INNOVATION:Going against common business thinking, Henry Chesbrough advises companies to open up their operations to achieve greater success

Company managers and owners must think US academic Dr Henry Chesbrough mad when he suggests that they open up their factories and workplaces to unknown experts and share their cherished business practices with outsiders.

But Chesbrough, a lecturer at the Haas School of Business at the University of California, Berkeley, believes that businesses can benefit enormously by opening up to outside experts and customers because they all can share their opinions.

The US academic coined the term "Open Innovation". It might sound like esoteric business jargon but it captures the idea of introducing new practices that could at first be regarded as highly risky but which could in fact transform a business radically if the managers of a company are open-minded enough.

For example, companies might become very profitable by selling one business model and seeking out opportunities for that model. But the company might overlook opportunities where it could, in the long term, make more money by distributing the model free of charge to a mass audience and using advertising to generate revenue.

Chesbrough uses IBM as the best example of a company that embraced innovation to reinvent itself. The company was a stalwart business of 1960s and 1970s corporate America but by the early 1990s it was creaking under the weight of massive losses. Something drastic needed to be done to save the business.

An outside chief executive was brought in, costs were cut, staff were laid off. The floorboards of the company were ripped up to see where it could generate much-needed revenue. Out of necessity grew an unusual and risky solution.

The company decided to offer its semiconductor technology to other companies for their products. This would previously have been regarded as corporate suicide, but the company quickly recognised that this not only brought in much needed revenue but increased the use of the company's equipment and facilities.

The company also opened up its patents and technology, raising hundreds of millions of dollars every year by licensing its intellectual property. It created a research alliance to share the high cost and risks of creating new technology.

As Chesbrough has noted, more than half of IBM's $90 billion (€63.6 billion) revenue in 2005 came from a business that didn't exist 15 years previously.

"I am not suggesting that firms need to shut down their research and development labs. I am suggesting that they open up their labs and let a lot of ideas from outside into those labs and let the ideas in there out," Chesbrough told The Irish Times, speaking from his base in California.

"It is important for companies to realise that not all the smart people in the world work for you. You need to let the smart people into your company to let them connect and collaborate with the smart people inside your company."

Chesbrough stressed that this was "not outsourcing or subcontracting".

"You can evaluate the quality and effectiveness on the outside," he said. "IBM is a company that used to be closed and has become much more open."

IBM went further with open innovation by placing its PhD researchers with the company's customers so they could try and solve problems, and use those solutions to create products that would be sought after by customers.

"They aimed their researchers at a customer problem in a customer's location," said Chesbrough. "Demonstrators showed technologies to customers in an environment that looks like an office. They played with the products and saw how they worked. IBM called its programme 'Extended Business Opportunities'."

The US academic believes one of the best examples of "business model innovation" is low fares airline Ryanair. Chesbrough says the company creates a number of revenue streams within the company, with its suppliers and with its customers.

For example, the airline agrees deals with regional airports where they partly subsidise the company by offering to cover some of its marketing costs and in return the airline ensures a steady flow of passengers through the airport.

"I give full marks to Ryanair. They have innovated with a different model. They have created value for themselves, their suppliers and their customers."

He said problems can arise, however, because of the open nature of the process. Products and processes can be created with a large number of participating parties, but difficulties can arise over who actually owns the intellectual property after it is created between the parties. "There is no way to anticipate what solutions they are going to come up with because they have not come up with them yet," he said.

Businesses are obviously reluctant at first to open up to outside influences and ideas, he said. "Every company I know of has taken some sort of shock to its system to embrace the open innovation model. They first have to see that the old model doesn't work any more and that a rival is doing it better. They have had to do this to stay in business; they have been opened by necessity," he said.

Companies also have to tread carefully not to open themselves too much or become too reliant on one outside company for their business growth. Chesbrough cites two start-up companies to show the lessons to be learnt for young businesses.

The first, Go Corporation, started in business in 1987 and created technology to develop handheld, pen-based computers. It worked closely with Microsoft but, fatally for the small company, a bit too closely. When the relationship with the larger company ended, Microsoft produced its own version of Go's technology. One of Go's founders filed an antitrust lawsuit against Microsoft in 2005, claiming that its technicians had stolen technology from his company that had been shown under a non-disclosure agreement. "Go was too open," said Chesbrough.

The other start-up company cited by Chesbrough which used open innovation is US firm Collabra.

Established in the early 1990s, the company produced technology similar to the Lotus notes desktop application and built relationships with a large number of companies to develop their products and generate revenue.

"They didn't put all their eggs in any one basket. They worked with a variety of companies. They were open in a very thoughtful way," said Chesbrough. "Small companies need to be open to be successful but they need to be careful not to be too open, otherwise one large company can capture their business rather the small company capturing aspects of their business,"he said.

PROFILE: DR HENRY CHESBROUGH

Dr Henry Chesbrough is the brainchild behind the business model Open Innovation.

He is the author of two books - Open Innovation: The New Imperative for Creating and Profiting from Technology (2003) and Open Business Models: How to Thrive in the New Innovation Landscape (2006).

He is the executive director of the Centre for Open Innovation at the Haas School of Business at the University of California, Berkeley.

He has taught at the Harvard Business School. He has a BA in economics from Yale University, an MBA from Stanford and a PhD from the UC, Berkeley.

Chesbrough has advised and studied leading companies such as IBM, Philips, Procter & Gamble and Unilever.

Chesbrough will speak at Enterprise Ireland's conference, Innovating The Business Model, on October 24th in the Stillorgan Park Hotel in Dublin.

For further details, visit: www.enterprise-ireland.com/ openinnovation