Crowdsourcing. Is it wise for crowds or just for business?

In December 2007, just like other leading consultancy firms like Boston Consulting Group[1] and Booz Allen Hamilton[2], McKinsey & Company revealed their predictions for 2008: their ‘eight business technology trends to watch out for’[3]. Like Boston Consulting Group and Booz Allen Hamilton, the McKinsey Quarterly focused on the priority for innovation and in particular on showing that technology alone is rarely the key to unlocking economic value:

‘companies create real wealth when they combine technology with new ways of doing business.’ [4]

Of these new ways to do business, the first three: distributing cocreation; using consumers as innovators; and tapping into a world of talent, were all heralded as both fantastic challenges and enormous opportunities for business leaders to take hold of. The key is to open everything up, knock down the corporate boundaries and turn not just the employer-employee relationship on its head but also the producer-consumer relationship too, but what exactly does this mean for the shape of business, for the nature of the employee-employer relationship, and what about the impact on and changing role of the individual as a consumer and the business as a producer? What will it be like to live in a world where there are no prescribed boundaries between the two? Is there really more wisdom passing you by outside in the street waiting to be tapped into than sitting there on the other side of the office? And if so, do you need to employ anyone at all anymore? Should you be competing to fill your office with the best and brightest – and pay for them? Or should you throw every innovation challenge your business faces out there and let someone half way around the world take care of it, for a tenth – even less – of the salary you’d pay an internal team? Should you even have an office in the first place? Is this phenomenon the end of the office, the end of the boundaries between those that make and those that buy? Is it wise for the crowds or just wise for business?

This essay looks at these three McKinsey predications and attempts to look at the effect on business should their predictions be taken up by the business community and put into practice. It looks at what it means to break down the boundaries and embrace ‘them’. It then takes a look at it from the other side of the coin, from the perspective of the individual who is suddenly being empowered and entrusted with being both creator and consumer of their own products. What are the benefits for them? Is it just another gimmick to get them to keep buying the same products and services as before, or is there a real power shift going on here that has lasting and profound importance to the future shape of the information society.

The first McKinsey predication is on ‘distributing cocreation’. According to the McKinsey article, this involves companies making a radical use of internet technologies to ‘harvest the talents of innovators working outside corporate boundaries’[5]. Great business speak about ‘harvesting’, but the implications are much more profound than simply telling business leaders to reach out to the talent they don’t actually employ or to look beyond existing boundaries such as geography, culture, or market. The prediction calls for a radical shift in thinking, a radical move toward not just reaching out to find sources of innovation – individual innovators – but allowing those innovators to come in, poke around the business, and see how they can help. In this sense the call is not to simply lower ‘corporate boundaries’ but dismantle them, not just scale them down one way or the other but like the Berlin Wall find ways to pull them down for good.

How does this work in reality? Quite simply where companies once relied on recruiting the brightest minds, innovating a product internally, and then hoping it sells, the successfully innovative business of 2008 has to decentralise; the roof over the production line has to be taken off, even the drawing board unveiled, so that everyone – customers, suppliers, specialists, and independent contractors alike – can all be proactively involved in the cocreation and distribution (selling) of the products themselves. Citing companies like Loncin, a leading Chinese motorcycle manufacturer who sets deliberately broad specifications for their motorcycles to enable suppliers to work with one another to design the components and make sure everything fits together (and thereby reduce costs), McKinsey suggests that no company could or should leave anyone out of any stage of the development of its products or the refinement of its services. The benefits: ‘companies may reduce their costs and usher new products to market faster by eliminating the bottlenecks that come with total control.’ [6] And the estimates if this really broadens out from Chinese motorcycles to everything else we buy and use is staggering: ‘If this approach to innovation becomes broadly accepted, the impact on companies and industries could be substantial. We estimate, for instance, that in the US economy alone roughly 12 percent of all labor activity could be transformed by more distributed and networked forms of innovation—from reducing the amount of legal and administrative activity that intellectual property involves to restructuring or eliminating some traditional R&D work.’ [7] Whilst this sounds promising, there are pitfalls we shall look at later.

The second of the eight key 2008 McKinsey tech trends to watch out for follows naturally the first: There is obvious value in using technology to lower corporate boundaries and indeed in enabling cocreation with partners and suppliers, but how do you get your customers to innovate for you, to innovate the very products they want you to sell back to them, to act as not only the designers but also their own sales people? This is not as hard as it might seem: it is all down to enabling interactions, the nature of them, the economics of making them work, and the management challenges associated with them.

Of course the global marketplace is not a new phenomena, the globalisation of products and services has become commonplace through Internet based companies such as eBay and Amazon. These services are now well embedded in our day to day lives with millions of people logging on to utilize these services. More recently than this is the Wiki trend, which over the last 5 years has swept across the Internet, encouraging people from all over the world to communicate and collaborate on projects and ideas. But crowdsourcing and cocreating and distributing products and services is more than just bringing people together. To agree on the correct definition of ‘crowdsouricng’ and ‘cocreation’ itself, we must take a closer look. It has huge implications for the shape of businesses and the nature of the business-consumer relationship, and Web.20 technologies have already enabled these interactions to become commonplace. Open-standards-based computing technology and networking capabilities (surely 2007’s top trend) have already facilitated feedback mechanisms with powerful effects. As more and more sophisticated work takes place interactively online and new collaboration and communications tools emerge, companies can outsource increasingly specialized aspects of their work and still maintain organizational coherence. Much as technology permits them to decentralize innovation through networks or customers, it also allows them to parcel out more work to specialists, free agents, and talent networks. In fact, companies can be entirely born on this model. A good example of this is online clothing store Threadless. ‘….Threadless, asks people to submit new designs for T-shirts. Each week, hundreds of participants propose ideas and the community at large votes for its favorites. The top four to six designs are printed on shirts and sold in the store; the winners receive a combination of cash prizes and store credit.’ [8] In September 2007 Threadless[9] opened its first physical retail operation in Chicago, so they are not just click and mortar, but the way they work is built on constant interactions and feedback. Companies that involve customers in design, testing, marketing (such as viral marketing), and the after-sales process get not just better ideas with which to make better products, but also better insights into customer needs and behaviour that may be able to cut the cost of acquiring new customers, engendering greater loyalty, and speeding up development cycles.

But this leads us to our third key McKinsey trend: Tapping into a world of talent. If you can open up your business, if you see the benefits and opportunities presented by cocreation and crowdsourcing, how do you know you are getting the best ideas out there, which crowds do you chase? What if the people you already employ are the best and brightest? What if your problems are so specialised that your consumers themselves wouldn’t have a clue how to help you?

One good example of this phenomenon is the birth of the Idea Marketplace or ideagora. (There are a number of so called idea marketplaces out there, but of these the three of most interest are, InnoCentive[10] (Science), TopCoder[11] (Technology/ Software) and NineSigma[12] (Science). For the purposes of this essay we will look at InnoCentive.) In the late 1990s, US pharmaceutical giant Eli Lilly wondered if it was getting enough bang for its R&D buck. They employed some of the best and brightest scientific minds in the world to keep them ahead of the competition, and with competition from companies like Proctor and Gamble the cost of R&D and the salaries they were paying were substantial, but at least they had talent within with which they could tackle their most pressing challenges. But then one day Alph Bingham – then vice president in research and development for Lilly – recalled his student days, how his professors would throw open their problems to their graduate students in the hope that one of them would prove resourceful with some problem or another, and that often they would be able to help. Bingham wondered if there was a way to do just that: to throw their problems out to the world and see if they could help, not only in finding solutions to things their own researchers couldn’t solve, but in finding new and more novel solutions to those problems. As Bingham says: “Thinking about the way scientific creativity manifests, it’s not always a given that the next problem you encounter will be solved by a Nobel laureate. Perhaps it will be by some guy at a rural, private college in Vermont or a small research facility in China or an East German startup……So we asked ourselves, if we had enough diversity of exposure, would we get novel solutions? And the answer was yes.”[13]

After an initial yes he asked Lilly to invest several million dollars in building a platform for anyone interested in the research they were doing to come together and look at (in private and anonymously) the problems they had, in 2001 InnoCentive was born. How it works is quite simple: Lilly – as a ‘Seeker’ – has a problem its own internal researchers can’t solve (maybe no one can, because the problem in unsolvable, but knowing that you’ve reached a dead end is as good as endlessly going over the same ground). These problems are converted into easily understandable possible projects, or Challenges, and then, given a price tag or prize (there are prizes on the site now in excess of $1,000,000), they are literally thrown out to a global network of what InnoCentive calls ‘Solvers’ to work on, with a deadline for their solutions and the prize awarded (or not) to the successfully accepted solution. It worked. Seven years later, InnoCentive has over 30 Seeker companies, 140,000+ Solvers in 175 Countries(a surprising fact as noted in the Harvard Study and not originally predicted by Innocentive was that the more removed an InnoCentive problem was from a Solver’s area of expertise, the more likely he or she was to solve it. In other words, if you want the answer to an engineering problem, an engineering network isn’t always the best place to find your answer. This has led to Innocentive looking for a much broader range of Solvers), and they have expanded from Lilly style pharmaceutical problems to over 40 Industry Disciplines including green technologies and business. Of the 350 challenges posted on InnoCentive since it opened, about a third have been solved, which is, according to a Harvard Study[14], pretty good when you consider that there is only a 12% success rate at research-based companies like P&G, one of InnoCentive’s earliest customers, drawing only on their internal capabilities.

So what does this say about R&D? Does it mark a high water mark in the recruitment of scientists when companies can literally get more solutions by posting their problems on sites like Innocentive? Initially, you would have to say yes. P&G for example, “a company whose corporate culture was once so limited it became known as the Kremlin on the Ohio,”[15] have put a hold on recruiting any new R&D staff after coming against the Innocentive model. Larry Huston, Procter & Gamble’s vice president of innovation and knowledge says: “Every year research budgets increase at a faster rate than sales. The current R&D model is broken.” [16]

But even though P&G figure that for every one of the 9,000 top scientists inside their labs, there are another 200 outside just as good. That’s a total of 1.8 million people in areas like Brazil, China, India, and Eastern Europe whose talents it doesn’t use, and even though they have capped recruitment, they have not shed those 9,000 scientists and sent them running to sign up to Innocentive. Rather than cut P&G’s in-house R&D department they have instead sought to change the way they work, looking for all the ways of working that we have looked at earlier, for crowdsourcing and cocreation, increasing the number of eyes and ears they have at their disposal. And it has worked. After coming up against Innocentive, P&G set a goal of increasing the number of innovations acquired from outside its walls from 15 percent to 50 percent. Six years later, critical components of more than 35 percent of the company’s initiatives were generated outside P&G. R&D productivity is up 60 percent, and the stock has returned to five-year highs. “It has changed how we define the organization,” Huston says. “We have 9,000 people on our R&D staff and up to 1.5 million researchers working through our external networks. The line between the two is hard to draw.” [17]

So the business benefits are clear. If you can tap into the right talent, you can get them to work for you, not in the sense of outsourcing, but in a more broader, ongoing creative and collaborative sense, whether because they like your t-shirts or because they want the prize money. But is it all good news for those companies that embrace these new ways of working?Not necessarily. As McKinsey was keen to point out that ‘Companies pursuing this trend will have less control over innovation and the intellectual property that goes with it, however. They will also have to compete for the attention and time of the best and most capable contributors.’ [18] A company open to allowing customers to help it innovate must ensure that it isn’t unduly influenced by information gleaned from a vocal minority. It must also be wary of focusing on the immediate rather than longer-range needs of customers and be careful to avoid raising and then failing to meet their expectations. With all this knowledge at the fingertips of the people with the problems, companies will still need to find a method of selection – how do they know which solution truly is the best? They will still need to employ research scientists and consultants to filter the aggregated solutions and implement their design, could this just be like panning for gold? Pushing money towards something with an uncertain outcome? There is still no cast iron guarantee that a problem will be solved, but the evidence remains that any one company will never have more than 1% of all the resources it really needs, and so outsourcing there R&D is cost-effective and time consuming way to see if their problem can be answered, and InnoCentive still maintain the right to ‘Award’ the project if they feel that a valid solution has been found. “Nobody is as smart as everybody”[19] Traditionally, the CEO of a company is the person with the BIG ideas, that person’s workforce, are the idea builders. They take the initial innovations of the CEO – the Richard Branson, Steve Jobbs, and Bill Gates of this world – and develop and produce their ideas. This still works of course. No one is saying that great ideas don’t come from great individuals, just that you can never hope to employ all the best and brightest minds. But as we have seen there are limitations to this model.

But what’s in it for the Solvers? What’s in it for the consumers, the prosumers, the crowd? Money? Another finding of the Harvard study into innocentive showed that cash was not a sole motivating factor in why Solvers worked on Seeker Challenges. So although some people – possibly those scientists not employed due to P&G’s decision to stop hiring – may be there for the spare cash between jobs, there are other motivating factors such as prestige and ego, the old image of the eccentric in the garden shed just happy to tinker away. Empowerment? Yes, it is good that consumers and their feedback is taken seriously – even more than seriously, that consumers are being empowered with having an almost majority share in opinion within the company, in the direction and shape of the companies next developments. But is that enough? Is that sustainable once the thrill of the Challenge dies down, when the crowd no longer feel the value of being valued? And if it is, is it exploitative? After all, it’s free labour when one considers how valuable the Intellectual Property rights they are signing over are? If we are now crowdsourcing – for the chance of a reward or just because we believe in or are passionate about a company or its products – is the only real reward going to the company? We are not now needed as employees – or at least new employees – and are now competing against everyone else? Are we being groomed to serve when companies should be serving us? Is this just the next source of legalized sweatshop labour where you never even need to meet face-to-face, let alone account for, the people doing the work? Is this a good model where the world’s biggest challenges are concerned? The answer is yes and no.

Let’s take the example of Cisco[20]. Cisco is currently still running the Cisco I-Prize which was split into three phases: Phase I – Brainstorm (Innovators submit ideas and other registered innovators comment and vote on the submissions. Then innovators find other innovators to form a dream idea team.), Phase II – refine (the teams collaborate to build their idea and technology plan and define the market opportunity.) and Phase III – present (Finalist teams present these plans to a judging panal of industry top dogs and Cisco seniors using Cisco TelePresence to communicate their ideas, passion and drive). Quite simply, the Cisco I-Prize is all about helping Cisco identify and find new business opportunities. It is free to anyone over 18 to register and take part. It asks individuals from ‘the Human Network’ to not only submit but also grade and crowdsource other individual’s submissions. This all sounds like some kind of Matrix style human ideas powerplant, where not only the ideas themselves are farmed, but also the maintenance is taken care of without Cisco doing anything more than setting up the registration process and fielding the final solutions that are then narrowed down. But ‘the winning team may have the opportunity to be hired by Cisco to found a new business unit and share a $250,000 signing bonus. Cisco may invest approximately $10 million over three years to staff, develop, and go to market with a new business based on your idea.[21]’ So it’s not just about the prize, not just about the thrill, there is long term potential here for those willing to put in some hard work. It’s not just about getting people to do work for free. It’s also about giving something back in return. Which takes us to the business model as it applies to wider economic and social issues. According to a recent Evalueserve Business Case Study[22], the InnoCentive solver network is distributed worldwide, a quarter of which is in poorer countries.It has emerged however, that poorer regions such as Eastern Europe and South Asia have yielded almost equal quantities of solvers as regions within western civilisation, such as Western Europe and Asia Pacific. This offers much confidence in the idea that their truly is an untapped resource of solvers not being utilized – this kind of profound change in the way big business R&D problems are solved could dramatically speed up the process of innovation, and the speed at which we see our technological advances in all aspects of our lives.All fields of research can benefit from this method of global collaboration, and as always, there are massive profits to be made.As was pointed out in the Financial Times article, the solvers inability to exploit the technology once it has been developed gives headway to poorer civilisations to benefit from the new freely available product, though this is not the kind of prolific change that will happen over night.

From a philanthropic perspective, the opportunities provided by InnoCentive are endless, increasingly we will see benevolent prizes offered for solutions to the problems faced by the world, The Rockefeller Foundation’s ‘Accelerating Innovation for Development’ Initiative (Also set up by Spencer Trask) now hold a section on the InnoCentive website dedicated to this kind of philanthropic innovation[23], and have posted various ‘clean technology’ challenges. Kimberlin calls for innovation that is ‘every bit as revolutionary as Edison’s incandescent bulb’ [24]. The InnoCentive site also includes a section dedicated to clean technology and renewable energy[25]. This deploys a very simple image, one of unity and the collaboration of minds from across the globe with a view to save the planet – certainly the kind of image any global giant would want to be part of, and there have been many recent takers, such as the £10m offered to the person who can prevent the climate change crisis by Richard Branson[26], and the Pneumococcal Vaccine Advance Market Commitment which was launched in 2007 by the governments of Canada, Italy, Norway, and the United Kingdom, as well as the World Bank and the Bill & Melinda Gates Foundation and announced a $1.5 billion “Advanced Market Commitment” or AMC for pneumococcal vaccines. The AMC sets out specifications for the vaccines and has pledged $1.5billion to “heavily subsidize” their purchase. “Backers suggest the AMC will speed delivery of vaccine to developing countries by 10 years and save the lives of 5.4 million children by 2030.”[27]

“We’re in the first inning of a new renaissance.”[28] One thing McKinsey forgets to mention in its forecast, perhaps because it is a forecast, is that this whole new crowdsourcing boundary removing prize based paradigm does have historical precedent. A recent article in the Financial Times suggested that crowdsourcing might not be such a modern idea. The article details how in 1737 John Harrison ‘a self taught clockmaker from Yorkshire’[29] provided a unique solution to the then notorious Challenge of how to determine a ships longitude – and in turn it’s position at sea. The incentive: £20,000, which is equivalent to around £5,000,000 today, is several times more than the highest prizes posted at InnoCetive. So it is worth considering that the notion of crowdsourcing and prize induced challenges has been around for hundreds of years, and companies such as InnoCentive are simply re-discovering the benefits, albeit with the help of technology. But is it wise for the crowds or just wise for business?

It is good for both. It is good for businesses to open up and involve people, the people that matter just as much as their ‘most precious asset’ – their people – their customers. It doesn’t mean the end of employees, just a more realistic appraisal of their value, and more people being paid on the outside to look in – who might have been and even still could be hired anyway. It’s good for customers to have their say, and good for people who would previously never be exposed to big business to get themselves in the spotlight. Talent will always find a place to work and ideas will always find their place in the sun. Employers will always need both new ideas and new talent to put them into action. Prizes help, but as we have seen, prize money is not the only incentive, and so these new ways of working will have to find new ways of making it work, new ways of involving, incentivising, motivating and collaborating with one another and new ways of sharing the rewards, not only between themselves but also with the wider world. And if business leaders buying into McKinsey don’t see this, if all they see is a one sided way forward, a way of cutting staff and R&D, as a way of getting everything for nothing, then someone within the crowd will talk, and the talent within those crowds will move on somewhere where their collective as well as their individual voices will be heard. Or worse, they will turn around to each other and say, let’s pool our collective talent together and create products and services without these companies, or let’s create ideas which we can sell to them – for much more than they are currently said to be worth, and share the profits equally amongst ourselves. That way the companies work for their customers, which is perhaps as it should be anyway. Then again, maybe human nature will take over. The novelty of always losing to more talented people in the competition for prizes will see the crowd dispersing, stopping to look at the company whose walls have suddenly come down. Then McKinsey will have to come up with a new future trend: the end of the crowd.

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Websites referenced within this essay:

· http://www.bcg.com

· http://www.boozallen.com

· http://www.threadless.com/

· http://www.innocentive.com/

· http://www.topcoder.com/

· http://www.ninesigma.com/

· http://www.conft.com/web/solutions/iprize/index.html

· http://www.cisco.com/web/solutions/iprize/contest_overview.html

· http://www.independent.co.uk/environment/climate-change/branson-offers-16310m-to-the-person-who-can-prevent-the-climate-change-crisis-435647.html

· http://www.keionline.org/index.php?option=com_content&task=view&id=29