December 2008

"In nearly every company, 70-90% of IT takes the form of basic undifferentiated infrastructure."

Nick Carr

The objective of this article is to argue for a new model that guides the efforts of multiple stakeholders to solve a problem. The new model is referred to as Open Innovation 2.0 Its main benefit is to gain competitive advantage through effective spending combined with enterprise to enterprise collaboration instead of traditional instead of cost reduction.

Beyond Cost Cutting

Given these gloomy economic times, I am reminded of Henry Haslett's simple but powerful book, Economics in One Lesson. His prime lesson is to not judge the economic consequences of what you see but rather to look beyond and consider the consequences that you don't see. Applied to today's economic crises, it is not the amount of business cost cutting that will determine the winners but rather what investments are made. For those who adapt successfully, bad times will yield great good times. As an example, in the past two recessions Southwest Airlines gained market share over their competitors by adding capacity while others reduced theirs. There aim was not to reduce costs, but rather to spend more effectively then their competitors. The winners in today's economy will not just retrench and focus on cost reduction. Instead they will search for ways to better spend resources to gain greater strategic advantages.

In a down or up market the customer is king. The difference in what you do and how much depends on how the customer is responding to market changes. If customer is king, than adaptability to changing customer needs is the key to the kingdom. So, how does one adapt or transform in a down market? By spending more effectively. Few would argue that eliminating duplicated costs is one way to spend more effectively, yet there is an enormous amount of information technology (IT) spending duplication, with some estimates that duplication exceeds 80%.

Duplicate Spending

Consider implementing a unified communication system or an upgrade to an enterprise resource planning system. Much of the associated costly processes, lessons, and knowledge learned could be shared among enterprises. By reducing duplicated spending, each collaborative enterprise could spend freed up funds on improvements that would foster each participating enterprise to better serve their customers.

This seems logical, however, very little duplicated spending is actually eliminated. After working with CIOs for the past two years we discovered why there is so much "talk" about collaboration but very little "walk". Three barriers are largely to blame:

  1. Complexity: it is difficult enough to get groups within one enterprise to collaborate, let alone among two or more enterprises. Who is in charge? How are the resources shared? Who owns what intellectual property (IP)? What about competitors? These are just a few of the issues that create complexity and therefore perceived overhead and risk.
  2. Leadership: even if a collaborative project can be defined, what happens if something goes wrong? How is the solution shared beyond the project participants? How can each participant gain a competitive advantage from the project collaboration? Clearly, if each group must find a way to manage this process for each project, there will be more complexity and perceived overhead.
  3. Alignment: this last major issue encompasses both timing and "fit". Solving a shared problem only works if each collaborative member can participate at a time when their available resources and internal needs line up with the project.

In observing other collaborative project models, open source software (OSS) continues to demonstrate excellent success.

Open Innovation 2.0 Model

Open Innovation is similar to OSS, except the content is IT/business solutions instead of code. Open Innovation is used to describe the business equivalent of open source, where open refers to collaboration and innovation is the result. In consideration of multiple enterprise collaboration, we extend the Chesbrough model from research and development to IT and combine the notion of trusted relationships of social networks for business. We use the phrase Open Innovation 2.0 to refer to our model.

Figure 1 illustrates the Open Innovation 2.0 model for enterprise transformation. The model highlights that shared efforts towards innovative solutions replace duplicated spending.

Figure 1: Open Source vs. Open Innovation

By sharing completed solutions and jointly collaborating on projects, each participating enterprise can reinvest spending and further enhance efficiency. The resources freed up can be spent to more effectively address customer demand.

Consider an enterprise that successfully implements a unified communications solution that improves employee productivity and reduces vendor spending. As part of a collaborative Open Innovation 2.0 network, they agree to share that solution with two enterprise participants. The original expense to procure, integrate, and implement the solution was $500K. By sharing the solution, issues encountered, and providing expertise to aid in implementation, each participating enterprise saves 50% or $250K. The three companies agree to share in support, upgrade, and security expenses, saving each company another $150K per year. Through this process, the companies build trusted relationships and identify several similar opportunities to reduce duplicated expense. Figure 2 illustrates this example.

Figure 2: Unified Communication Example

This same enterprise network was also able to collectively convince their respective management teams to implement a new "self service" application platform that would allow business units to create many of their own business applications while IT maintained control of the overall process. The collaboration extended to business units of the three companies who were able to build trusted relationships and shared applications and business processes, thus, leveraging the innovation to each company's competitive advantage.

Collaborative Supplier Networks

How do suppliers fit into collaborative enterprise networks? The short answer: there are major advantages for suppliers to participate in Open Innovation 2.0. Traditionally, suppliers develop 1:1 customer relationships and protect those relationships like they would protect core IP. For many suppliers, their customers go through a trust building process before committing to the supplier. Then they proceed with implementation and work through typical issues. Finally, they provide support internally and respond to problems.

Much of this process is duplicated from one customer to the next - typically 80% or more. In addition, most prospective customers don't just accept the benefits described by a vendor sales and marketing teams. To build confidence in their decision, IT executives talk to their peers who have worked with the supplier to gain critical insight.

Following the Open Innovation 2.0 model, suppliers can transform their customers into a trusted enterprise network that shares experiences, knowledge, and requirements openly with the supplier. Customer support forums are common place and create valuable insight for suppliers. However, these forums are designed to aid in solving technical support problems and are not designed to reduce duplicated project spending. By creating a collaborative network at the business level, customers can share lessons learned, roadmaps, requirements, and skilled sources - motivated to reduce spending and increase innovation directed at their needs.

This network becomes enormously valuable to the supplier as members of the network are encouraged to communicate their experience and value to prospective customers. Since there is peer pressure to be trustworthy, prospects will quickly understand not only the supplier benefits but the issues and limitations of the supplier. This builds trust towards decision making and produces a reduced sales cycle for the supplier. In addition, the customer network represents a sample or spectrum of the supplier's customer base and the network's consolidated requirements represent inbound marketing without all the noise that occurs with supplier marketing. Trusted customer networks are much more difficult for a competitor to penetrate than a single customer.

The goal of the supplier is to fine tune their customer network so that their customers are motivated to attract additional customers to the benefit of all the participants. This creates organic revenue growing where cash flow oriented business models cultivate customer network effects.

The bottom line is similar to enterprise based networks: fewer processes to solve a problem. This sets up self funded transformation opportunities where duplicated spending is replaced by shared innovative problem solving. Customer collaboration at the business level opens up new business opportunities for commercial open source companies. Consider a well known venture funded supplier that has been using a traditional open source business model where they offer customers free downloads. The goal is to convert a percentage of users into corporate clients that pay for support and services. The supplier has a very small marketing and sales staff and currently depends on "trickle up" sales to get to positive cash flow. In today's market, this model provides insufficient capital to get to positive cash flow and few options for an exit. By embracing collaboration at the business level, paying satisfied customers can share solutions, new initiatives, and resources not only within IT but at the business level. These customers are motivated to introduce other potential customers to the network because it is in their own self interest. The supplier's business model has transformed from a low level sale to a strategic sale. The trickle up model can co-exit and neither model requires the build up of an expensive sales and marketing team.

Conclusion

Commercial open source companies can also network together and share customer networks and processes for bringing their respective solutions into enterprise wide acceptance. Since these companies already understand the leverage of open source, they have a great opportunity to be early adopters in Open Innovation 2.0. Desperate times are great times for those who are quick to adapt and find new ways to reward their customers. Now is a great opportunity for commercial open source companies to seize the opportunity to break through the inertia of large controlling oligopic suppliers and once again prove the lesson of Henry Haslett.

Recommended Resources

Open Innovation

Center for Open Innovation

Innocentive

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