The days in which innovation was achieved solely within an organisation's defined and often siloed internal R&D team are long gone. Knowledge and technology might still come from more traditional collaboration partners – universities, research organisations, trusted suppliers, but, increasingly, these partners now take on a number of guises, even that of a direct competitor. In January 2019, for instance, car giants Ford and VW announced a global alliance to develop zero-emission vans and pick-up trucks. In the longer term, they may venture into electric and autonomous vehicles together. Often, innovation partners include start-ups and scale-up businesses, consumers and not-for-profit organisations. They might come from related sectors. In technology-based innovations, which depend on niche expertise, they might derive from multiple non-related sectors. Parkinsons UK for example have collaborated with Benevolent AI to solve specific research challenges. Ideas and technologies may also be co-created by the value chain, or fostered in group forums or via innovation competitions. In theory, this is all great for pushing the boundaries of possibility. But, not all open innovation pursuits are successful. Effective innovation requires clear and properly executed strategies, discipline, leadership and a genuine innovation culture; it will involve skills, tools and expertise – and it takes time to embed. Not surprisingly, that means that while most companies understand the importance of innovation to their business, far fewer report that they are satisfied with their performance in this regard.1 The rapid change in approaches to innovation has meant that many organisations are playing catch up. For those who have developed an innovation strategy, it may be this is not in tune with the business strategy.2 New approaches to innovation can be met with considerable internal resistance due to a lack of buy-in at a management level, an internal mindsight that continues to focus on traditional approaches to R&D, or a lack of the cross-disciplinary skills (and cooperation) needed for successful innovation. How are businesses managing these challenges, and how are in-house legal teams grappling with them? Is the rapidly changing and diversifying innovation ecosystem forcing legal teams to reconsider how they support their organisation’s innovation strategies? And if so, how? 1. http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/how-we-help-clients/growth-and-innovation 2. A recent study found that 54% of businesses surveyed struggle to bridge the gap between innovation strategy and business strategy: PWC, Reinventing innovation: Five findings to guide strategy through execution, 2017. Data Sources: Audience polling from Open Innovation event hosted by Herbert Smith Freehills in London, 2 July 2019 72% Increase 20% Maintain 8% Decrease 54% Yes 46% No HERBERT SMITH FREEHILLS OPEN INNOVATION: COLLABORATE TO INNOVATE Themes from our conversations Open innovation - open to interpretation? It is clear that across sectors, as businesses look to innovate by collaborating with a broader and more diverse range of partners, many are seeing “open innovation” as being particularly helpful in providing organisations with quick access to new ideas and technology. Despite this, there is not necessarily a clear understanding of what “open innovation” is, and many organisations seem to have developed their own sense of what it actually involves. 3. “H. Chesborough, W Vanhaverbeke & J West (eds), Open Innovation: Researching a New Paradigm, Oxford University Press, 2006”. Innovation models can be seen as a spectrum from "closed innovation" when a business develops and commercialises new products in-house, through to what may be termed 'free innovation' in which ideas and information are shared freely and with no restriction on their use. Between these two extremes sit a range of approaches to innovation with varying levels of collaboration, structural flexibility and openness to external parties. The term "open innovation", originally coined by organisational theorist, Professor Henry Chesbrough in 2003, has since been characterised as “a distributed innovation process based on purposively managed knowledge flows across organizational boundaries”.3 It has come to encompass a number of different ways of improving efficiency, utilising new technology and allowing organisations to gather multiple ideas from a range of sources. The pharma sector is one that has seen significant shifts from an introverted approach to a more external focus in its innovation strategies, ranging from the integration of external innovations, early and diverse alliances relating to new drug candidates, and even crowdsourcing. This has seen a corresponding awareness of a greater need for flexibility on the legal and IP side, but accompanied by a clear position on the non-negotiables. It seems that open innovation is sometimes used to describe a way in which organisations can gather and develop ideas and technologies from within, in addition to a process involving external collaboration. Through internal open innovation, organisations seek contributions from their existing employee talent pool, rather than relying on a dedicated R&D or "innovation" team, separate "ideas units" or external consultants. This often involves incentivising and rewarding employees to innovate, as well as providing simple mechanisms that encourage the submission of ideas. Some have attributed this so-called "insourcing" to the constant pressure to reduce costs, while others simply see their employees as previously untapped resources already attuned to the business and potentially valuable improvements. These companies are therefore investing in systems to connect employees with the expertise and frameworks that they need to develop ideas as they emerge. External open innovation can take the form of collaborations with third parties through individual arrangements or arrangements with curated communities of specialists in a given field, interacting on agreed terms and conditions within a "community" with whom problems requiring innovation can be shared. Other approaches are even more open, such as those which use a public facing platform to float issues and collect ideas from a community of patients, carers and clinicians. What is "Open Innovation"? “Open innovation is about creating partnerships with fintechs and leveraging on new ideas for innovative solutions” SocGen “Open innovation is being where you can find the infrastructure and environment for anyone to innovate. It's about openness, a common language and the ability to set standards and provide wellgoverned platforms” Oxford University Innovation “It is about decluttering innovation” Circle of Intrapreneurs OPEN INNOVATION: COLLABORATE TO INNOVATE HERBERT SMITH FREEHILLS //06 “We’ve focussed on creating an ecosystem of collaboration whether internally or externally” BARCLAYS “Open Innovation is an open remit to think outside the box for individuals and teams – it's a change of approach which can add efficiency and robustness” MAN GROUP “Facilitate ideas from wherever they're generated – not just the innovation division” PARKINSON'S UK Many businesses we spoke to have adopted the approach of opening up challenges or contests to the public at large such as by posting them on their websites or through "hackathons", which allow them to identify potential innovation partners with the right skills. Many also reported an almost inevitable expansion in the range of their external collaborators, with the active sharing of non-core assets with competitors, as well as an expansion out from a business' traditional remits in order to sponsor, and thereby harness, a more diverse range of technologies generated internally. Sometimes these collaborations are with external start-ups which are effectively incubated by the business with the successful ones later being fully integrated. Others then may be spun-out. In some cases internal "start-ups" are encouraged and the best concepts retained (although this can sometimes lead to a loss of innovative talent where employees' ideas are not taken up by the business in the longer term and those staff then leave to continue to develop the project independently). Others we interviewed spoke of posing questions or challenges internally on their intranets so that anyone in the business could interact and submit ideas or solutions. Anglo American’s “FutureSmart Mining™”, Rio Tinto’s “Mine of the Future™”, and Iluka Resource’s partnership with the Unearthed hackathon are just a few examples of the ways in which the mining sector have been looking to facilitate external collaborations and a more open approach to innovation. There were also trends to industry-wide participation towards the creation of common platforms. An exploration of blockchain for example being used in the energy sector for contributions to national grids. Clients in other sectors felt more restricted due to their heavily regulated nature, often using start-ups or independent ventures to innovate in a less restrictive environment, before absorbing successful innovations back into the main business in a fashion acceptable to its regulators. Whilst organisations define open innovation in a variety of ways it is almost always based on the fundamental idea and realisation that knowledge is spread throughout a business, industry or society rather than just being held internally. By accessing both internal and external knowledge, organisations are able to exploit a wealth of information and create a bigger pool of ideas in order to seek the best solution to a specific problem which they are facing. Data Sources: Audience polling from Open Innovation event hosted by Herbert Smith Freehills in London, 2 July 2019 Does your organisation have a dedicated innovation team? 66% Yes 29% No 5% Not sure HERBERT SMITH FREEHILLS OPEN INNOVATION: COLLABORATE TO INNOVATE Speed, flexibility, and trust Speed Clients have stressed the importance of getting access to market first; if the collaboration is slow, it loses value. In the race to innovate, first mover advantage is key; missing out on a technological development can freeze a business out of important slices of the market. This commercial driver (which some described as overriding almost everything else) has focussed clients towards efficiency rather than perfection, even if it makes the initiative riskier. With that in mind, in-house legal teams across multiple sectors have recognised that they need to support their businesses in assessing and understanding risk, rather than being focused on hammering out the intricacies of the perfect deal. At least one client from the mining sector observed that the sector recognises that “a more open, collaborative approach to innovation is more effective” and drives better outcomes. But a more open approach requires agility from the legal team – legal needs to be “focusing on the material aspects” rather than “having red pen over the contract." Flexibility As one of our interviewees said, the key is to "declutter innovation". As with any project, it is not always clear at the outset whether it will gather traction and interest. It is important to be flexible in order to be able to reach the best outcome collaboratively. After all, technology transfer is the "art of the possible" said a client involved in academic partnering, it needs to work for both partners. Moreover, businesses need to be light on their feet to allow a collaboration to gather momentum. The reality is that not every project is taken forward, and a more flexible approach means businesses can avoid wasting time on the details of initiatives that do not progress. To address this, a staged approach to new projects has been suggested by clients from various sectors. Multiple clients, in sectors as diverse as mining and pharmaceuticals also identified that having a clear, upfront, understanding of your baseline position on key issues, such as IP, can give you flexibility on the rest of the deal at an early stage. Companies who report the greatest confidence in these new forms of innovation are those who emphasise communication between innovators and legal teams early and regularly so that all teams are on board with the project, and emphasise flexibility and adaptability throughout the development process. Trust Clients have also identified that a major stumbling block for innovation collaborations can be whether you look at people as competitors or as partners and whether things end up being collaborative or adversarial. Here, it is possible to draw a parallel to the open source software community within which there is an expectation that participants will do the right thing even if it is not strictly legally required. A failure to comply with that expectation runs the risk of falling out of favour with the community. The position is similar when it comes to open innovation – you have to "It's a shift in brand values – more from a model where the charity does everything, to one where it wants to facilitate the best out there" PARKINSON'S UK "[We're seeing] increasing use of 'early' use technology, under a more flexible agreement, such as for early development work or non-commercial research. Overall, I see tech transfer as the art of the possible – it needs to work for both partners, so flexibility is the key." OXFORD UNIVERSITY INNOVATION "On a macro level it’s creating the right culture; on a micro level it’s finding the resources and capacity to drive the initiatives forward; and to go even more granular, it's having the right framework in place". SKY Starting blocks for collaboration While there may be differing views as to what open innovation is, it is clear that most businesses are becoming more receptive to new forms of collaboration to stay ahead of the curve, or at least to prevent being left behind. In doing so, they are looking to implement processes and structures that are built on three fundamentals: speed, flexibility, and trust. OPEN INNOVATION: COLLABORATE TO INNOVATE HERBERT SMITH FREEHILLS //08 be more upfront, more open, and clearer about what you want and where you are going. Our interviewees spoke of this in terms of openness and “speaking the same language” as your collaboration partners. You need to act quickly but also in a way which preserves long-term reputation and goodwill to avoid becoming an undesirable collaborator in future projects. Talent and diversity The battle to attract the best talent has intensified, as a critical part of driving internal innovation and creativity within the business. This is coupled with most companies' burgeoning investment in technology and a heavy demand for software and systems development (and, in particular, input around data science, AI, machine learning and blockchain). However, there was widespread recognition that this brought new challenges to ensure that a diverse pool of talent was being recruited, to ensure that teams would maximise the range of ideas, contributions and skillsets available to harness innovation. Structures and obstacles Hurdles to structural success While recognising that speed, flexibility, and trust are key, ultimately, there is still a need to decide how to frame each collaboration – some sort of structure is required after all, and there is no "one size fits all" approach. Particular hurdles in establishing an ideal structure might include: collaboration with academia where there might be a clash of interests or priorities; the approaches and histories of different jurisdictions or subsidiaries; striking a balance between the profit and charity elements of social entrepreneurship; and the need for compliance in heavily regulated sectors, such as financial services. In this regard, start-ups or newer businesses might be more likely to be comfortable with the idea of open innovation, while mature companies may be more inclined to run with policy-driven approaches to ensure consistency and efficiency. Ownership At least one of the reasons that start-ups or newer businesses may be more aligned with the drivers of open innovation is their shift in thinking around ownership of rights. Clients have told us that while the emphasis has historically been on owning and protecting the products of innovation (such as intellectual property), this is no longer the case. Now, the focus is on collaborating with a more flexible approach to ensuring access to technology. That does not mean that nothing is worth owning. To the contrary, more than ever before, intellectual property is core to the value of many businesses. However, the way in which it is used and valued is shifting – it is used to facilitate collaboration through access regimes ranging from licensing to open source platforms, rather than being used to lock 4. W Backler, T Heikkilä, D Kennedy, ‘The New IP Strategy: Make Love, Not War”, Boston Consulting Group, 6 June 2018 at https://www.bcg.com/en-au/ publications/2018/new-ip-strategy-make-love-not-war.aspx (accessed 24 May 2019). Data Sources: Audience polling from Open Innovation event hosted by Herbert Smith Freehills in London, 2 July 2019 Does your organisation have a framework or process in place to handle innovation? others out of the market – it is used "to make love not war".4 Clients also report a shift away from their traditional focus on ownership of all potential IP assets to ownership of 'core' or 'end game' assets, or securing rights through licensing. Investors in start-ups still look for IP rights as a form of security and collaborators for ownership or unrestricted use of the results of collaboration, but the approach is becoming more flexible with licensing often taking the place of ownership in order to provide the flexibility and collaborative environment with which to get ahead in the market. 63% Yes 19% No 19% Not sure HERBERT SMITH FREEHILLS OPEN INNOVATION: COLLABORATE TO INNOVATE The tension between legal and business The alignment of legal and business desires is crucial to drive innovation. As lawyers are fundamentally risk advisers, some clients feel that their mindset is inherently traditional. By approaching innovation from a legal angle, lawyers may be tempted to "play it safe" and reduce the flexibility and security of collaboration arrangements. To avoid this, parts of some businesses may not consult their legal teams at all, or may do so, say at a deliberately late stage in the project, when it is too late to go back. This may be because of an in-house legal requirement for strict compliance with standard non-disclosure agreements ('NDAs'), the negotiation of a full collaboration agreement before any work can get started and even a take-it-or-leave-it attitude on terms and conditions. This is particularly pertinent in heavily regulated sectors, such as banks or charities. The consequence of this misalignment is that flexibility and cooperation are affected and often simple legal solutions can be missed. Resolving the tension Some of those we interviewed solved this problem by integrating the legal function into the innovative areas of the business, so that the in-house legal teams were in at the start of new projects and could appreciate the commercial needs as well as being able to identify the legal ones at an early stage. This approach also allowed commercial and R&D teams to appreciate the legal issues and help in developing a joint approach that works from both a commercial and legal perspective. The key message from most of our client conversations is that the earlier that legal gets involved, the more successful an innovation project is likely to be. Creating a legal framework around open innovation will emphasise the outer limits or 'red lines' of projects, and crucially, provide an overall structure. It is within this overall structure that any tension can be resolved more comfortably. Clients suggestions included considering termination provisions in joint venture scenarios; providing a checklist to cover all legal aspects for start-ups, spin-outs, or entrepreneurs; and undertaking formal training listing legal do's and don'ts. By setting out the kinds of legal protection that may be available in a particular sector at the outset, such as intellectual property rights or contractual protections, businesses will be better placed to understand the legal context within which they launch innovation projects. Clients realise that this may require a shift in culture within legal teams, with the inclusion of different backgrounds, generations, and perspectives to push innovation forward. When creating risk models, which lawyers inevitably do, it is important to challenge norms, and change the psychology of teams over time. Rather than having a single approach to any and all contracts which the business enters into in respect of structure, terms, conditions and levels of risk which are acceptable, in-house lawyers should adopt their approach to fit the nature of the collaboration, taking into account what the business ultimately wants to achieve and the level of risk that it is willing to take on.
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Open Innovation: Collaborate to Innovate
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