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Innovation Happens Elsewhere

Companies who wish to create wealth are always interested in productivity. Productivity includes being able to innovate effectively. Effective innovation is not merely being able to invent and improve, but also being able to determine what to invent and how to improve. High productivity requires doing less to produce as much or more--a company that requires its own employees to labor hard and long to make its products or perform its services will be less profitable, in general, than one that can take advantage of the efforts of others. In most cases, this means that a company wishing to innovate productively must recognize that valuable work and talent exist outside the confines of the company and that it must find ways of using that outside material and expertise while still maintaining a competitive edge.

Until now, the most effective way of accomplishing this has been to purchase a company that has a technology or product of interest to the buyer along with the personnel who can maintain and move it forward. One of the best-known examples of this was Turbo Pascal, one of Borland International's most successful products--one that helped put Borland on the map.

Turbo Pascal started out as Blue Label Software (BLS) Pascal, developed and marketed by a company called PolyData based in Copenhagen, Denmark, and written primarily by Anders Hejlsberg. It was a subset of the full Pascal language along with an editor, compiler, and run-time libraries. BLS Pascal evolved into a complete Pascal implementation, changing its name to COMPAS and then PolyPascal as it moved to other platforms and further evolved. In 1983 PolyData entered into a license agreement with Borland. Borland wrote a new editor and menu system for PolyPascal, and the resulting product became Turbo Pascal. PolyPascal and Turbo Pascal were marketed in parallel for a few years, but thereafter PolyPascal was discontinued. When Anders Hejlsberg moved to the United States in 1987, he became a full-time employee of Borland.

One of Borland's most significant innovations with PolyPascal was to take a product that had previously sold for about $500 and sell it for $49.95. At that time, fully professional-grade development environments including a language compiler sold for around $3000, and Turbo Pascal was of similar quality. Therefore, this price innovation had a dramatic effect on the market. Moreover, not only was Borland able to get a top-quality development tool, but it was able to hire a top programming-language designer and implementor. By not having a stake in how hard it had been to develop the product, Borland was able to price the package so that it would sell dramatically well. Few people at that time--the early 1980s--had any idea that software developed for sale could be sold reasonably at commodity prices. And even after Borland entered the scene with Turbo Pascal, the lesson was learned only slowly.

Nevertheless, an important part of the Turbo Pascal story is that intellectual property rights were well defined and protected for both PolyData and Borland. Borland would not have entered into the agreement without the exclusive rights the agreement provided. Deciding whether to incorporate open source as part of a business strategy requires coming to grips with which property rights and control over the technology are important to your company.

The phrase "innovation happens elsewhere" captures the essence of the idea of adding just the smallest amount of innovation necessary for competitive advantage. It is common for people working for a technology company to suffer, at least a little, from the belief that all the really innovative people in their particular technology happen to work at that company. This can cause such a company to work too hard to produce every last bit of related technology, which is often not the best competitive approach. Many advantages accrue when a company adopts the attitude that most innovation happens elsewhere and focuses on choosing the best outside innovations and figuring out the right distinguishing features to make its products competitive.

Traditional open source is one of the best examples of this approach. The Internet started out as the ARPAnet, and many of the underlying technologies powering it--Domain Name Service (DNS via BIND), email transport (sendmail), and various open TCP/IP implementations--were developed in the public domain and remain open-source implementations, even when there are commercial versions available. Working in the public domain in the style of an open university research environment was the norm when the foundations of the Internet were being laid in the 1970s and early 1980s. Although there were software companies and software for sale, software was considered secondary to hardware, which made up the bulk of the purchase price of a computer system. Even in the late 1980s the concept that the software for a system might cost more than the hardware was laughable--the hardware is real, after all. Today it is quite common for the software costs to dominate the cost of a desktop computer system, and this trend has paralleled the rise of the software market. Open source is the continuation of this earlier style of software production, and the increase in activity in open-source projects has likewise mirrored the expansion of the commercial software segment, largely as a reaction to it.

Despite their apparent political or philosophical tendencies, the open-source and free-software activities point the way toward harnessing outside innovation for companies. What we mean is that not only is the software produced by open-source projects useful for improving productivity for companies, but so are the open-source practices and the idea of companies participating in and starting open-source projects.

By engaging an outside community, a company can learn which innovations to make and how to make them. All that is required is to play by some rules, give up the commodity part of the product, and skillfully retain the high-value part. In exchange, the community will, in general, act as a co-author of the company's product and innovate in unexpected ways.

Open source is not simply a resource--it is a viable business strategy.