over 50 percent of its
pipeline and products in the market had an external technology or an external C&D connection. As a
sign that the open innovation is working for P&G, in 2011, P&G was ranked 5th for world’s most
admired company by Fortune magazine.36
Initially, P&G used the percent of pipeline and products in the market with an external element as a
metric of open innovation. How high the share of external element can go is probably dependent on
the industry and many other factors. However, for open innovation to work there has to be internal
capability for R&D. In the event that the company loses its internal invention and development
capability, it will not be in a position to evaluate technologies coming from outside. At the time
when P&G adopted the open innovation model, ‘percent of pipeline and product with an external
element’ was chosen as a metric of open innovation since there was not a better one known at that
time. Since then, P&G has been measuring the success of its open innovation using several other
metrics as described below.
Number of ‘touch points’ to market launch: P&G documents the number of touch points a
potential product has to go through to make it ready for market launch. The fewer touch
points that exist the more time and money saved. At P&G, the products from open innovation
consistently involve less touch points than TIH products.
Time taken for a product to market launch: The shorter the development time for a
product the better. At P&G, the development time for products with external elements is often
much shorter than TIH products.
14
Net product value (NPV): A product from external element is followed throughout its life
cycle, and NPV is documented. At P&G, usually the products with external elements have
higher NPV than TIH products. Shorter development time for open innovation products biases
the NPV towards open innovation products.
In addition to performance metrics, P&G also has other process metrics to make sure that the
innovation is sustainable. To this end, there is a training program to train scientists and engineers
in open innovation. To be able to succeed with open innovation, a company has to respond rapidly
and diligently to partners’ initiative. The response time to partners’ initiative is another measure
that P&G uses to gauge the efficiency of open innovation process. The other metric is the view of
employees towards open innovation. In the beginning, there is a lot of skepticism. However, once it
has been demonstrated that open innovation works, the proportion of employees with positive
opinion about open innovation increases. The number of external partners and the number of deals
signed in a given time period can be other process metrics for open innovation.
Now that we have established what open innovation is, highlighted some key trends of open
innovation, and reviewed a framework for establishing metrics for open innovation success and
performance, we will now discuss in detail some of the current open innovation models in use by
leading companies in the field of open innovation.
Current Open Innovation Models and Best Practices
Big pharma as a whole has shown great reluctance in adopting the notion of open innovation. Big
pharma has the resources and cash to hold out for several years for their internal development
pipeline to come up with another “blockbuster” product that will keep the company alive and
satisfy the stakeholders. Small pharmaceutical companies on the other hand, lack the financial
resources to support large scale production and expensive clinical trials. Many of these small
companies lack even a year’s worth of cash in the bank. As a result, these companies are often
forced to engage in open innovation and seek external alliances in order to survive. Big pharma’s
strict reliance on internal R&D has worked in the past as there were fewer products on the market
and more unmet needs. Over the past twenty years; however, the market has been flooded with
drug products and there are fewer unmet market needs with simple solutions. As in P&G’s case
mentioned earlier, R&D costs are increasing faster than revenue from new products. As a result,
some of these companies are beginning to realize the need for open innovation. In spite of the
overall reluctance of the industry as a whole to adopt open innovation, a few large companies have
made enormous strides in the direction of open innovation. We will now explore some of these
companies and highlight some of their best practices in open innovation.
Eli Lilly: Office of Alliance Management
Eli Lilly is regarded by many to be at the forefront of the open innovation movement among big
pharma. Until the early 1990s, Lilly was driven by internal R&D. In the early 1990s Lilly’s thinking
15
began to change. Lilly management realized that they needed more than an occasional partnership
opportunity in order to supply a sustainable external stream of ideas to supplement their R&D
pipeline.19 As Lilly shifted its strategy to sustainable alliance capability, it became clear that they
would need to improve their business model to adapt to the requirements of managing alliances for
success. Thus, in 1999, the Office of Alliance Management (OAM) was born.
The goal of the OAM was to manage relationships between Lilly and their external partners. The
OAM was organized as a group of committees that oversaw each alliance. Each committee was
assigned an alliance manager from Lilly and each partner was given equal representation on the
committee. The OAM was given three responsibilites to function as the 1) internal alliance
champion, 2) alliance leader, and 3) alliance manager. The alliance champion is typically a senior
level executive who provides the high-level support necessary to breakdown bureaucratic barriers.
The alliance leader is the technical leader, or project manager who manages the day-to-day
activities of the alliance. Finally, the alliance manager represented the OAM and mediated the
business relationship between Lilly and the alliance partner. The alliance manager was involved
with the entire alliance process, beginning with the early search for partners and the due diligence
process. The alliance manager was also given four key responsibilities.11
1.
Provide pre-deal assessment for potential alliances
2.
Facilitate the start-up of new alliances
3.
Support value creation efforts for ongoing and transitioning alliances
4.
Build Lilly’s capacity and capabilities for alliances
To aide in the managing and success of alliance management, the Lilly Alliance Management
Process (LAMP) was created. LAMP is essentially a protocol with guidelines to help streamline the
alliance management process. LAMP also provided a framework to identify value creating tools and
common processes.11
Scott Fishman, an alliance manager at Lilly, described his role in one particular alliance like this:
There’s the contractual governance, which is what you can read in the contract. But what really
brought the collaboration to life was the non-contractual governance. It was those small extra
things. It was adding score cards; it was additional venues for research discussions and for
coordination of activities. It was a lot of non-contractual things that didn’t rewrite the
contractual governance but enhanced it.11
The OAM has proven to be very effective in alliance management. Lilly partners have described
their experiences with Lilly and the OAM as very positive. The OAM and its dedication to the
success of the alliance gives Lilly’s partners confidence that they have a voice in the partnership. A
senior scientist for one of Lilly’s partners described working with Scott Fishman and the OAM:
16
Scott has been a terrific influence in the alliance. Scott and I spent a lot of time on the phone.
Scott is a voice of reason and process. It helps to balance the style of others at the Lilly team.
Scott is the kind of person who I could call up and say, “Look, we’ve got a situation, in chemistry
or maybe wherever. We need to talk through this and see how we’re going to sort this out.” In
any alliance, you got to have someone who is diplomatic and uses really good judgment. Scott
has a very good understanding, because he’s involved in many other alliances.11
In 2003, Lilly received the Quality Award for Alliance Management from the Association of Strategic
Alliance Professionals. By 2004, Lilly had more than 200 strategic alliances.11
Alliance Health Scorecard
Part of the success of Lilly’s OAM can be attributed to the regular Voice of Alliance (VOA) surveys
that the OAM conducted to measure the health of the alliance. Lilly developed an Alliance Health
Scorecard (AHS) as a tool to analyze the health of the alliance relationship. The AHS measured the
health of the alliance across fourteen categories (Figure 5). The scorecard is often used to measure
the change in each area over time.19 It provides a clear picture of the alliance and clearly identifies
areas where more effort is needed to improve the relationship.
Figure 5 Alliance Health Scorecard19
17
InnoCentive
Even with many alliances and a wealth of subject matter experts, Lilly encountered some difficult
development challenges that confounded their expertise. Regardless of how much experience they
possessed in-house, these challenges often required the aid of external expertise to be resolved.
Many of these challenges did not lend themselves well to seeking partnerships or hiring
consultants. Lilly needed a set of tools that could be used to reach outside of the company to find
the right skill set or right person to solve the dilemma.
Alpheus Bingham and Aaron Schacht, both Eli Lilly executives, realized the necessity for such a
toolset. The unprecedented wide-spread reach of the internet provided the technology for such a
tool to become a reality. With this in mind, Bingham and Schacht set out to develop InnoCentive, a
tool that would utilize the internet to reach a nearly unlimited pool of talent.
InnoCentive was the first global internet-based platform designed to connect “seekers” and
“solvers”. InnoCentive was designed to protect the intellectual property of both the “seeker” and the
“solver”. Seekers in search of a solution, post a high-level problem statement on InnoCentive’s web
platform. Solvers can browse through all of the problems statements to find ones that they want to
work on. Solvers then volunteer to work on the problem and are provided more information under
a non-disclosure confidentiality agreement. If the solver finds a solution, they submit the proposed
solution to the seeker. If the seeker is satisfied that the solution works, the solver given a monetary
award ranging anywhere from $5,000 to $1 million and the intellectual property associated with
the solution is transferred exclusively to the seeker. InnoCentive exists solely as a medium to
connect seekers and solves. InnoCentive neither generates nor vouches for solutions. Seekers pay a
set price ($35,000 in 2009 unless a bundle is purchased) to post problem statements.20
InnoCentive began as an internal tool for Lilly, but quickly became a separate entity after enjoying
huge successes. In 2009, InnoCentive had grown to 32 employees who continually improve the tool
and provide its services to any company in need of finding solutions to complex problems. From
2001 to 2009 there were more than 170,000 participants from 175 countries. From more than 800
problems posted, nearly 400 solutions were found (approximately 50% success rate). Nearly $4
million in awards were paid to solvers for these 400 solutions. The real strength of the InnoCentive
tool is its ability to reach an extremely wide range of expertise. Karim Lakhani, a professor at
Harvard Business School, noted that “The further the focal problem was from the solvers’ field of
expertise, the more likely they were to solve it.” It has also been noted that the most successful
solvers were organizing problem solving teams to select and solve problems. Some of these solver
teams also worked closely with the academic community to reach solutions. With the evolution of
this pattern, InnoCentive has begun developing additional tools and features to encourage to
formation of problem-solving teams.20
Procter & Gamble (P&G) Company: Connect and Develop
As discussed earlier, P&G realized the need to utilize external resources after their huge market
decline in 2000. P&G realized its internal R&D could not meet its growth objectives by spending
18
more and more on R&D for less and less payoff even though its R&D was well established with a
strong knowledge pool. As a result, the new appointed CEO, A.G. Lafley, asked employees of P&G to
find a solution for this situation.20, 22
Larry Huston, vice president of innovation at P&G Company, and Nabil Sakkab, vice president,
Corporate Research and Development, and a member of the Leadership Council, at P&G, said that
P&G knew that most of its best innovations had come from connecting ideas across internal
businesses. And after studying the performance of a small number of products from the internal
labs, they realized that external connections could produce highly profitable innovations as well.
Thus, they decided to be more open in their innovation process, and developed a new open
innovation model called Connect and Develop (C&D). This new model was designed to look at
available external resources to find new products, technology, packing, design, processes, and
business models.20, 23
The new C&D model would not elimiate internal R&D, but instead leverage their capabilities to find
and develop technical partnerships. Lafley estimated that a total of 1.5 million potential researching
forces, including scientists or engineers elsewhere in the world, could be their potential resources.
However, prior to implementing this plan, he had to change the company’s attitude towards
external innovations from “not invented here” to “proudly found elsewhere.” He also needed to
change how the company defined, and perceived its R&D organization – from 7,500 people inside to
7,500 plus 1.5 million outside, with a permeable boundary between them. This new approach
produces more than 35% of the company’s innovations and billions of dollars in revenue.23
Identification of Needs at P&G
For C&D to work, P&G needed to know what they were looking for and where to innovate. If they
did not have well defined targets, they would not find useful ideas. So they searched ideas from the
area that showed a degree of success already as prototypes, technologies, or evidence of consumer
interests. Based on synergic effect with its technology, marketing, distribution or capabilities, they
narrowed down the focus areas. However, P&G was producing more than 300 brands and spending
almost $2 billion a year on R&D across 150 science areas, including materials, biotechnology,
imaging, nutrition, veterinary medicine, and even robotics. They decided to narrow their focus
based on three criteria.23
Top ten consumer needs: P&G compiled a top-ten-needs list for each business, which
might contribute to brand growth by asking its customers, rather than working on the
problems that they found interesting. These needs lists were then developed into science
problems to be solved.
Adjacencies: This criterion was also important because expansion of successful product
lines could help the company to take advantage of existing brand equity. For instance, P&G’
had expanded the Crest brand beyond toothpaste to include whitening strips, power
toothbrushes, and flosses.
19
Technology game boards: this was P&G’s unique technology evaluation system to predict
how acquisition of the technology in one area might affect products in other categories.
Through process, the company also could answer questions such as what needed to be
strengthened, what needed to be acquired to help itself for better competition with rivals,
and what can be licensed, sold or further co-developed.
P&G Networking
P&G’s global network is the platform which constitutes the C&D strategy. The networks themselves
do not provide any advantage compared to the phone system. The benefits are found in their
strategic use. After identifying the needs of the company, P&G works closely with proprietary
networks and open networks of individuals and organizations available to the company. Using
these networks, P&G searches for ideas from various researching sectors. Here are some major
examples of networks that P&G used to seek out new ideas.23:
1) Proprietary Networks
a) Technology entrepreneurs (TEN): These technology entrepreneurs’ networks
around the world contribute to the operation and momentum of C&D. These people
in P&G lead the development of its needs lists, create adjacency maps and
technology game boards, and write the technology briefs that define the problems
the company is trying to solve. They also create external connections by meeting
with university and industry researchers and forming supplier networks, and they
actively promote these connections to decision makers in P&G’s business units.
These groups of people have identified more than 10,000 products, product ideas,
and promising technologies.
b) Suppliers: 50,000 R&D staff members in its top 15 suppliers are a huge source for
potential innovation. To maximize the value from them, P&G created a secure IT
platform to share its technology briefs with its suppliers. For example, if P&G
wanted to make detergent perfume last longer after clothes come out of the dryer,
they would post this problem on the platform. One of its chemical suppliers may
have a solution. However, this approach had the drawback that suppliers were
unable to see each other’s responses. To solve the problem, P&G and its suppliers
sometimes worked together through this network in P&G’s lab and they’ve seen a
30% increase in these joint projects. P&G also holds top-to-top meetings with
suppliers so its senior leaders can interact with its suppliers to arrange shared staff,
improve relationships, increase the flow of ideas, and strengthen each company’s
understanding of the other’s capabilities.
2) Open Networks
a) NineSigma: This is an open innovation services provider that connects companies
having science and technology problems with companies, universities, governments,
20
private labs, and consultants that can develop a solution. Ninesigma writes a
technology brief that describes the company’s problem, and sends this to its
possible solution providers worldwide. If any company submits its proposal to
NineSigma, it is forwarded to the contracting company. If the company likes the
proposal, NineSigma connects the company and the solution provider, and the
project proceeds from there. Through this open network, P&G distributed its
technology briefs to more than 700,000 people and have completed over 100
projects, with 45% of them leading to agreements for further collaboration.
b) InnoCentive: mentioned in Eli Lilly’s case
c) YourEncore: In 2003, P&G and Eli Lilly found the networking company called
YourEncore, which connects about 800 high-performing retired scientists and
engineers from 150 companies with 50 client businesses. By using YourEncore,
companies can bring people with deep experience and new ways of thinking from
other organizations and industries into their own. The advantage of this network is
providing client companies experience at low cost and with little risk on crossdisciplinary approaches to problem solving. Several retirees from YourEncore may
work together on a single problem for P&G.
d) Yet2.com: This is an online marketplace for intellectual property exchange. In 2000,
P&G joined a group of Fortune 100 companies as an initial investor in Yet2.com. If a
company seeks a specific technology, Yet2.com and its client company write a
technology brief and distribute it to its global networks, including businesses, labs,
and institutions. If any member in the network is interested in posted briefs, they
request Yet2.com to introduce the relevant client. Once introduced, the parties
negotiate directly with each other. Through this network platform, P&G was able to
license its low-cost micro needle technology to a company specializing in drug
delivery.
When to Engage
Once products and ideas are identified by the networks mentioned earlier, P&G screens them
internally. At the initial screening level, technology entrepreneurs meet with lab heads, scan
patents, or select products off store shelves. The company evaluates these products, technologies,
or ideas against the criteria mentioned earlier. The next step is to log the product into P&G’s online
“eureka catalog” and distribute it to the general managers, brand managers, R&D teams, and others
throughout the company’s network for evaluation. At the same time, the technology entrepreneur
may actively promote the product to a specific manager in relevant lines of business. If an item
captures the attention of the director of the baby care business, she will assess its alignment with
the goals of the business, identifying obstacles, and gauging the product’s business potential. If an
item passes these steps, it goes on to be tested in consumer panels. If the consumer panel response
is positive, the item is moved into its product development portfolio. The External Business
Development group then contacts the product’s manufacturer and begins negotiating licensing,
21
collaboration, or other deal structures. At this point, the externally sourced product enters a similar
development pipeline as any internal product would. In the end, only one out of 100 candidate
ideas found on the outside is commercialized.23
The Future of Open Innovation in Pharmaceuticals
The Pharmaceutical Shift
On average, a pharma company needs 10 years between the discovery of a compound and its entry
to the market.24 Drug development timelines are not getting any shorter and internal development
pipelines are beginning to run dry. This year alone, the drug industry will lose patent protection on
10 blockbuster drugs that represent $50 billion in annual sales.25
Taking into account that the probability of a drug in preclinical testing progressing to clinical
testing is only 1 to 5%, companies have to find a faster, cheaper and more efficient way to develop
innovative products in order to sustain long-term profitability.24 The easiest way to do this is to use
the external creativity found in smaller companies and in public research. These small discovery
and development firms make a plethora of new drug candidates available to larger pharmaceutical
companies through licensing and partnering.26
However, with this shift to open innovation, R&D will no longer be an easy-to-manage in-house
operation, but a global initiative with many stakeholders involved. This shift in innovation models
must also be accompanied with a shift from a paranoid individualist mindset to an information
sharing mindset in which collaboration is the center of business relationships. Information sharing
networks must be established. Large pharmaceutical companies, with large sums of financial and
capital resources, will serve as the center of a collaboration network and manage relationships
between multiple business partners and stakeholders. These networks will consist of many
companies specializing in specific areas of the value chain such as discovery, development, clinical
trials, regulatory approval, manufacturing, packaging and distribution, and marketing. The trend
will be centered on sourcing specialized external companies and managing strategic
collaborations.27 Benefits of such extensive outsourcing and collaboration include:

Improved R&D efficiency28

Improved collaboration between public and private laboratories

Improved relationships with customers, medical staff and regulatory agencies that will be
involved in early stage research.
These benefits are key to accelerating the product development pipeline and push open innovation.
From managing a business deal to creating an effective collaboration
A key element to success in collaboration is people. In 2006, Cutting Edge Information estimated
that 70% of alliances failed because of poor partnership health.28 The question becomes, how do we
22
manage a large network of collaborators who don’t necessarily share the same goals and interests
and how do we create an efficient information sharing environment? We will probably trend
toward the Elli Lilly capability complementation model in which partnerships are not only business
deals but alliances. An Office Alliance Management or similar comittee will take charge of
supporting the successful implementation of the alliance. With the proliferation of open
collaborations, building a trust relationship is paramount for the deal to be effective and
sustainable.29
Another method that is being employed to facilitate the paradigm shift from a “push” to a “pull”
strategy is crowd sourcing. There are pharmaceutical companies that are using methods like those
of InnoCentive where these companies can post challenges that they have encountered with various
projects and offer a bounty for an appropriate solution from the public.30 This type of innovative
approach allows a company to develop and deploy a product more efficiently and effectively.
Another example of the use of crowd sourcing, mixed with open platform, would be the
implementation of a “digital workplace” which serves as an online database where everyone can
put in their information, studies, and ideas to help the company be more efficient and effective in all
areas of its business.31
Cloud Computing: The next big thing
The recent development and proliferation of “cloud computing” will open up new possibilities for
innovation business strategies. Cloud computing can be defined as computing in which services and
storage are provided over the internet or "cloud".33 Essentially, everybody within the company
(partners as well) will use the same tools and share the same operations platform which will
always be available. By using a common language, toolset, and platform, you increase collaboration
within the company as well as with external sources.
Having a closer relationship with external stakeholders makes it possible for the company to “pull”
information from the market. For example, they can set up automatic alerts whenever a certain
number of doctors notice side effects or potentially dangerous drug reactions. With this technology
you unlock the possibility to pull large amounts of data from the web, accessing petabytes of up-todate data on demand.
The “cloud” also promises a wealth of processing power. Large banks of processing power can be
accessed over the web on demand. For example, a scientist can access the processing power of the
“cloud” to run a protein simulation remotely in the middle of a desert and receive a result much
faster than if he were left to the processing power of his laptop alone. Finally, the flexibility of the
cloud will permit the company to save money having a reduced dependence on their own IT
infrastructure and switching to a pay as you go approach (rent power only when needed).34
The next step is to understand how to manage this computing power and vast amounts of data to
acquire knowledge. This knowledge is the promise of a better understanding of the market which
will permit pharma companies to address market needs quicker and more accurately. However, in
spite of all of the advantages of cloud computing, the application of the technology is surrounded
23
with uncertainty. Storing all of your data on a large networked server represents a major security
issue. On the internet nothing is secure and good hackers can virtually enter everywhere, becoming
a huge threat for the pharma industry in which knowledge is the added value of companies. We
have to find new ways of securing data over cloud computing networks to unlock its full potential. It
is the key to new fields like sentiment analysis or data-mining.
Challenges
It is quite easy to adopt a consultant point of view and list all the problems and what a company
should do to improve their process; but from a company point of view it is not so easy. When your
industry has been successful for dozens of years in a given environment, you don’t want things to
change. In nature, the environment changes over time. Species that don’t adapt disappear.
Businesses are the same. The external business environment is evolving and Pharmaceutical
industry has to evolve to survive. But change represents risk and uncertainty. We don’t have the
magic recipe for the perfect future-proof successful pharmaceutical business plan. The transition
will also be extremely difficult and full of challenges. Executives feel like they are trying to move
their Titanic corporate boat (heavy and previously thought unsinkable) from a tempest zone to a
tropical area, but in the process they have to cross the Arctic sea and avoid icebergs with limited
supplies and using a telescope in the fog. They are scared. In the business world, every decision is a
question of people and people are scared of uncertainty. The real question is how to make
pharmaceutical workers more confident about change, how to make them adopt open innovation
within their company. Let us offer a few suggestions.
First, you need to give the key to workers within the company. According to Tushman and O'Reilly,
organizational culture lies at the heart of organization innovation. But in order to change a
corporate culture you need to start with the top of the pyramid and change the vision and values of
the top executives.35 With an innovative company culture it is easier for individuals to change their
work habits and mode of thinking. For both workers and executives, the key is educating them on
open innovation and its benefits on the future of the company.
Once they are aware of the necessity of change, open innovation should be implemented step by
step, function by function. This step-by-step approach minimizes the risk of making a disruptive
mistake. It will also allow time for stakeholders to adapt and prove to the entire company that open
innovation can work for them.
Conclusion
If the mega pharmaceutical companies of today can make this transition successfully, it will change
the landscape of the industry as we know it. Pharmaceutical companies will see healthy forecasts
and a sustainable business model that will carry them into the future. New, more effective drugs
with fewer side effects will enter the market at a pace previously unseen. Market needs will be
more accurately determined and met in a much more timely manner. And problems which were
once considered impossible to solve will find solutions. But open innovation is not a magic bullet; it
24
is not the end-solution in itself. Instead, it is a process through which companies can change to be
successful in the future.
25
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