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Supporting Disruptive Growth Opportunity through Co-Innovation

My last blog entry was meant to invoke a discussion for how best to manage IP for co-innovation. I encouragage you to comment as I think it could generate some interesting discussions.

While we do have an established IP framework in place today to support co-innovation with partners like anything, there is room to evolve this framework to further streamline efforts to accelerate project-based innovation and make it easier for SAP and its ecosystem partners to collaborate on co-innovation projects of interest.  For not only our lab but for the industry in general, some very non trivial questions remain for how best to enable co-innovation for success from a legal perspective. Intellectual property concerns persist globally and will certainly remain at the forefront of any discussion pertaining to innovation for the foreseeable future.  Even when the innovation comes entirely from within, the firm must determine the best means of protecting its IP from threat of infringement and to select the best licensing schema in a way that optimizes share price and value.  The same issues persist among partners who collaborate yet with the added complexity of how to manage IP where in the end, both firms can benefit economically from the combined effort.   It is becoming more apparent with time that the focus for managing IP relative to co-innovation needs to shift from independently assessing the value of the IP, to assessing the value of the spoils derived from commercially successful innovations. A firm can certainly wind up owning and controlling IP created out of collaboration with a partner, perhaps as a result of protracted negotiations and painful arm wringing. Yet what if the negotiated win is followed by failure to successfully monetize the IP because while all the arguing over IP ensued, the window of opportunity in the market initially targeted with the innovation closes?  Was it worth the unilateral effort?

Polaroid and Kodak battled each other for years over an instant film patent infringement, spending wicked sums of money on litigation. When the court battles ended, there was no longer a market for instant film. Advances in technology sped right past both companies while they sat in the courtroom.  This was a technology battle fought ages ago. Everything is much more accelerated today. Scott McNealy once proclaimed that “technology has the shelf life of a banana”, and he was right. As soon as a company creates a new technology, global competition rushes in and erodes what little competitive advantage was there at the start.  Even with patent trolls attempting to block others from trying to play in the same space; widespread infringement is inevitable.  True co-innovation more strongly emphasizes getting to market as fast as possible and developing the best model for monetization that best serves the investment and effort made by each participating partner.  It begins to make a lot of sense when we consider the number of innovation projects initiated by firms that end in failure. A firm must continue to innovate or it will wither and die, but it does not have to do so entirely on its own. Its strategic alliances can become a platform for product innovation and deliver more value than being limited to broader reseller agreements. When partners truly begin to reap the benefits of working together to bring innovation to market quickly; it stands to become a game changer for those who succeed at it and a nightmare for those that are left with no way to compete with it.  Adequately resolving the larger open issues surrounding how partners can best manage co-created foreground IP, co-innovators can then begin to dive more deeply into developing disruptive innovations and not be limited to only modest integration and interoperability enhancements among complimentary products.  The market is generally receptive to the right disruptive innovation and we know for a fact that the largest firms today struggle with producing such disruptive innovations- disruptive innovations almost always come from the edge of the market. Firms that choose to co-innovate may find through combining talent and resources that they can collaboratively address the insatiable demands from the market for the more disruptive technologies (and processes) that best serve customers.

To take Cloud Computing as an example; the market is beginning to offer many grails from which to drink from. We should soon expect a majority of top vendors to soon deliver (or claim to anyway) a single, comprehensive solution and road map for at least private cloud solutions. Widespread adoption is a different matter but it is otherwise imminent if the success of virtualization is replicated.  Yet like any other new and emerging IT technologies, (think Open Source OS, security, virtualization, SOA, mobility, web 2.0 etc,) we move through product lifecycles fueled by hype, and adoption followed by industry consolidation and on occasion, a standard or two might also surface.  Perhaps more co-innovation would amplify the objectives of strategic alliances that would shake this cycle up by accelerating some of what we see when consolidation begins to occur. It won’t dampen the hype factor, but it might force market leadership relative to innovation to take form more rapidly as customers gravitate towards more integrated solutions coming to market more rapidly serving to both deepen and broaden their own value chain. This is certainly to be preferred over trying to make multiple point solutions work where each must be independently fitted to the processes of the business they are meant to serve. Customization that I assume even when successful, requires a lot of costly systems integrator participation today. The SAP Co-Innovation Lab seeks to enable the innovation process in such a way that it becomes congruent to market needs. It helps to encourage and enable innovation through collaboration with partners inside the SAP ecosystem.

SAP’s Co-Innovation Lab is an enablement platform comprised of a robust IT infrastructure, knowledge brokering to identify and connect with needed subject matter and domain expertise, an IP framework and operational management all dedicated to supporting project-based co-innovation among SAP and its partners. When you consider what it requires for any single firm to pull together the resources that make up this enablement platform, it is not so hard to understand why so many innovation projects pursued singlehandedly by a company fails or at the least underwhelms its stakeholders. If however, you begin an innovation project using the co-innovation platform as the base, it allows the project teams to focus more precisely on the innovation work and figuring out how to go to market with success in a much shorter time frame than if the team must first allocate a chunk of its limited time and talent to sourcing and managing any or all of the foundational elements needed to support the project.  Strategic alliances that attempt complex collaboration presents many unique challenges but with business drivers on both sides well aligned and efforts made to build a genuine trust relationship between the firms; such challenges can be faced successfully.

The co-innovation participants can take immediate advantage of a co-innovation lab and avoid being hindered by at least some of the obstacles companies face trying to innovate with respect to resource allocation and project management. Evidence is abound of R&D efforts where the contribution to science is well documented and yet such achievements do not always result in material impact of increasing revenues, market share or improving a company’s share price. The SAP Co-Innovation Lab has developed processes designed for assessment of project requests that includes careful examination and review of the business drivers and that the results of the co-innovation project is aligned to the participating partner’s strategic business objectives.

Ideas fueling innovation initiatives come from many sources. For co-innovation the majority of ideas emerge from both inside and outside of the firm.  SAP for instance might have specific objectives and subsequently originate innovation ideas seeking to leverage partner technology with interest in addressing white space opportunity in the market.  Conversely, an SAP ecosystem partner could present its own ideas for doing the same. The fact that the SAP Co-Innovation Lab exists as an enablement platform with the express purpose of encouraging co-innovation should serve as an impetus for SAP and its partners to directly explore how collaboration and the tacit exchange of knowledge can help to identify new innovation opportunities; both sustaining and disruptive.

Sustaining innovation simply means to build upon that which already exists. Companies pursue such innovation with their products and services as a matter of fact.  There exists additional logic for expanding this effort to drive greater levels of integration and interoperability with complimentary 3rd party products if it brings value to customers.

The SAP Co-Innovation Lab readily supports sustaining innovation projects with its partners and while there is a great deal of value derived from these collaborations, I’ve developed the opinion that SAP and partners should equally  consider that an exceptional opportunity exists to put more energy into co-innovation targeting disruptive innovations too.

The challenge in doing so I think, is how SAP and a given partner (or partners if the potential project requires multiple, inter-firm collaboration) evaluates if a potentially disruptive opportunity is economically or technically feasible. With sustaining innovation opportunities the task is easier because such an assessment is easily made using existing metrics that business managers are familiar with and understand well. It seems logical to me that for partners to collaborate on disruptive innovation requires direction or incentive to come from a more top down, corporate managed effort from each of the participating firms.  I think this top down influence is likely necessary to prioritize it as well as to make certain that there is true alignment to corporate strategy.

Business school texts often describe how new strategies can emerge from the middle of the organization. Such strategies do get traction and in such instances there is little to prevent such middle born strategies from being driven by an idea representing a disruptive growth opportunity or from such an idea to have developed through a strategic alliance partner. It is a fact today that strategic leadership occurs at all levels of an organization. The open question is how does this coincide with decision making?  For a disruptive innovation pursued through co-innovation to have a chance at success will mean that the firms involved must agree to assess the potential for value creation differently than how sustaining innovation initiatives are measured. To use the same methods will simply suggest that the risk for pursuing the disruptive opportunity is too high. from direct comparision, I  would assume any disruptive innovation project would look riskier if assessed and measured in the same way.

It seems reasonable that if the right assessment model for choosing to run with an idea and measuring the success of the project could be developed, that the co-innovation lab environment offers a natural boundary for this to be possible. Assuming that this is acceptable, it should also be acceptable to a firm that the ability to originate, develop and deliver disruptive innovation does not need occur only within the dominion of its R&D labs nor must it be contained to ideas that only emerge from inside the company.

To increase the rate of innovation and to accelerate getting new innovations into the market invariably means to take greater advantage of partnering and putting more energy into building valuable trust relationships that facilitate a rich exchange of knowledge among trusted partners. This serves to increase the number of ideas needed to fuel innovation and it is innovation that drives true growth.

Multiple research and consultancy groups collectively agree that nearly 90% of companies worldwide cannot maintain adequate growth to sustain above-average shareholder return for more than a decade. Innovation initiatives originating from within firms do not have the track record expected despite the investments companies make to drive it. Seeking to expand efforts to drive innovation through inter-firm co-innovation seems like a logical step.

Remaining true to form for this blog, there is a lot to digest here. I’m tempted to break it up into 2 or more posts but I do want to go back and further explore the potential relationship between open innovation and co-innovation so I’m just going to let this one fly.

As always, I am very interested to hear what the community thinks so if any of this resonates with you, please do comment.

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  • I spent some time re-reading some of my earlier blog posts over the past few days, and I will be the first to admit that it may sound as if my view of co-innovation does not sufficiently acknowledge the importance of intellectual property to the firm. Some might ewven argue that I wrongly or shortsightedly eschew the risks inherent in exposing IP to a collaborating partner or be too willing to seek bilateral terms with respect to how background IP is used or foreground IP is managed as the result of pursuing a co-innovation project with a partner.

    I do understand the importance of protecting intellectual property because I understand how important the need to innovate has become in this world. Firms that successfully innovate absolutely need to rigorously protect and assert the rights afforded to it under every country’s laws. Few will disagree with the fact that innovation confers a competitive advantage for a company. In many circumstances it is true that this competitive advantage derived from innovation will be short-lived without some form of protection from those who can simply copy it.

    Even co-innovated IP needs to be owned and protected. What I believe however is that the way we approach the development of an IP framework for co-innovation has some fundamental differences to what is sometimes an entirely opportunistic approach when a firm develops a new innovation on its own.

    When a firm and its partner(s) elect to collaborate in order to make an innovation possible, there is a need to assess several dimensions critical to arriving at a successfully negotiated outcome with respect to the contract written in support of a co-innovation project. This includes yet is not necessarily limited to:

    1.     understanding of each company’s risk tolerance with respect to IP

    2.     The nature of the IP

    – The functionality associated with the foreground IP
    – The perceived potential economic value of the co-invented IP to each partner
    – The perceived common benefits of the co-invented IP to the partnership

    3.     The competitive landscape in which each company operates

    4.     The business goals of each company

    5.     The transaction specific investment required of each partner

    What I think is perhaps short-sighted is to miss the importance and the value of the “act of innovation”. When and how we innovate (and with who) is also of critical importance. Where being able to get to market with innovation faster than a competitor with a technology solution will make a difference as to whether the innovation succeeds commercially.

    It may be that within the context of co-innovating with partners that the projects pursued may not produce an innovation like that of an incremental change made to the core IP of a firm. A good example might be something like Service Oriented Architecture (SOA). A company could develop a novel way to make a service available using some standard protocol which then optimizes the performance of some business process or transactions. Yet the architecture and much of its contributing underlying components change rapidly as do the business processes they are meant to support. In an open and dynamic architecture the chance for another firm creating an equally novel non infringing means to achieve the same result within months or even weeks after the first attempt by the original competitor might mean that the attempt to patent such work would be cost prohibitive. Nevertheless, if such an innovation can be driven more quickly to market through co-innovation with a partner, and being the first to market produces economic benefit to both partners, should this not become more of the focus for the co-innovators, knowing that such an innovation may only maintain its economic value for a short period of time?

    My SOA example is not too unlike the idea that a pysical product becomes a commodity and when it does it remains so until the originator of the product (or its competitor) innovates and injects new value. While this might be more than possible for tangible goods I’m not convinced it is the same for at least some intangible assets. For a new food processor maybe someone can swap out the spinning blades for some kind of variable magnetic field that blends the food ingredients. Patenting and owning this innovation seems logical and likely makes it very difficult for a competitor to come up with a non-infringing alternative. In some instances the same might hold true for a software-based technology, but for the moment, most OOP languages leverage the same paradigm of design and the code that is written manipulates CPUs, memory, networks and storage in such uniform ways that for many software solutions, the useful life and economic value is limited. What then maximizes value for the first innovator is getting to market and monetizing first. If firms can do this even faster through co-innovation, then determining the right business models for how each contributor to the co-innovation benefits economically becomes of greater value than spending too much time arguing over who should outright own an innovation that has a very fast clock of obsolescence.

    With respect to driving successful co-innovation, I do not blindly advocate ignoring the basic tenets of protecting a firm’s IP, I’m simply suggesting that collaborating firms can benefit from accelerating innovation in way that increases competitive advantage for both in instances where the new technologies deployed may so dynamic that it makes more sense to try and extract the value at the start of the technology solutions lifecycle as this value begins to decay rapidly and is more likely to be replaced than augmented over time.

    What do others think? I’ve had enough conversations with others to suggest that many share some of the views expressed in this blog space.