 Welcome to this session to discuss and inside an idea with Henry Chespero. My name is Sumitra, professor at NCI. Henry, welcome. Oh, thank you. You're best known for the discussion around open innovation and perhaps even the father of open innovation. So can you perhaps explain what does open innovation mean? So open innovation in very briefly would be the idea that organizations should make much greater use of external ideas and technologies in their own innovation activities on the one hand. On the other hand, a lot of their own internal unused ideas and technologies should be allowed to go outside for others to use as well. Now you've probably seen open innovation being practiced, implemented in a number of corporations. So what kind of benefits do companies get from it? So I would say there are at least a couple of important benefits on the outside-in half of the model. You get the benefit of reducing the cost of your own activities because you are leveraging others as well and you only pay for the part that you're using. And you can start in the middle with outside organizations or contributors. You don't have to start at the very beginning. So there's a cost efficiency in that. Also a time savings for the same reason. You don't have to start at the very beginning and fund all the loose ends, the blind alleys that come in any extensive research project. Instead, you only work with the things that have already met a certain demonstration and test and from there you build on top of it. So those are some of the benefits on the outside-in. The inside-out benefits are different. On the one hand, by sharing your ideas much more widely, you can actually construct value chains from suppliers yourself, your downstream distribution to the final consumer, attracting people in parts of the ecosystem you want to stimulate by sharing these things. Alternatively, you can sometimes earn a royalty on technologies that you share and so they may be using them in completely different areas that you would never get to on your own, but now you're participating in that as well. So it makes research and development more economically sustainable because you don't have to simply restrict its usage to your own business. You can open up its usage for many other businesses. Now in terms of the impact of open innovation ideas, how do you see sort of influencing the challenges and innovation that companies, for example, sector of pharmaceuticals face? So there are a lot of challenges faced in industries like pharmaceuticals. There's widespread agreement that the so-called blockbuster business model of big pharma is so 20th century. It's over and it's really not economically sustainable. If you look at the pharma trade association for all the pharmaceutical companies, they show that pharmaceutical R&D spending is going up and up and up. But the number of new compounds being produced is going down, down, down, down. So it's getting unsustainable to keep doing that. So the prescription of open innovation would be, don't try to do it all internally, open it up. And indeed in pharma you can see areas where you see, instead of the marathon from the lab all the way through to the market, much more of a relay race. But if you look at innovation, whether in pharma or many other sectors, traditionally it's been very much 100% company owned, 100% real benefits and real life. So the question is, what kind of cultural leadership challenges are faced in making the transition? Because the transition is very nice to picture the relay, but it's a major change for these organizations. You're exactly right about the change in the mindset. I think the starting point has to be not all the smart people work for us. And as a culture, instead of being threatened by that, we have to embrace that and say great, how can our smart people go out and find, collaborate with, and then leverage the other smart people that don't work with us. So open innovation is not about outsourcing R&D to somebody else. It's really about leveraging and enhancing your internal capabilities by these other mechanisms and making you more efficient and effective as we were saying earlier, not only in cost, but also in time, and even I would say risk. Because you were sharing often the risks in these projects as well. You talked about smart people and all companies and all organizations do the best to attract the best people. And how does open innovation or the concept of open innovation change talent management in organizations? Well, it's a really good point that many organizations include retention, promotion and reward systems that really reinforce the earlier closed approach. So it's clear the culture really celebrates the internal discoveries of an impressive industrial research lab. If you're moving to an open system, you don't let go of that, but you have to augment it with some new reward systems. You have to celebrate not only the internal achievements, but recognize and celebrate the external ones as well. I think the focus and celebration is very important what you're saying. And clearly, for managing talent now, you have to celebrate many different kinds of achievements. Right? Now, we talked about inside out, outside in. Which one of these two do you find more prevalent, more easier done? There's no question that the book came out back in April of 2003. And I would say in that time, the outside in part of the model has been much, much more accepted by organizations that I'm aware of. While the inside out piece of the model is still very underdeveloped, I would say. And why is that? Well, let's see. One reason, I think, is that using the outside in requires you to change your mindset, your culture, particularly in your research and development organization. But for much of the rest of the company, life goes on as before. When you get to the inside out part of the model, you're letting ideas and technologies that are not being used right now on the shelf going to the outside. This is potentially threatening to the business that didn't take advantage of the technology when it was inside. But the biggest fear is not that the technology goes outside and fails. The biggest fear is the technology goes outside and becomes very successful. And that's embarrassing to the people inside the organization who saw it long before it went outside but didn't see any opportunity in that. And so I think these kinds of awkward, embarrassing possibilities that involve many other parts of the organization have caused the inside out piece to be slower to develop. Is there also a cultural element out there in terms of is taking something from someone easier than giving what you have created to someone else? Well, of course, when you're using the outside in, you are taking from someone else who is in turn giving to you. So there is a market of sorts. There is participation on both sides of that market. Now, usually what happens is the donors, so to speak, the ones doing inside out might be the universities, might be individuals or small companies, et cetera. And for them, this is their exit or this is their opportunity to get some reward and then move on to their next thing. So they don't see it as inside out, they just see it as a successful outcome. But you're right, for the company that receives it, I think there is something that's in this case more blessed to receive than it is to give. Now, let's look at open innovation and perhaps just compare and contrast with other similar, quote-unquote similar things like, let's say, open source, how do you compare the two? So open source software shares a number of attributes of open innovation, but there are distinctions. I would say one of the things it shares is the idea that useful knowledge is widespread and lots and lots of people can make meaningful contributions. So that part is completely like outside in kind of activity. Where the two begin to part company is around the notion of a business model. In open innovation, the idea of what you bring in from the outside and what you let go to the outside is framed by the business model of your organization, how you create value and how you capture at least a piece of that value for your own organization to sustain yourself going forward economically. In open source, it's been crafted to try to deliberately avoid a business model being formed around it. Now, you have moved on beyond open innovation and your other two books focused on business models and services. Maybe you could just describe how your thinking has evolved over the last few years. So yes, the second book came out a few years in 2006, about three years later called Open Business Models. And the contribution there was to say, sometimes a better business model will beat a better technology. So the book was about how do you open up business models so you can innovate those and get more people contributing and building on top of what you're doing and create more value for yourself in the process. So before we come to your third book on service on the business model angle, do you feel that the current trends, let's say in hyper connectivity, the global internet emerging markets are allowing or creating more space for these innovative business models, open business models? This is I think one of the insights from the inside out part of the open innovation model. Most organizations that are big enough to have some ability to do genuine research and development, they're not just scrambling to stay alive, they're actually planning for the future. Most of those same organizations are doing that activity to fit their current business model and all too often they become trapped by the business model. One of the things the inside out part of the open innovation model allows you to do is by letting others use these ideas in different markets with different business models, you get the best market research money can buy. Because you have a real customer who buys a real product paying real money. And no survey research focus group, other conjoined analysis, other qualitative methods you can use is gonna give you that validity in the research. So by letting these things go outside, seeing what happens to them, finding the business models that emerge from them. That can be very powerful. And for companies that are trying to take their business from one region or one country to new regions, a very common problem is they not only take the product and the technology, but they take the business model with them as well. What needs to happen is you need to have a different business model in a region like that that's much more locally attuned. And it's gonna rearrange how you take your ideas and technologies to market. So maybe as a closing question to you, Henry, I would like to just ask you what are your dreams about what would you like to see happen and what do you think is gonna happen around this whole space of open innovation broadly defined. How open will we become and how open should we be? So I do believe that one of the fundamental philosophic underpinnings of open innovation is the idea of abundance. That we are not in a world of scarcity. We are in a world of abundance when it comes to knowledge and useful stuff all around us. And that's not confined to one country, to one region. I think it applies many, many places. So a dream I have, and one of the things I'm exploring in future work, is to examine what are public policies that can enable this? And what public policy should we stop doing that might be getting in the way of this? There are a lot of ways and a lot of business models for people to create and engage in value and then capture a piece for themselves. We need enough protection for people to be able to make those initial investments. We want to keep the protection low enough that these other business models have a chance to flourish and let consumers decide how best to enjoy the fruits of people's knowledge. Thank you very much, Henry. I'd like to especially thank you for helping make the world a little bit more open. I think it's a better place. Thank you very much. Thank you.