Think of intellectual property — patents, trade secrets, business methods, trademarks, copyrights, and the like — and one of your first mental associations will likely be legal protection. It's not an abnormal connection to make given how valuable these intangible assets are to a business: they made up 80 percent of the market value of S&P 500 companies in 2010, according to intellectual property merchant bank Ocean Tomo.
Creating an innovative culture at middle market companies is critical to their success, as detailed on the National Center for the Middle Market. Fail to innovate, and you've practically asked competitors to leave you in their dust, and yet companies of this size don't have the resources that giants can employ for similar efforts.
One possible solution, explained by GAA Accounting, is to use open innovation and combine resources with other companies, whether that means working with customers, suppliers, or sometimes even competitors. The intent is to take some risk out of the creation of intellectual property. By working with others, your company is less likely to overlook a potentially important development. The result is being able to better afford research and development while speeding the process and gaining access to new ideas. As management consultancy firm Bain & Company puts it:
Open innovation applies the principles of free trade to innovation, advancing new ideas through the use of tools such as partnerships, joint ventures, licensing, and strategic alliances. By collaborating with outsiders — including customers, vendors, and even competitors — open innovation enables the laws of comparative advantage to drive the efficient allocation of R&D resources. By reaching beyond corporate borders, a company can import lower-cost, higher-quality ideas from a wide array of world-class experts to improve the speed, quality, and cost of innovation. This approach allows the business to refocus its own innovation resources where it has clear competitive advantages. Ideas also are exported to businesses that can put them to better use.
As an economic sector, middle market companies have the most to gain from this strategy, as they are large enough to need more innovation than a small company but lack the resources of the largest firms. Many middle market companies already benefit from open innovation, as detailed by Ohio-based open innovation services provider NineSigma.
Encouraging open innovation may be disconcerting to some of your executives and managers and seen as giving up control and potentially losing valuable internal information to competitors. Some might worry that open innovation is an all-or-nothing proposition or that the company may lose its own innovative edge. Therefore, according to Andy Zynga, CEO of NineSigma, it's important to communicate to skeptics within your company in order for them to recognize some common misconceptions about open innovation:
- Open innovation means that everything is open. Your company needn't have its doors open all the time. There may be points during product development when finding compatible technology from outside sources makes sense, but you can create mechanisms to seek exactly what you need without constantly opening up your internal R&D to others. Similarly, you can present certain technologies to potential licensees without circulating a list of every technical advantage that your business enjoys.
- Open innovation replaces internal R&D. You employ open innovation to supplement your own expertise or shorten development cycles; your R&D department still works on core technology for the company, however. In fact, without R&D, it becomes impossible to identify the specific areas that you need to supplement.
- Open innovation will put intellectual property at risk. Concern about losing control over a company's hard-won intellectual property is understandable, but you can still protect your own property through formal legal mechanisms such as patents, as well as through clearly defining the type of innovation that you seek while keeping the details of your internal R&D private.
- Open innovation requires major resources and investments. Strategically using open innovation can reduce costs and create unexpected opportunities that more than justify the expense. Zynga mentioned Spartan Chemical Company, a middle market chemical company that develops industrial maintenance and cleaning products: "Within several weeks of issuing [a request for proposals] some months ago, they identified solutions from around the world, and that spurred them to develop a new product for launch later this year. They believe it will be an industry game changer."
Innovation is a critical factor in any company's success, but there's no reason to assume that you have to make this type of activity totally isolated. Working with other companies and licensing technology in and out can speed time to market, reduce costs, and create new revenue sources.
When implementing open innovation, what are the most important factors to consider when choosing other companies to work with? Let us know what you think by commenting below.
Erik Sherman is an NCMM contributor and author whose work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, Newsweek, the Financial Times, Chief Executive, Inc., and Fortune. He also blogs for CBS MoneyWatch. Sherman has extensive experience in corporate communications consulting and is the author or co-author of 10 books. Follow him on Twitter.