Posted by andy@assembla.com Tue, 05 Jul 2005 17:43:00 GMT

User innovation, in the form of open source software, is one of the most powerful forces in the software business today. Will this force propel the software industry to yet another phase of bold innovation? Or, will it cripple commercial R&D organizations and lead to a future of stagnant, commoditized software?

In his book Democratizing Innovation (available online), Sloan School professor Eric Von Hippel shows user innovation at work in many industries, including sporting goods, surgical equipment, electronics manufacturing, and the 18th century mines of Cornwall. His finding is that innovations from users are often more lasting and important than innovations from vendors. Hippel finds that while vendors focus on incremental improvements to known capabilities, users are more likely to come up with new capabilities that have important future uses.

Hippel focuses on “lead users” – users with extreme needs that have not yet been encountered by most other users. A lead user might be a surgeon practicing a new technique, a systems administrator under persistent network attack, or a mountain biker exploring new terrain. Lead users are motivated to figure out how to build new things with existing products. And, this book demonstrates, they often have the ability to make substantial progress. A weekend kiteboarder might be an aerospace engineer during the week. A surgeon might be able to raise funding to manufacture new equipment. An electronics manufacturer certainly has the means to make extensive customizations to the equipment it uses on its primary assembly line.

In contrast, vendors doing market research for a new product typically focus on their mainstream users. They make improvements in the speed, size, convenience, availability, usability, and reliability of their products, as typically used. Each iteration of the vendor product is produced largely by the same engineers building the same product for the same customers, but in an improved version. That’s the groove or rut that I see most software companies climbing into.

Vendors also segment their users into just a few categories, hoping to simplify their product planning and production by making a high-quality, one-size-fits-all product. In doing so, they miss what Hippel calls “heterogeneity of need”. Users of a product often have many different needs. In one survey of Apache Web server administrators, Hippel found that there were 92 different security related functions requested, and that there was no clustering or pattern in their requests. Some of those requests come from lead users, but they are hard to identify in the vendors aggregate view.

The most eye-popping statistics in this book come from a study of product development at 3M, where certain product development teams were coached to use a “lead user” method for identifying new product opportunities. They looked at emerging market trends, and then they identified users that were at the leading edge of those trends (the lead users) and went to them for ideas. A different set of product development teams used traditional market research and R&D to design their products. At the end of this study, the traditional teams had generated 41 incremental improvements and 1 major new product line, with forecast annual sales of $18M per product. The “lead user” teams had generated zero incremental improvements and five major new product lines, with forecast annual sales of $146M per product.

The software business has both the motivation and the ability to advance with user innovation. Heterogeneity of need is so high for large enterprise systems that virtually every installation is customized. User communities have leading-edge collaboration techniques, and communities have substantial programming resources that often include vendor capabilities.

Hippel gives us a handy formula for figuring out the build/buy decision. Assuming that either the vendor and the user can build a product or innovation for the same cost, a vendor spending 50% of non-sales expenses on R&D, with a 25% cost of sales, will need to sell 3 copies of a system before making any money. If the market is smaller, users will need to pick up the development task. At a 75% cost of sales, the vendor needs to sell 9 copies. This calculation, along with the variation in needs, starts to explain why, as the cost of selling a new software license has risen to over 75% of revenue, users have shifted resources from packaged systems to building custom systems with offshore and open source building blocks. This shifts resources toward user innovation.

In this situation, software producers must learn to take advantage of user innovation. They can provide toolkits to users (for example, source code), so that users can add more value through innovation. They can share the work of innovation. They can create processes for bringing user modifications back into the mainline product. In short, they can be more like open source communities.

User innovation works well, but is it in the interests of users or vendors to participate in an innovation community? Why reveal and contribute code if it just helps the free riders who don’t contribute? In the open source world, there may be tens of thousands of users for every contributor. What explains the increasing volume of commercial open source contributions? Hippel approaches this question by observing that the “free revealing” of important commercial innovation is widespread in many industries. He cites examples ranging from 18th century mining engineers who started a journal to share advances in steam engine technology, to IBM, which “after a lag” recently revealed its important copper interconnect chipmaking technology to competitors. In most of these cases, free revealing “is the only practical option.” Competitors can reproduce an innovation if they observe it, and patent protection is weak in most fields. Furthermore, individuals (consultants and developers) often have a strong incentive to freely reveal innovations that advance their careers or their personal missions. Free revealing increases the pace of innovation and benefits the mission of the innovator. By controlling the timing and placement of freely revealed innovations, commercial organizations can build up their platforms, their industries, their customer and partner participation, and other types of competitive advantage.

Hippel concludes by observing that user innovation and free revealing lead to enhanced “social welfare”. It can make everyone better off. User innovation is a powerful force that can benefit both users and vendors. This book helps you understand how it works so that you can make it work for you.

This article also appeared in IT Managers Journal.