Crowdsourcing + Open Innovation Fuel a Prize-Driven Economy (part 2)

In an earlier post,  I gave a precis of McKinsey’s “And the Winner is…”, a comprehensive study of the $2 Bn  incentive-based prize market. I also described  the March White House initiative to encourage contests promoting open innovation among federal agencies.

Here I continue my summary describing some of the business efficiencies associated with prizes that make them so appealing and  the reasons they are knitting themselves into our business fabric. I’ll also identify some of the players who stand to win the near-term “prizes”,namely, building the infrastructure itself for the new prize-driven economy itself.

In early 2009, Virtual Nerd, an online video-based math and sciences tutoring company, won the Olin Cup business plan competition and its $70,000 investment prize The company had entered the contest to help finance their start-up.  Why The NY Times  found the story particularly fascinating is that Virtual Nerd decided not to accept the award. 

This fascinated me as well:  What better way for a startup to announce its presence in the market, attract media attention as well initial customers, partners and financing than to enter a nationally prominent contest? (And yes- Virtual Nerd might have refused the $70.000 – but they ended up accepting a $250,000 loan from a private investor.)

No doubt- for risk-taking new startups, winning a high-visibility prize, is one of the most flamboyant, high yield  opportunities for both funding and publicity. Opportunities abound as new commercially-oriented hybrid prizes emerge. Within neglected disease research there is a phenomenal but little publicised prize: According to Cell Magazine, the Gates Foundation and four countries have donated $1.5 Bn for a new financial-marketing instrument, an Advanced Market Commitment (AMC), an extraordinary prize, whereby  the winning team earns a significant purchase order for a certain number of pnuemocaccal vaccines.

For large commercial, philanthropic organizations and soon federal agencies, prizes and contests are now seen as a means of injecting  the innovation of such startups (and the wider public) into a  too-often lumbering operational flow.


Open Innovation Prizes as Change Agents

Much of my excitement over the McKinsey report was in contemplating their thought-graphic, “Seven Ways that Prizes Deliver Change”.  The graphic captures in one visual snapshot the immense range and power of prize psychology, from  identifying talent, quickening the pace of problem solving for a core societal or industry issue to influencing public perception, waking up the public imagination to  the often amazing ability of humans to solve seemingly impossible problems.

Source: McKinsey’s 2009 “And the Winner is..” Report

If you consider the Ansari X PRIZE, it helps to concretize the seven changes: The Ansari X PRIZE, with the lofty goal of creating a reusable manned spacecraft, spurred the development of the private spaceflight industry, attracting 26 teams to invest more than $100 Mn in combined R&D — an amount far more than the $10 Mn prize itself. 

The endeavor was of epic proportions: Burt Rutan’s team achieved what had only been achieved previously by three of the world’s most powerful countries.  It captured the press, and captured the public imagination: And while quite expensive now ( at $200,000/ticket) the public can await future trips to space. As Virgin Galactic’s video below promotes- it’s the advent of Space Tourism. This is something, NASA, from its government agency position, simply could not provide.


What an exciting way to create a market!

Whether you tuned into the Netflix Prize progression over a 3 year period or were fortunate to catch DARPA’s Red Balloon Challenge last December , it’s like watching the real-time game film of science and engineering’s most passionate and talented players — even though, so far,  we’ve had but blogs, tweets, and website leader boards to watch and comment on the action. (I’ll talk more on media coverage in a bit…)

From the prize sponsor’s viewpoint, enlisting participants of diverse talent outside their organization boundaries can lead to tremendous efficiencies. 

Business Hyper-Efficiences of Incentive-based Prizes

While McKinsey’s report was focused on philanthropies, they make clear throughout that the basic principles of prize psychology and management apply to all forms of organizations. I’ve taken some liberties in expanding some their points to focus on four important bottom-line and productivity areas:

1. Lower R&D Costs by Outsourcing Development 

Most obviously, a prize contest opens the door to virtual team expansion,without adding salary and overhead.  No longer are companies constrained by their internal talent pool.  As we saw so well with the Netflix Prize and the 55,000 engineers in the competition, even a large prize can marshal the talents of a much a larger-dollar value workforce — on demand – and directed at a specific critical problem.    

2. Potential for Decreased Human Resource Costs for Hiring World-Class Talent.

With a contest, a company obviously does not need to directly hire talent. However, a networked contest and its prize can serve to attract and identify The Best and the Brightest not only with greater certainty (only solvers hired) but from the immense global talent pool. What better “test” to give job  candidates than to place the toughest challenge in your industry in front of them? All of them?

Organizations like TopCoder in fact are using their prize contests to identify and place rarified expertise within the software industry.  As IdeaConnection, an open innovation service provider, writes near their online prize challenge submission form,

Life is getting simpler for R&D Departments who can articulate their innovation needs…

It’s somewhat amazing to think – but organizations like  Innocentive , IdeaConnect and TopCoder  may be the  Creative Artists Agencies of the future — identifying and managing key technical talent and wunderkin around different industry and societal problems.   

In fact,  I suspect the Class-A headhunters looking for world-class talent from agriculture, automotive, the arts to pharmaceuticals, check in with the prize committees listed in the appendix of McKinsey report. Broadcast search may well be the future preferred method for identifying technical excellence. (And, for that matter, what’s to exclude challenges from including business and financial problem-sets to test the skills of next-generation C-level execs?)

3. Increased Speed & Liklihood of Finding Innovative Solutions

 This bears on the “Focus the Community” change effect in the McKinsey diagram. Open Innovation plays a core role here. A seminal 2007 paper, The Value of Openness in Scientific Problem Solving,  drew attention to the power of broadcast search, introducing 166 distinct scientific problem to outsiders, and showing nearly a 30% increase in solve-rate for problems  that had remained unsolved by well-known science firms. That’s a pretty phenomenal result.

What a prestigious and high dollar prize adds to the open innovation process is critical marketing parameters: a deadline, rules of engagement, sometimes progress milestones (sustaining motivation and momentum) and built-in publicity.

 The Netflix Prize, directed at achieving a 10% improvement in a movie recommendation engine, demonstrated the collaborative power of a networked diverse group.  As Wired magazine described after interviewing participants, 

The top two teams beat the challenge by combining teams and their algorithms into more complex algorithms incorporating everybody’s work. The more people joined, the more the resulting team’s score would increase.

This outcome drew attention particularly as the results fly seemingly in the face of the well-known Mythical Man-Month Limit, which describes the problems of adding head-count within the more traditional closed engineering group.

Diversity turns out to be a core asset in problem-solving. : The Harvard study showed winning solutions were more likely from problem-solvers whose core expertise was 6 disciplines away from the problem. Contests -where challenges are broadcast to a wide public and where interim methods and results can be shared among unlike minds –  increase innovative solutions.


Source: Steve Fennessy, Innocentive

Perhaps the most famous case illustrating diversity’s role is the $20,000 Oil Spill Recovery Institute’s challenge  to assist with one of the disastrous consequences of  the 1989 Exxon Valdez oil spill.  The technical challenge was to find a method to separate frozen oil from water.  Much to everyone’s surprise – an Illinois chemist suggested the winning solution, one developed from the concrete industry. 

4. Built in Cost Controls and Risk Mitigation.

This is undoubtedly the most potent bottom line savings for prize-giving organizations. As success-contingent prizes are only paid with achievement of a defined goal, Peter Diamandis, Founder and Chairman of the X PRIZE Foundation has described them  as a form of “fixed cost science and engineering”. Prizes shift risk from the prize sponsors to the competing participants- who themselves, as in the case of the Ansari X PRIZE, may invest much more than the prize value in the project.


Is There Anything Really New Here?

 Open Innovation as a business model and management construct is not new: Originating with Chesbrough’s 2003 book Open Innovation: Researching a New Paradigm, the methods have been adopted by some of the world’s largest best-known corporations such as Eli Lilly and Procter & Gamble. Principals fromEli Lilly,  an early adopter, founded Innocentive, one of the first company’s leveraging incentive-based prizes on top of internet technology.

The new aspiration is that open innovation prizes may become a particularly furious business force when combined with Web 2.0’s  open collaboration tools.

Source: EngadgetNothing so demonstrated the power of all elements working  together as DARPA’s Red Balloon Challenge. Designed “to see whether social networking sites like Facebook and Twitter should be seen as credible sources of information” the challenge to identify the locations of 10 red balloons strewn across the U.S. was solved by an MIT team and its collaborators within a mere 9 hours.  The solution has made us all keenly aware of social networks role in identifying missing persons in a timely manner.

Net net: Social networks promise still another productivity multiplier to prize-driven markets. So when Forbes magazine somewhat cynically wrote about The Myth of Crowdsourcing as really being still the product of single virtuosos – I believe they somewhat missed the point: Yes, these are virtuosos participating, but the Netflix Prize result would not have occurred had not a significant and diverse number of these virtuosos been sharing and merging their diverse methods.

Who are the Market Makers?

With more federal agencies  soon to join the $2 Bn incentive-based prize market and with much smaller firms now realising the business efficiencies of prizes, particularly as the recessionary economy still struggles back, its likely the market is poised for considerably more growth.

Who will reap the benefits in creating the infrastructure of this growing Prize-Driven Economy?

The McKinsey report suggests there are at least four groups who will benefit, many of whom have years of experience in prize management :

  1. Open Innovation Service Providers. Prize management consultancies and their software platforms are the first and foremost beneficiaries. McKinsey references Idea Crossing, Innocentive, NineSigma and Spigit as offering a wide realm of services, from strategic goal-setting to managing the (often non-trivial) contest logistics.
  2. Contest Tracking Orgnaizations include and ChallengePost  who advertise and provide a software platform for these and smaller contests to prospective participants.  
  3. Intellectual Property Law Firms. WHile the X PRIZE and the Netflix Prize are wonderful examples of masterfully navigating the IP rights of sponsors and participants alike, some commercial prize sponsors will find dividing and protecting IP to be a challenge, particularly where it involves point solution types prizes related to products. The complexities become apparent in reviewing the approaches of the service providers. NineSigma requires all submitters to  have issued patents or patent applications for their submitted technology. Innocentive protects participants by requiring their solution “seeker” companies to agree to intellectual property audits; should the company not make the award for a problem, the IP is not used.  
  4. Public Relations Firms Skilled in Prize Contest Management. Mckinsey describes the case of  the Man Booker Prize,  a yearly contest to identify the best novel written within the Commonwealth of Nations. The visibility of the prize has greatly  benefited from the efforts of the PR agency involved,namely Colman Getty. There are clearly many other agencies with similar prize promotion expertise.

There’s perhaps a fifth group yet to benefit: The Sci-Entertainment Media Group. For with such vast sums of money riding on highly-publicised prizes — The Media is sure to follow.

Lights, Action, Science!

 Having spent a bit of time myself in the past sitting in the dark surrounded by oscilloscopes, it’s inspiring to think that we may be living in an age where scientists and engineers can get the form of fame and fortune previously reserved only for the world’s most elite athletes and celebrities. 

We’re just missing the large Olympic stadium fan fare and tv cameras. But this too may not be far away. According to Cell Magazine, multiple television companies have approached the X PRIZE Foundation to document the next $10 Mn Automotive X Prize.

Will we soon see the likes of Discovery Communications (owners of the Science Channel)  cover world-riveting technical challenges, much as the social gaming world in the Electronic Sports World Cup?

What’s more exciting is the likes of TED TV, Wolfram (inventor of Mathematica) and O’Reilly Media doing it. (After all, O’Reilly’s mission includes amplifying “faint signals” from the alpha geeks who are creating the future”. )

With some 5.8 Million science and engineering researchers on the planet and a much larger base of teachers and next-generation student-scientists, as well as readers of Gizmodo, EnGadget and the many other high profile Sci-Tech blogs out there- it’s clear there’s an immense global audience for instilling excitement over some of the world’s finest scientific and medical challenges. (More to it- not only are Nerds not  a minority but they include some of the highest net worth, influential people on the planet)

What do you think? Is an Electronic Sports World Cup format disrespectful of scientific endeavors? Would cheering scientific teams online while they pose solutions to climate change or a medical problem be distasteful? Or would scientists benefit from a bit of such Hollywoodization?


Related Posts:

Crowdsourcing + Open Innovation Fuel a Multi-Billion Prize Dollar Market (Part 1)

EPA Contest Seeks the Biggest (Kilowatt) Loser- GreenBiz News (April 27)

Six Marketing Lessions of the Netflix Crowdsourcing Experiment


Crowdsourcing + Open Innovation Fuel a Multi-Billion Dollar Prize Market

(This is Part 1 of a 2-part posting.)

One of the fabulous things about the internet and this era of user-generated content, social platforms and collaborative technologies is that they have made us keenly aware of the many talented people out there. It’s silo-breaking, allowing us to identify and access the genius talents of individuals outside our organizational borders. It’s community building, allowing realization of team strengths and the development of new social skills that magnify group intelligence. 

Best of all, the new social web has built-in PR: a resident blogosphere which writes up and actively discusses these team collaborations, many of which, like the DARPA Red Balloon Challenge, light up the public imagination of what’s possible. No where is this more apparent than in the emerging world of incentive-induced prizes and contests, where a cash reward is offered to encourage pursuit of a specific goal.

As I wrote in an earlier post, nothing so woke me up to the potential value of contests and prizes in changing the rules of business-as-we-know-it  as the NetFlix Prize, attracting over 51,000 contestants with the hope to win $1 Mn for improving a movie recommendation engine. There’s consensus that NetFlix leveraged that investment extremely well in terms of received R&D benefit, marketing community brand building and much more.  In fact, there are marketing lessons in the NetFlix Prize that any prize sponsor or challenge seeking organization can learn from.

According to a recent post on the TechPresident blog, the latent potential of such success-contingent prizes has not been lost on the White House which issued a directive on open innovation in January.  Two weeks ago, the Office of Management and Budget  released guidance to federal agencies on how they could legally arrange contests to seek ideas  for using technology to promote innovation, open government and other national priorities. The message is clear: “Go forth and crowdsource.”

To facilitate the agencies’ action on this, the White House is launching  a public website within the next 4 months which agencies can use to “advertise” and promote their challenges  Adding momentum to the initiative, Michelle Obama simultaneously launched her “Apps for Healthy Kids” contest, part of her Let’s Move campaign.  The contest invites software designers, game developers and others to build fun and engaging tools to motivate children to eat better and engage in physical activity. It has  built-in lesson to agencies watching too as the contest design requires using the USDA nutrition data set. What a clever and constructive way to build a better user interface to what would otherwise be fairly dry and abstract data to kids.

Starting with a great example is smart, but how will federal agencies new to this learn the intricacies of both crowdsourcing and contests? (Obviously, DARPA, NASA and a few others within the fold have talents to share.)


Enter McKinsey’s Roadmap for Understanding Prizes

For those seeking to understand how to successfully construct prize contests and challenges, the OMB memo references a 2009 McKinsey study “And the Winner is…Capturing the Promise of Philanthropic Prizes” . This  124 page report describes McKinsey’s research, case studies, a rather comprehensive database of prizes as well as  their future potential. But what makes the report extremely valuable is that it leverages the knowledge of sponsors and administrators of some of the best known and successful large-scale prizes, including interviews with experts from NetFlix, The World Food Prize, the X Prize and many others.


The Attention Rivetter: A  $1-2 Bn Big Prize Market

What’s capturing a bit of attention right now is that McKinsey estimates there’s a $1- 2 Bn Prize market today in the U.S. – and it’s growing.  They point out that the dollar amount for prizes over $100,000 has tripled in the last decade to $375 million a year, expanding particularly in the area of incentive-induced prizes.

Now with part of  federal agency budgets to be unleashed soon, there’s more money to add to the prize pot. As Thomas Kalil, Deputy Director for Policy at the Office of Science and Technology Policy at the  June 2009 incentive2innovate conference  reminded conference attendees,

When you consider that the government invests a total of $150 billion in research and development, there’s a bit more room for experiment in this area.


Starting Point: What Types of Prizes Exist?

One of the more useful thought tools within the”And the Winner is…” report  is a description and analysis of  six archetypal prize types. ( The diagram below modifies the original McKinsey exhibit to include some of their examples for each prize category.)


Source: McKinsey’s “And the Winner is….” Report

We are all perhaps most familiar with their “Exemplar” form of prize, one, like the Nobel prize, which sets a standard for excellence in a field. But there are newer, less familiar prize forms here, ranging from the narrow  “Point Solution” (eg. NetFlix prize) in which a specific challenging problem is posed to the broader “Market Stimulation” type, the canonical example of which is the X Prize portfolio, in which real world market conditions are emulated inside the challenge.  Perhaps nothing so raised public perception of the raw power of prize development as the $10 million Ansari X PRIZE, which helped ignite the development of the private spaceflight industry.

The diagram is great mind food for considering the types of prizes your own organization might consider, depending upon your goal.

What prize can your organization offer? Will your organization build and implement prizes? Or will your organization seek to win one of the prizes to the benefit of your brand’s value?

If I’ve inspired you to read McKinsey’s “And the Winner is…” report, that’s great. That was one my goals. But bear in mind that while there’s a groundswell of interest in prize mechanisms to address complex problems and identify emerging markets and a growing corpus of knowledge, the report makes clear that the intricacies of successful execution are non-trivial.

In my next post, I will continue this topic, summarizing some of the business efficiencies associated with prizes that are wooing government as well as commercial ventures, despite the complexities. I’ll also identify some of the pre-game players who stand to win one of the near-term “prizes”,namely, building the infrastructure itself for the new prize-driven government and commercial markets.