Opening the corporate doors to ideas and inspiration from the collective crowd holds great potential, but there are pitfalls. To succeed, a company must have a culture open to outside ideas and a system for vetting and acting on them. Successful projects are typically hybrids of ideas flowing from a decentralized crowd.

Few concepts in business have been as popular and appealing in recent years as the emerging discipline of "open innovation." It is variously described as crowdsourcing, the wisdom of crowds, collective intelligence and peer production -- and those terms apply to a range of practices.

The overarching notion is that the Internet opens the door to a new world of democratic idea generation and collaborative production.

Early triumphs like Linux, the operating system, and Wikipedia, the Web encyclopedia, are seen as harbingers.

In the new model, innovation is often portrayed as a numbers game. The more heads, the better -- all weighing in, commenting, offering ideas. Collective knowledge prevails, as if a force of egalitarian inevitability.

But a look at recent cases and new research suggests that open-innovation models succeed only when carefully designed for a particular task and when the incentives are tailored to attract the most effective collaborators.

"There is this misconception that you can sprinkle crowd wisdom on something and things will turn out for the best," said Thomas W. Malone, director of the Center for Collective Intelligence at the Massachusetts Institute of Technology. "That's not true. It's not magic."

The Netflix Prize is a stellar example of crowdsourcing. In October 2006, Netflix, the movie rental company, announced that it would pay $1 million to the contestant who could improve the movie recommendations made by Netflix's internal software, Cinematch, by at least 10 percent. In other words, the company wanted recommendations that were at least 10 percent closer to the preferences of its customers, as measured by their own ratings.

The contest will end next week because a contestant finally surpassed the 10 percent hurdle on June 26, and, according to the rules of the competition, rivals have 30 days from that date to try to beat the leader. The front-runner is a seven-person team, and its members are statisticians, machine learning experts and computer engineers from the United States, Austria, Canada and Israel. It is led by statisticians at AT&T Research.

The leading team is an elite crowd, indeed, but it is also one that was made possible by the Internet. The original three AT&T researchers (one has since joined Yahoo Research, but remains on the contest team) made good strides in the first year of the contest. But to make further progress, they went looking for people with other skills and perspectives. So they reached out eventually to a pair of two-member teams, who were among the leaders in the rankings on the contest Web site.

The contestants' algorithms must find patterns nestled in a collection of more than 100 million movie ratings. What is learned in tackling such a large-scale data analysis and predictive-modeling problem could well be applied in many industries, like Web commerce or telecommunications.

Often, companies rely on a contributing crowd for ideas, though management then chooses. International Business Machine, for example, conducts online brainstorming sessions it calls Jams.

IBM used one session to guide its strategy for investing in new growth fields, starting in 2006. An estimated 150,000 employees, clients, business partners and academics participated. Management sifted through the ideas and committed $100 million to invest in several opportunities to apply technology innovations to energy saving, health care and smart electricity grids.

"It starts out as crowdsourcing and it is culled to a set of action items," said Jeffrey T. Kreulen, a researcher at the IBM Almaden Research Center in San Jose, California.

Open-innovation models are adopted to overcome the constraints of corporate hierarchies. But successful projects are typically hybrids of ideas flowing from a decentralized crowd and a hierarchy winnowing and making decisions. In Linux's case, anyone can submit code, but Linus Torvalds, the system's developer, and a few lieutenants decide what code will be included in the operating system, said Mr. Malone of MIT.

Opening the corporate doors to ideas and inspiration from the collective crowd holds great potential, but there are pitfalls, warned Henry Chesbrough, executive director of the Center for Open Innovation at the University of California, Berkeley. To succeed, Mr. Chesbrough said, a company must have a culture open to outside ideas and a system for vetting and acting on them.

"In business, it's not how many ideas you have," he observed. "What matters is how many ideas you translate into products and services."

About the Author

Phillip Ayoub is a PhD Candidate in Information Sciences & Technology at The Pennsylvania State University. He received his B.S. in psychology from the University of Wisconsin and also obtained a masters degree in Industrial Engineering from The Pennsylvania State University. He has worked as a human factors engineer at The Boeing Co. and as a design researcher at Steelcase, as well as a consultant in areas of management and information technology. His research focuses on socio-cultural and information technology aspects of innovation, organization and work.

Dr. Irene J. Petrick is a Professor of Practice in the College of Information Sciences & Technology at The Pennsylvania State University. In addition to her professorial activities, she has over 25 years of experience in technology planning, management, and product development in both academic and industrial settings. She is author or co-author on more than 100 publications and presentations. Her research interests include supply chain collaboration and innovation, technology roadmapping, and technology forecasting. Previous sponsors include Lockheed-Martin, Boeing, Honeywell, IBM, the U.S. National Institutes of Standards and Technology, and the PA Department of Commerce, among others.

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