Two weeks ago, we published a piece that discussed the current state of open innovation (OI). In order to get the most accurate information for my story, I spoke with several executives from a number of leading OI companies. One of those interviews was incorporated into Eric Blattberg’s long and insightful discussion with ChallengePost’s Brian Koles. Today, I am sharing my very enlightening conversation with InnoCentive’s Vice President of Marketing Steve Bonadio.

Anton Root, Crowdsourcing.org: I’ll start by asking about InnoCentive. I was wondering how the idea for the company came about, what your initial goals were, and what your goals are now?

Steve Bonadio, Vice President of Marketing at InnoCentive: Absolutely. The idea for InnoCentive came to Alph Bingham, who is one of our co-founders, and a colleague of his, while they were working at the pharmaceutical giant Eli Lilly in 1998. They originally dubbed it Molecule.com, and later Bounty Chem. Eventually, over the course of a couple years, they worked on the idea and incubated it within Lilly. In 2001, they launched the company InnoCentive with majority seed funding coming from Eli Lilly.

The early history of InnoCentive, you can call it phase one, was 2001 to 2005. As you can imagine, coming out of a pharmaceuticals company, a lot of the challenges and competitions that we ran were focused around life science challenges – pharmaceuticals, improving medical devices, biotechnology, and so on. In 2005, the next big milestone of InnoCentive, we were actually spun out of Eli Lilly, with investments from Spencer Trask, a venture firm out of New York. In 2006, our current president, Dwayne Spradlin, took the helm, and a lot of different things started to happen.

We very rapidly began to expand beyond just the life sciences-type challenges, to a much broader set of disciplines. In the 2006 timeframe, we signed a contract with the Rockefeller Foundation, adding a non-profit program line that has been very, very successful over the last several years. In many cases, our services are delivered pro-bono to the non-profits because they are trying to solve really important problems. They are trying to find disease cures, bring portable water to African villages, provide solar light devices to the same villages, and focus on how to better educate our young.

We also branched out into a much broader range of disciplines. If our early life was spent in the life sciences industries, we are now doing a lot of work in agriculture, aerospace, defense, chemicals, consumer goods, energy, food and beverage, and manufacturing fields. Over the last few years, what’s really exploded have been the public sector government challenges. The 2010 America Competes Reauthorization Act by President Barack Obama basically enabled federal public sector agencies to run prize challenges. So we have expanded into a lot of different areas over the course of the last ten years, particularly the last 6 or 7 years, and we have also introduced some new products.

We introduced the concept of a Grand Challenge, which is generally a challenge with a very high award, in the $100,000 plus range. We’ve even run a couple of million dollar grand challenges. These are highly visible challenges that are trying to solve problems that can literally help the world and humanity. We made an acquisition in January of this year of a small U.K. firm who specialized in grand challenges to bolster our offerings. We are very much focused on those, as well as our bread and butter challenges, which we’ve been doing for many, many years now.

Thank you for the detailed answer. I would like to talk a little bit more about the products you offer. You mentioned the Grand Challenges, but you also have two other tiers of challenges that companies can contact you about. Can you start there?

Let me give you a sense of how it all works. From a products perspective, our vision is really straightforward. We want to own the challenge marketplace. We have the high-end challenges, the Grand Challenges. We also have Premium Challenges, which are our bread and butter -- we’ve done 1450 premium challenges throughout our history. We also recently introduced in beta form something that we call a Brainstorm Challenge, which is a self-service challenge, for which anyone pay over the website and launch on their own.

InnoCentive brings a few very unique things to the market. First and foremost is the ability to create and develop a challenge vis-à-vis the methodology that we developed called “challenge-driven innovation.” We work with the customer to really formulate the challenge in a very specific way. What that means is that we have a staff of PhDs in different disciplines that work with our clients and take a very close look at their challenges. They decompose them into their base elements to establish very specific criteria, by which successful solutions will be measured. Once that challenge is formulated, it is posted on our site and our network of about 260,000 problem solvers from around the world can view it.

The solvers range in geographic locations, there are about 40% in the US, 60% in the rest of the world. They generally tend to be very educated, 61% of our solvers have a masters degree or a post-doc, and come from a lot of different backgrounds. We manage all of the interactions with the solvers. Once the solutions are submitted, we rate them and present those to the client. The client ultimately selects the winner or winners, and makes an award. So we manage that whole end-to-end challenge process, provide the expertise in challenge development, and provide access to the network. That is a lot of what we do.

What we introduced in 2009 was actually a new platform. It is a challenge platform that enables companies to do the same thing internally, within their four walls. We have big customers like NASA who are using our platform, and they not only run external challenges, but they are also now using our platform to basically promote collaboration among all of their development centers. That’s the other piece of what we do.

Can you talk a bit about the community of the problem solvers that you have? How exactly do you brand it to your customers, and what do you think the benefits are of branding it one way versus another?

That’s a very good question. Anybody can come to innocentive.com, sign up for free, register as a solver, and attempt to solve challenges. There are agreements in place that they have to click through and agree to in order to participate in a challenge and open what we call a Project Room, which is their own personal workspace. Those agreements range from confidentiality to any kind of intellectual property (IP) treatments, if those are a part of the challenge, and so on. They agree to certain conditions in order to participate and get the award if they submit the winning solution. The awards range from $500 to $1 million, but the average award for an InnoCentive challenge tends to be in the $20,000-$25,000 range.

It really is quite simple. The value to the solvers is many-fold. Many of our solvers are not motivated by the money, actually. They are motivated by their curiosity, the need to solve problems that matter, and desire to apply their expertise in new ways. When we survey our solvers, money is a factor, but it’s not the primary motivation.

This is especially true for the public challenges that we run – some challenges just tend to spark people's imagination and curiosity, and they want to participate. We ran seven public challenges with NASA with topics ranging from keeping food fresh in space to predicting solar particle events; all seven were solved, actually. When we interviewed the solvers after the projects were done, the most common motivation was, “You know, I just wanted to participate because NASA is really cool. I was honored that a rocket scientist from NASA looked at, evaluated, and actually awarded me for the winning solution.” So the motivations vary, but it’s very much about trying to solve challenges that matter.

That is the solver aspect. The other side of the equation is what our customers get out of it, and what makes the solver network valuable. And the reason it’s valuable is primarily because of diversity. What we find in many situations is that it’s not the chemist who is solving the chemistry challenge, or the biologist solving the biology challenge. It’s the chemist solving the biology challenge, and the biologist solving the chemistry challenge. It’s the people on the periphery of a science and the diversity that the whole network brings together that make it such a valuable resource for companies that want to run a challenge with us.

Do you play a role in implementing the solution into your clients' businesses?

In short, the answer is no. We don’t participate in the commercialization or the implementation of a particular solution. We always love to stay in touch with our clients who run challenges and talk to them six months, a year, or 18 months after they ran their challenge to see where they are and see if we can talk about how their solution was implemented. But once a challenge is solved and awarded, our role is essentially over with our clients, unless we have an ongoing relationship with them to run additional challenges, or they’re using our platform to do it internally.

But, you know, it’s a whole development process. If there is R&D [research and development], we’re more of the ‘R’ and sometimes the ‘D,’ but the actual implementation or commercialization of a project or solution is not something we get involved it, it’s just not our business model.

I’m interested in how you help your customers run OI challenges within the company, but outside the R&D department. Can you elaborate a bit on that?

In 2009, we came up with a cloud-based platform called InnoCentive at Work. And it basically provided the capability for our clients to leverage our process and methodology to select solvers within the companies – it could be the entire company, it could be certain divisions, it could be any specific groups that they identified.

And by the way, it doesn’t have to be just people inside the organization, it can be an expanded ecosystem. Clients can turn to strategic suppliers, or partners, or even their customers and basically go through the same workflow and process. They develop the challenge, broadcast and post it to an audience, manage solution submissions, and make awards. In some cases, the awards are cash, but usually companies do creative things around prizes when they are running internal challenges – it could be points, or it could be iPods.

Over the course of the last couple of years we evolved the platform. It is now called the InnoCentive Challenge Platform, and it basically enables companies to do what we’ve been doing externally for years, internally. NASA and some of our other customers are using it to bridge different groups to get R&D to start thinking about where solutions can come from within the organization. So it brings disparate groups of problem solvers together around common goals.

When clients come to you, I’m sure they are in different stages of embracing OI and some are probably a little bit more hesitant to commit to it. Can you talk a little bit about their mentality?

It’s interesting that you ask. We recently engaged Forrester to do a rather big study for us on what we call the State of Open Innovation. One of the questions we asked was, “Discuss the degree to which you identify with your current OI initiatives.” What we found was that 19 percent of the companies classified themselves as early-stage or experimental, 61 percent classified themselves as emerging and expanding, and 17 percent classified themselves as mature. What that says to us is that a large number of companies are really not only starting to dip their toes into OI, but they’re actually actively expanding their use of the tools and techniques that OI affords. Our interaction with our clients and prospects really validates that.

Three years ago, it would have been a very different story. Then, we spent a lot of time educating our clients. Although there is always going to be some sort of education, we spend a lot less time on that now because clients already get it. They have the mandate, or already have the funds allocated to experimenting with different OI techniques, and they want to figure out the best ones to leverage to achieve their goals. So it’s much less of a missionary sale today than it was even two years ago. Customers get it – they get the value, they’ve run experiments, they’ve had some successful results.

Companies are varied with respect to where they are on the sort of maturity curve, but from our perspective, the value is tangible. In many cases, it’s just a question of connecting the dots for them, and helping them understand how OI techniques can fit within their broader innovation portfolio. We’re not advocating that they fire their scientists and stop all internal R&D. That would be foolhardy. What we’re saying is that there is a place for OI in any major organization, across any industry, to augment and add value to its existing innovation or R&D processes.

I’d like to get your thoughts on where this is all going. Do you see internal challenges as the next big thing in OI?

I think the big trend we’re seeing is a multi-channel world. This is what our platform has started to support over the last couple of years. What I mean by that is there are different audiences that organizations, whether they’re commercial, government, or non-profit, are going to want to tap into to help them solve important problems.

These audiences could be individuals within a corporation, groups within a corporation, the whole company, supplier networks, customers, or it could be external networks and marketplaces, like our network of 260,000 solvers. It can even be a much broader ecosystem. One of the things we do is we partner with Nature, The Economist, Popular Science, and a few others, to post challenges to their communities. So our challenges reach, actually, well beyond our 260,000 solvers, to upwards of 12 million potential people.

There are different audiences to which companies want to direct their challenges. The idea is that you can have a single platform that can manage those multiple channels and audiences. You can also imagine a channel escalation scenario – you might start a challenge out just in a small group within your organization, and maybe you don’t get a solution, but you learn a little bit more about the problem and how you want to define it. Then you take that to a bigger audience – maybe its all your employees plus your strategic suppliers, and maybe you don’t get an answer there, either. So you recast the challenge with the additional learning from that process, and then you go out to an external network. Companies need one platform to manage all of their challenges and OI efforts, not only to solve problems, but also to generate ideas, to consolidate needs, and to serve as a basis for collaboration with different audiences. I think that’s where we see the market going.

We also see that there is an absolute need for challenge types that scale up and down. Not everybody can afford a Grand Challenge, and not everyone can afford one of our standard Premium Challenges. We believe that there is a lower end market. I mentioned the beta project we are running now called the Brainstorm Challenge, it’s an open discussion format challenge. It’s a relatively inexpensive product compared to our other, traditional products, and it makes our methodology and the process of running your own competitions much more accessible to a much broader audience.

Our goal is to own what we call the challenge economy, and I think we already do own a large part of that. But we also want to be able to have offerings that apply to smaller and medium businesses and individual entrepreneurs, all the way up to big multinational corporations that have dozens or hundreds or even thousands of challenges that they need to solve.