The Power of the Prize

April 11, 2008 by Anya Karmenetz

Lo and behold, contests actually work to spur innovation. So should we use them for everything?

They gave the world guns and butter – specifically, the AK-47 and margarine. They sent Charles Lindbergh's The Spirit of St. Louis from New York to Paris and Burt Rutan's SpaceShipOne almost 70 miles above the earth – twice.

They are innovation prizes – think, X Prize – and from their origins in the Age of Discovery in the 1500s, they've come roaring back to life in recent years, with foundations, governments, and businesses alike rewarding fantastic achievements.

This spring alone, Cisco Systems, eBay, and MIT are expected to announce the winners of major business-idea competitions. Some economists – and some CEOs – believe that public contests have the ability to usher in a new era of progress by leveraging R&D resources to capture diverse imaginations and tackle everything from Web widgets to massive global challenges.

But what's the real return on a prize? How does an innovation contest go beyond PR buzz to find unexpected, workable, cost-effective solutions to intractable problems? And what types of problems are most amenable to these rewards?

"We're looking for the next billion-dollar business," says David Hsieh, senior director of marketing at Cisco's Emerging Technologies Group. He's one of the leaders of the I-Prize, which will give one team the chance to join the company to head a new emerging-technology business, with a $250,000 signing bonus and up to $10 million in funding over the first few years. Broad collaboration has been a huge boon for the project, Hsieh says, with initial entrants coming from 104 countries.

Twenty percent of the semifinalists were multicountry teams, many of which formed on Cisco's I-Prize Web site. "In many parts of the world," Hsieh says, "you have really smart people with incredibly great ideas who have absolutely no access to capital to take a great idea and turn it into a business."

A contest broadcast outside a company can stimulate far more value than the cost to stage one. Take eBay's $10,000 quest for the best widget – a small, portable program delivering eBay data to affiliated sites. "Given enough scale, with enough people doing this, we're hopeful the top things are going to be higher quality than what you'd get if you say to employees, 'You're responsible for five innovative ideas a quarter,' " says Alan Lewis, who has worked on both internal and external developer contests at eBay. Ten grand is pretty cheap, too – perhaps, Lewis points out, worth more hours and dedication from an Eastern European engineer than one of eBay's own.

Karim R. Lakhani, an assistant professor at Harvard Business School, has conducted academic research into the power of prizes – specifically, the value that diverse minds and experiences can supply. He analyzed 166 problems posted to the "crowdsourcing" marketplace InnoCentive. "Not only did the odds of a solver's success actually increase in fields outside his expertise," he says, such as mathematicians taking on chemistry or biologists looking at physics, "but the further a challenge was from his specialty, the greater the likelihood of success. That is very counterintuitive."

In that spirit, Clear, which operates private passenger-security lanes at 13 airports to speed members through, announced a $500,000 prize last January for any technology or invention that will improve the process. Clear's contest rules say that the winning innovation, whether a faster X-ray machine or a better tray for your laptop, must improve throughput by at least 15% while costing less than 25 cents per passenger. This meets Lakhani's test for a good challenge: It's specific enough to let someone in another discipline tackle the problem.

"We think prizes are a potential innovation in business models that can only be compared in importance to what the Internet did for telecommunications," says James Love, an economist who, as the director of the think tank Knowledge Ecology International, has been studying innovation prizes since 1999.

So can prizes do more than help business? Can they be harnessed even to solve the world's biggest problems? Love thinks so. He helped come up with the Medical Innovation Prize Act, a bill introduced in the Senate last fall by Bernie Sanders of Vermont that would end monopoly rights for new drug patents. Rather, a whopping $80 billion annual purse would be split among the best inventors. "Prices would drop to generic levels," Love says of his, let's say, highly idealistic solution. "Drug developers would focus on treatments with the greatest health outcomes." In other words, more malaria prevention, fewer Viagra knockoffs.

From Issue 125 | May 2008


Tags: Innovation, Technology, Design, Design in Business

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