Mercury's Blog

I want to begin with a pet peeve: I really don’t like the word “innovation.” I think that many people and corporations have begun turning an important concept into a buzzword.

However, innovation is still a very important concept. An organisation can grow two different ways: through market size and share, but also through innovation, generating new products and services. I firmly believe that while both are important, only innovation can keep a company healthy in the long term. But innovation happens on multiple levels. Jeff Bezos of Amazon.com said this in an interesting article in BusinessWeek:

Q: Academics say Amazon excels at different kinds of innovation — from creating new ways of doing business to making small changes that improve the online store. [...] How do you balance these approaches?

A: There is a ton of fine-grained innovation that happens on a daily basis. That kind is super important—things that make our operations more efficient and lower cost so we can afford to offer lower prices to our customers. But there is a spectrum, and at the other end is large-scale innovation like Kindle and Web services and Amazon Prime. With large-scale innovation, you have to set a very high bar. You don’t get to do too many of those [initiatives] per unit of time. You have to be really selective.

I’ve talked before about prediction markets and using them for innovation. Specifically, using PM’s to rank ideas and innovations is a horrible idea. However, I do believe that once you have a short-list of good ideas, prediction markets are appropriate to get a numerical comparison of how each could affect a business or organisation.

But so far I’ve been distinctly unimpressed with how most corporations approach “crowdsourcing” and innovation. There are two approaches, and both have a similar flaw:

• External: Companies ask their customers or the public at large to propose new ideas.
• Internal: Companies ask their employees to propose new ideas.

All of the software solutions to each of these approaches follow a similar pattern; each is essentially a Digg for ideas. But an idea is only the first step in innovation, and it’s by far the easiest step. Selecting the best ideas is only a further marginal step forward. While a “crowdsourced” method of finding and ranking ideas is great, those ideas then go through a typical corporate process to be approved, managed and implemented. What starts off so promising (getting a group of people to start the innovation process) then becomes a standard organisational process. This implementation are where great ideas go to be killed off.

Great ideas that lead to great innovations inspire passion in the people that believe in them. This passion is what is lost when an idea gets put into an standard process. While the idea still may be implemented, I think that it will generally lose momentum if the people making an idea happen weren’t those that were passionate about it.

Side note: I mentioned the difference between external and internal crowdsourcing above because there are important differences when you go beyond a Digg-style ranking mechanism. Namely, an internal approach can take advantage of great ideas without any real intellectual property concerns, where an external approach needs to be sensitive to this issue.

There are some success stories, however. When a true marketplace for ideas and innovations is established, there is a flourishing community. For example, InnoCentive is a marketplace where companies can post technical problems they’re having problems solving, and anyone can try finding the best solution. This is a great model, but only works when a company has a well-defined problem that can be addressed by the innovator. The innovators can never initiate an innovation, they can only react to a request for innovation.

Summary

Innovation is NOT about ideas. Innovation is about putting great ideas into practice. While ranking systems are appropriate and a good start to the process, they are just the easiest first step.

I am dissatisfied with the current approach to crowdsourcing and innovation because current solutions just attack a small portion of the innovation process. I have some things I’m working on that I hope will eventually bridge this gap. This is a topic I expect to write about much more in the coming months, and would appreciate any and all comments, public or private.

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If you haven’t read it, the New York Times recently published a good article on prediction markets. It covered the usual topics and players, with quotes from Robin Hanson, Emile Servan-Schreiber, and discussion about Inkling Markets and Xpree. More importantly the author had some great quotes from Jeff Severts at Best Buy and Zubin Dowlaty of InterContinental Hotels about their experiences with prediction markets. (Though not mentioned, they use ConsensusPoint and NewsFutures software, respectively.)

For anyone that’s read this blog, there is likely little new in the article that you haven’t heard before. It’s great that it was focused more toward corporations and how companies use them, and I hope that a steady drumbeat of articles like this will help generate the momentum for more widespread acceptance and use of prediction markets.

But I want to focus on one aspect of the article; using prediction markets for innovation. I believe that while you can use prediction markets to help quantify innovative ideas, using PM’s to prioritise ideas is a poor use of the tool.

Prediction markets exist to forecast a variable; this may be a metric (such as sales figures), or a probability (which candidate will win the election). For markets to work effectively, the variable should be well-defined, such as US sales in Q1, will the Minneapolis office open on schedule, etc. By their very nature, ideas tend to be quite poorly-defined. Before an idea is ever put into place, significant work takes place to develop it within a company.

When companies start using prediction markets to “harvest and prioritize ideas” I believe they are using a prediction market incorrectly. The traditional prediction market is run on a variable that’s both well-defined and committed. (You are going to continue selling a particular widget; the project to open the Minneapolis office is going to happen.) However, running prediction markets to assess ideas that may change before implementation or may not happen at all turns the entire process into a simple beauty pageant. A beauty pageant doesn’t find the most beautiful girl, it finds the girl that the particular judges on the day find beautiful.

The New York Times had an interesting article recently that discussed this issue from a different tack. “Is Justin Timberlake a Product of Cumulative Advantage” discussed a study which tracked how identical songs become (or didn’t become) popular in separate social groups. Similar principles easily translate to prediction markets on ideas. In a phrase, this is the problem:

social influence played as large a role in determining the market share [price] of successful songs [ideas] as differences in quality.

So what can you do to harvest collective intelligence to generate, prioritise and quantify ideas?

Go out there, generate some great ideas in your company. But don’t use a prediction market to prioritise them; social influence plays too big a role since the market is (at that point) too ill-defined and it hasn’t been committed to by the company. Prioritise them somewhere else.

Once the list of ideas has been fully developed vetted down to a handful of well-defined ideas, then a prediction market could be useful to quantify the opportunity. At this point, traders would know enough about the opportunity to judge the potential outcome of putting them into practice, and the outcome should be reasonably accurate.

To be fair to InterContinental Hotels (which is quoted as using prediction markets for this), they are actually a NewsFutures customer and use their Idea Pageant software, instead of the normal Prediction Market software. (The Idea Pageant seems to be an effective way of doing the non-prediction-market prioritising that I mentioned above.) However, there are a number of companies that do use standard prediction markets to prioritise new ideas.

If you’re using prediction markets for this, I would suggest you stop. As discussed in the New York Times article above, the first-movers and influencers are very influential when assessing new ideas. When an idea is new and ill-defined, people put much higher priority on information from their social network instead of their own impressions. If you took the same set of initial ideas to a completely different group of people in your company you may get a very different set of results. This means that you’re not judging what people in the group think collectively, you’re measuring what that particular group thinks.