Bloomberg News

Hollywood Model Could Create New Stars in R&D: Alice Schroeder

June 29, 2011

June 29 (Bloomberg) -- How much should it cost the U.S. Air Force to develop a reliable system to detect sniper fire in a fraction of a second and pinpoint the shooter’s location almost as fast? If you’re thinking millions of dollars, how does $50,000 sound? The Air Force is evaluating sniper-detection proposals, and that’s how much it will award a researcher who provides a solution and the proof that it works.

That surprisingly low number is possible because of open source innovation. It’s the hot trend in R&D, built on the success of the open source software movement, itself built on the principle that crowds can solve problems faster than any individual, or any single corporate lab, ever will.

The open source innovation movement caught fire in the past few years and is best known for the great leaps it enabled in mapping the human genome. For corporate executives, open source innovation holds out the promise of maintaining a technological edge while lowering R&D costs. Open sourcing may also be the best hope for the U.S. to regain its toehold as the world’s R&D capital. The Organization for Economic Cooperation and Development ranks the U.S. a lowly eighth in the world for innovation based on research spending, patents and startup funding.

But open source innovation could also be a threat. If companies, government labs and other organizations can obtain scientific and engineering breakthroughs on the cheap, that could devalue the work of scientists and engineers, which already are in short supply. Will cost pressures put a ceiling on researchers’ pay or lead to outsourced Ph.D.s paid by the piece, instead of with full-time jobs and benefits? If so, will the best and brightest of tomorrow’s students choose other careers?

Bright Minds

Public and private R&D labs that keep bright minds employed, even if their innovations come only once a decade, are already headed in this direction, outsourcing some projects and collaborating with networks of strategic partners on others. In one sense, this is capitalism at its finest, finding the most efficient path to the best result.

Thomas Edison, founder of the world’s first industrial research lab, made this point clearly when he said, “I shall make electricity so cheap that only the rich will burn candles.” The scientific brain trust that runs the U.S.’s $400 billion-a- year government and industry R&D effort must stretch the return on investments past what a closed lab like Edison’s could do today.

InnoCentive Model

Enter InnoCentive, created by Eli Lilly & Co. to revolutionize the R&D process in the pharmaceuticals industry, which was crippled by research costs. Based in Waltham, Massachusetts, and now owned by private-equity firm Spencer Trask, InnoCentive is a pioneer in open source innovation and may well be the next R&D model.

It crowd-sources R&D work -- and its approach is stunningly cost-effective, as its sniper challenge shows -- by dividing the world into seekers (organizations in search of a solution to a problem) and solvers (scientists, lawyers, engineers, students).

InnoCentive earns its fees by consulting with the seekers, which include the Procter & Gamble Co., SAP AG and the Rockefeller Foundation, to refine the challenges and set the size of bounties. Then a challenge, such as how to do laundry in space for NASA, is broadcast to 250,000 registered solvers -- a number the company hopes will eventually reach millions -- who agree to sell their intellectual property to the seeking organization if their work is chosen.

Creative Challenge

Since 2001, InnoCentive has posted 1,300 challenges and awarded $28 million in bounties. Prizes have reached as high as $1 million for the most difficult tasks, including finding a biomarker for amyotrophic lateral sclerosis, or Lou Gehrig’s disease. Money is important, but solvers also crave the creative challenge and the emotional reward that comes from contributing something meaningful.

The bigger the social impact of the project, the more people sign up, as in a current Air Force project to design a humanitarian air drop for a $20,000 bounty that has attracted 1,129 people. InnoCentive also is trying to ensure that solvers are recognized by promoting them on its website, a badge that potentially becomes currency on someone’s resume.

Low Odds

It might seem counterintuitive that so many would be willing to work on problems with such low odds of getting paid. When it was founded, the company wasn’t sure how this would work, either. But it learned that solvers love intellectual challenges, such as the chance to outsmart methamphetamine-lab chemists by figuring out how to re-engineer decongestants so they can’t be processed into illicit drugs.

Harvard professor Karim R. Lakhani, who has studied the company’s effect on what he calls the “productivity of problem solving,” found that allowing as many people to work on a problem as possible produces better solutions, especially if the solver group is diverse.

It’s commonplace for the solutions to come from people working outside their own disciplines. “We’ve had lawyers solve chemistry problems,” says Robert Kinney, InnoCentive’s chief financial officer. “We’ve had veterinarians solve food service industry problems.”

It’s unlikely that a lawyer would come up with a dozen compounds of heterocycle-substituted 4-trifluoromethyl pyridines, as one current challenge seeks. But there is an array of projects, including “ideation” challenges, in which solvers dream up ideas to do things like keep cat-litter boxes from smelling repulsive, or improve how boxes are unloaded from trucks.

Financial Leverage

The financial leverage that solution seekers gain from crowd-sourcing is “a wonderful thing,” says Diane Parente, who studies online procurement as professor of management at Penn State University. InnoCentive is tapping into the “peripheral employment” market of retirees and moonlighters who want extra money, she says. The result is a significant gain in productivity as the seeking organization offloads a major cost, and the risk of failure, to solvers.

But over the long term, crowd-sourcing could undermine itself. That so many people will work for relatively modest rewards threatens to put a ceiling on research pay. As long as someone shows up and solves InnoCentive’s $25,000 challenge on how to predict the location of potholes in Boston, that’s what the work is worth, which means InnoCentive has set the market- clearing price for the pothole project.

Cultural Resistance

It’s not surprising that crowd-sourcing has faced some cultural resistance at research labs. To break through, InnoCentive created the @Work program, which lets companies crowd-source problems to its global research organization. If the problem isn’t solved, a company can escalate to wider audiences. It can reach out to partners InnoCentive identifies outside the organization, or to the entire InnoCentive solver group. If those don’t work, it can broadcast its challenge through a portal run by a partner such as the Environmental Defense Fund.

The multistep process is a brilliant way to sign up multiple solvers who would normally compete with one another. It gives companies flexibility in using InnoCentive’s platform. On the other hand, I would rather not be a member of a failing research team that caused a project to be crowd-sourced. Kinney, the InnoCentive CFO, told me that, indeed, one of the rewards for the employees who win @Work internal challenges could be “keeping your job, maybe.”

Financial Benefits

InnoCentive is candid in selling the financial benefits of its work, and has commissioned studies from Forrester Consulting that quantify how much “cost avoidance” a project can generate by not hiring researchers or not paying university grants. InnoCentive senior marketing director Steve Bonadio dismisses job losses as coming in “drips, not a flood” because the goal ultimately is to do more R&D. The real impact is on the way R&D is bought and sold, and that raises important questions.

If the new R&D marketplace favors the multi-skilled, entrepreneurial risk-taker, what happens to the cerebral egghead locked in a lab who thrives in a sheltered environment? How will it affect the cost of acquiring a doctorate, and the lifetime earnings of a graduate? What does this mean to academia, which is already facing formidable financial challenges?

Those are hard questions. Henry Chesbrough, faculty director of the Garwood Center for Corporate Innovation at the University of California at Berkeley and an InnoCentive adviser, has sketched out a model for what the R&D world of the future could look like.

Hollywood Culture

He makes the comparison to Hollywood’s culture of open innovation, in which producers, directors, talent agents, actors, screenwriters, technical workers, studio employees and specialty subcontractors collaborate through a fluid network of partnerships and alliances. The mobility of this workforce is legendary, Chesbrough writes. “Every waitress is a budding actress; every parking attendant has a screenplay he is working on.”

Science is not entertainment, and Ph.D.s are probably not going to be waiting tables to support their research. Even so, Hollywood evolved by abandoning the studio system that employed actors on contract, which resemble today’s closed research labs. In the process, it became, and remains, the global leader in commercial entertainment. If a similar system is the best way to locate snipers in a fraction of a second, the R&D world will adjust, and we should welcome it.

(Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” and a former managing director at Morgan Stanley, is a Bloomberg View columnist. The opinions expressed are her own.)

Read more Bloomberg View columns.

--Editors: Paula Dwyer, James Greiff

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To contact the author of this column: aliceschroeder@ymail.com.

To contact the editor responsible for this column: Paula Dwyer at pdwyer11@bloomberg.net.


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