Strategies for creating profitable partnerships in open innovation
Open innovation was defined by Chesbrough as "the purposive inflows and outflows of knowledge to accelerate internal innovation and expand the markets for external use of innovation, respectively."
In other words, open innovation is a system in which companies combine internal and external ways of generating and exploiting new ideas. Open innovation allows companies to use the best path for developing their ideas and to use the best external and internal ideas to fill their pipeline. External ideas could come from companies, universities, suppliers or customers.
Research has found that open innovation and exchanging knowledge with external partners can help improve the financial performance of your innovations. A survey of 141 US manufacturing firms found that optimal financial performance comes from a mix of 61% external and 30% internal sourcing.
But how can you make sure that your open innovation partnership is profitable? Romaric Servajean-Hilst, Associate Researcher and Professor at École Polytechnique, explained that there are certain steps to take to ensure open innovation partnerships are successful:
- Have an internal champion to lead the open innovation relationship
- Create rules to govern your relationships and guarantee a level of trust
- Protect confidential information to reduce rigidity in your partnerships
- Involve lawyers to draft comprehensive contracts that benefit both parties
Use internal champions to lead open innovation partnerships
When entering into open innovation partnerships, you may exchange countless ideas. But how can you ensure that those ideas are effectively passed into the organisation and implemented? This is where having an internal innovation manager or leader is crucial to oversee open innovation projects. This champion can share and pass external ideas to the right person and blend them with internal knowledge to ensure that the innovation potential is realised.
Romaric advises regular meetings with engineers can make a big difference. Here you can present ideas and get them excited about the projects. This can help with absorption of external knowledge into the organisation.
“Even if businesses are able to get new ideas from other companies, they’re still unable to implement that. You need to know how to absorb innovation. When there is an open innovation manager or champion that translated external knowledge internally and involved engineers early in the process, you can increase the knowledge absorption capacity of the firm.”
Create rules to govern your relationship with open innovation partners
When building a successful partnership, you need to share some common ground. A good partnership relies upon mutual agreements when setting the goals, pace, level of disruptiveness and processes. Set out these goals early to ensure a long lasting and trust-based relationship. This will foster great values and results because you’ll both be on the same page.
Research suggests that trust is central to a successful relationship. Trust leads to higher levels of loyalty from the bargaining partner and increases profitability. It also encourages partners to cooperate, seek long-terms benefits and refrain from opportunistic behaviour.
By setting out rules for your relationship, you can work together to achieve stronger long-term goals—particularly useful if your innovations are less mature.
According to Romaric, “When you have trust, a good relationship and your technology is of low maturity, you should work together to set out the future goals if the innovations are successful. For example, if you’re collaborating with suppliers, create long-term agreements that in the future they'll be your supplier—or your buyers will be purchasing some of your products.”
The coordination of future open innovation will become more manageable as you’ve already built trust with your partners and established a dedicated process to manage the partnership.
Protect confidential information to reduce rigidity in your relationship
Business leaders often feel protective over knowledge and assets when entering open innovation partnerships. They may worry that their innovations might be appropriated or stolen. Studies have also shown suspicion or hesitation towards collaboration due to previous negative experiences, lack of experience or incentive systems that strongly rewards internal technological development.
However, too much rigidity can create unnecessary obstacles in establishing profitable relationships—leading to closed innovation, rather than open.
Romaric says, “If you want to do something, you need to be less paranoid. With paranoia, you cannot do business and take risks. You need to understand what’s confidential and ensure that you sign confidentiality agreements or NDAs. If you want to win something, you need to take risks.”
One way Romaric solves this problem is by advising starts-up to ensure they have methods of protection for their ideas such as patents. Research suggests that intellectual property rights must flow for open innovation to take place. Without some form of protection, from their inventions—negating the case for open innovation.
Alternatively, you could sign NDAs or confidentiality agreements. Creating formal agreements should reduce opportunistic behaviours—such as one party trying to take inappropriate advantage of shared knowledge. Some partners may bring their own company-standard NDAs. Make sure you read the terms thoroughly—and ensure there isn’t anything that isn’t in your favour you’ll regret later.
Involve lawyers to draft mutually beneficial contracts
With patents and NDAs, make sure that you have lawyers who can help you manage the risks and uncertainties in open innovation relationships. Ask them to draft comprehensive contracts. It’s important to brief the lawyers so they can make informed decisions and help you manage your open innovation partnerships effectively. Research shows that lawyers have a positive effect on open innovation collaboration by decreasing problems around trust and coordination. Lawyers are required to draft comprehensive contracts to make your open innovation relationships contractually explicit. This ensures clear boundaries are specified—making the outcomes of your partnership more favourable for both parties.
Romaric says, “[often] people don’t brief lawyers on why they want this contract. If you brief the lawyers, it can create value. It’s like when you have a purchaser. The purchaser is there to cut costs and if you explain what the purchaser is for, you will add value. The same strategy should be applied to lawyers.”
About Romaric Servajean-Hilst
Associate researcher at the École Polytechnique, Romaric Servajean-Hilst teaches, conducts research and performs consulting assignments on the strategy and management of collaborative innovation and breakthrough innovation.
He has extensive experience in working with companies of all sizes, advising them on innovation and building successful innovation partnerships. You can find his research below:
- Early Purchaser Involvement in Open Innovation- the case of an advanced purchasing function triggering the absorption of external knowledge in the French automotive industry
- The secret to client-supplier innovation cooperation that lasts
- Shades of the innovation-purchasing function— The missing link of open innovation
- Partnering with start-ups— Purchasing is they key for success
Watch this webinar, hosted by Bruno Reynolds and Nathan Pike, Senior Consultants at Oxentia, Oxford University Innovation. They discussed how the knowledge economy is helping to forge new innovation models through the rise of collaboration and open innovation.