We talk a lot about business model innovation on this blog. In previous posts, we have talked about firms that are innovating different elements of the business model- such as selling, staffing, promotions, etc. But what about the innovation function itself?- Can one innovate this part of the business model too?

Hypios, a company that I have worked with over the last few years is helping many firms do exactly that– change their business model for innovation… Read on to find out how…

A  typical research intensive firm employs an army of experts  to help it develop new technology or products. These experts tend to have  highly specialized expertise and are often highly paid– in effect, they are a very specific asset with very high fixed costs. Research by its very nature is a risky enterprise, the returns from the efforts of these experts are unpredictable. Finally, technological, environmental and other changes may force a firm to adapt its product portfolio and the specific expertise of the experts may not be of much use any more.  Taken together, the innovation function is a huge risk exposure for firms– high fixed with uncertain utility and returns!

Hypios helps  firms  innovate differently. Essentially, it provides companies with a platform where they can post innovation “problems”. Freelancing experts from around the world, post solutions to these problems, the firm then evaluates these solutions and picks and reward/buys the best of these solutions. Now, it doesn’t have to bear the fixed costs of employing the experts and instead it only pays for the output i.e.  solutions that it likes. This in effect, limits the firm’s risk exposure. Another advantage is that the lure of the reward may incentivize the freelance experts to work just a bit harder leading to more and better solutions for the firm.  The freelance experts on the other hand, must now bear some  risk– on the downside, they  invest  their time in working  on  the problems  and  if they don’t win the contest, their efforts are in vain; on the upside, if their solution is picked, they are likely to earn a substantial return on their invested time and effort.

Such innovation contests are best suited for creative problem solving exercises– where  the returns from the effort are uncertain and a wide search helps improve quality. While such contests have been used for over 300 years, the internet has enabled bringing these contest to a wide range of areas. Today, a range of companies are running these contests either internally or by employing organizations such as hypios and innocentive. While hypios and innocentive specialize in  technical problems, 99designs helps firms employ contests for design problems such as logo, wordpress theme design, etc. The X-prize foundation has adapted the same idea to addressing complicated innovation problems in the areas of space exploration, life sciences and energy.

In effect, the use of innovation contests is a renaissance innovation– one that can give firms an inimitable competitive advantage by changing the risks inherent in the business model.