WHY PRIZE? THE SURPRISING RESURGENCE OF PRIZES TO STIMULATE INNOVATION [Research Technology Management]

Well-designed prizes leverage the principles of competition to motivate a fi eld of solvers to attack a particular challenge. All kinds of organizations can use prizes to engage user communities, enhance their R&D portfolios, and jump-start innovation.

OVERVIEW: Pairing a clear, measurable end goal with a variety of motivators, well-designed prizes leverage the principles of competition to bring a fi eld of solvers to bear on a given challenge. Prizes offer organizations an important tool to foster innovation and raise awareness. By setting forth a credible but challenging goal with minimal hurdles to entry, prizes rally diverse approaches around a focused agenda, supporting an entire fi eld of innovators rather than a single solution. Perhaps most importantly, they capitalize on a deep-seated competitive drive, capturing public interest for the issue at hand through the creation of visible heroes and compelling stories. This article explores how and why prizes are most effectively used and how organizations can use competitions to enhance their R&D portfolio and engage user communities by embracing diverse risk-takers and investors.

KEY CONCEPTS : Innovation contests , Crowdsourcing , Open innovation , Disruptive innovation , X PRIZE

In this era of social networks and globalization, successful organizations are learning to take a broad view of innovation, recognizing that yesterday's protest "Not Invented Here!" is today's battle cry. Of the many tools available to broad-minded organizations looking to source ideas from outside their usual teams, prizes offer perhaps the most compelling formula, bringing together maverick ideas, broad engagement, high leverage, a results-oriented mentality, and heroic story arcs built around the quest for the prize and fl ashbulb-worthy winning moments. Innovation competitions are not the right answer to every challenge, but where they fi t, they are an incredibly powerful tool for attracting innovative solutions.

History of Prizes

Prizes are not a new tool in the innovation manager's toolkit; indeed, they have been around for hundreds of years. Napoleon famously crowdsourced the invention of canning to preserve food in response to the challenges posed by the need for his army, "marching on their stomachs," to be fueled through the winter months. Charles Lindbergh did not cross the Atlantic on a whim, but revolutionized aviation in response to the $25,000 Orteig Prize. And the invention of modern timekeeping and maritime navigation began with eighteenth-century British cabinetmaker John Harrison, responding to the British Parliament's Longitude Prize, awarded for solving the problem of determining a ship's longitude at sea.

When the Ansari X PRIZE was launched in 1996, it harkened back to this long heritage of prizes to spur invention, offering $10 million for the fi rst private team to launch a three-passenger vehicle into space (100 kilometers) twice in two weeks. This challenge, which brought innovators into human spacefl ight, a domain thought to be the exclusive territory of governments, spurred 26 teams from seven different countries to spend a total of over $100 million trying to win the $10 million purse. In 2004, SpaceShipOne, built by aviation pioneer Burt Rutan, rocketed out of the California desert to claim the oversized check; in addition to the prize, Rutan landed a contract from Virgin founder Richard Branson to supply the vehicles for a newly imagined Virgin Galactic. Over $1.5 billion in investments later, the private spacefl ight industry is a bona fi de commercial venture and a cornerstone of the U.S. national space policy. All catalyzed by a prize.

On the heels of this success, a veritable industry of competitions has emerged, valued at over $1 billion and growing (McKinsey 2009). The intersection of this risk capital (to fund the prizes) with a highly connected and highly engaged global audience has resulted in tremendous yields, creating a vibrant marketplace for tough challenges and bright, creative solvers, independent of location and pedigree. Philanthropic donors, corporate R&D organizations, marketing teams, and even government agencies are getting in on the action. In response, a broad set of service providers have sprung up to support these challenges, allowing those who hold the purse strings the freedom to contract out everything from scoping a compelling challenge to writing the rules, recruiting competitors and judges, managing contest operations, and marketing the challenge. With this support, it is now easier than ever for any organization to launch a successful prize.

Benefi ts of Prize Competitions

Many different competitive inducement mechanisms exist for fostering innovation and engagement. While retrospective awards , such as the Nobel Prizes, are effective at recognizing success and associating a brand with excellence, their post hoc nature limits the amount of direct impact they can have on a community. Inducement prizes, on the other hand, challenge competitors to meet specifi c success criteria, driving forward a given agenda. Inducement prizes are notable for at least fi ve features that differentiate them from other procurement mechanisms:

1. They cast a broad net. In most procurement mechanisms, a single "winner" or small group of winners must be defi ned in advance, with funding provided to those contenders that appear best able to deliver on their promises. This means an early culling of less obvious candidates from the fi eld of possible participants on the basis of limited information. Prizes, on the other hand, incentivize a broad fi eld of participants. There is no need to guess ahead of time what the best solution or the best team might look like.

2. They pay for performance. Unlike grants and many contracts, inducement prizes typically pay only on success, making them a highly effi cient means of accessing innovation.

3. They leverage outside resources. By attracting a fi eld of competitors and challenging them to bring their own resources to bear on the challenge at hand, prizes can be highly leveraged investment tools. The fi eld of competitors vying for the Orteig Prize won by Charles Lindbergh spent over $400,000 in pursuit of a $25,000 purse. Paul Allen spent over $25 million backing Burt Rutan's quest for the $10 million Ansari X PRIZE.

4. They create a parallel innovation process. Because prizes source from a wide fi eld of innovators, they allow for parallel, rather than sequential, innovation. When Netfl ix offered $1 million in 2006 for a 10 percent improvement in its prediction algorithms, it sourced over 40,000 entries, far more approaches than they could possibly have trialed in-house.

5. They attract public interest. There's something innately interesting about competition. Sports are a multibillion-dollar business for a reason. The race for a prize holds that same attraction, providing ample opportunities to win positive public attention. The recent Progressive Insurance Automotive X PRIZE for cars that could achieve over 100 miles per gallon, or its energy equivalent, garnered over 12 billion media impressions, providing valuable visibility to the whole fi eld of competitors, their backers, and the prize sponsor.

Prize Theory: How Prize Competitions Work

Why do prizes differ so much from grants, contracts, and other incentives? What is it about crowdsourced competition that yields such powerful results?

Our work suggests that the prize narrative taps into a broader set of innovators with a wider range of solutions, networking them in powerful ways. Unlike solicitations targeted to a narrow audience of "usual suspects," prizes leverage the inherent democracy of competition to attract new parties to the table. A broadly scoped prize is agnostic to the competitor's level of education, approach to problem solving, and grantsmanship. It opens the problem up to solutions not just from those who might be expected to have ideas, but from all those who know about the problem. In the process, it expands the scope of solutions from the predictable and expected to a broader world of possibilities.

The meritocracy of a contest with a clearly defi ned problem and specifi c criteria for success gives an edge to nimble, creative solvers who can attack a problem with single-minded focus, and it gives the contest sponsor unique access to people and knowledge that may have otherwise remained outside its typical sphere of infl uence. In the context of an established network, prizes can be a powerful tool for connecting with the proverbial "long tail." Rather than sourcing ideas from a small number of the most-established employees, consumers, or suppliers, companies can use prizes to reach out across the entire network to fi nd the best fi t to a given challenge.

Prizes also tap into a broad set of varying motivations to deliver a broad set of outcomes. For some solvers, participation in a prize really is all about the money in the purse. But that is not the primary motivator for the majority of the fi eld. The prize purse signals to competitors and spectators that this is a serious challenge. It signals that this is a problem that the sponsor is willing to invest in. For many solvers, the importance of the purse is merely this signaling effect. The real reason they will pour time, money, and resources into attacking a challenge may be the chance to work on an interesting problem, the thrill of the chase, or the legitimacy third-party validation accords to their efforts. They may show up because the challenger is buying down market risk by providing a guaranteed customer, thereby allowing them to take on bigger technology risks. Or they may be there because, whether they win or lose, they can grab a piece of the public attention that is garnered by the competition as a whole. This diversity of motivations yields a wider range of entrants and solutions than the average procurement or technology search process.

And the very value of prize competitions may lie in that wider fi eld of problem solvers. A seminal study by Jeppesen and Lakhani (2010) examined 166 science challenges offered on the InnoCentive.com prize platform. They found a strong correlation in the distance between the fi eld of a problem and successful solvers' expertise. Contrary to common intuition, successful solvers tended to be working further from their declared areas of expertise. Those whose expertise most closely matched a challenge were actually less likely to deliver successful solutions. It is this key insight into creativity and innovation that gets to the heart of prizes. For the thorniest challenges, breakthroughs may be more likely to come from outside of our own narrow communities. Sourcing solvers further from the usual R&D pipelines can improve access to such productive diversity.

The best designed prizes go even one step further. They leverage this diversity not only in seeking high-performing solutions but also in capturing broader network effects. A fi eld that is able to see early solutions, build on them, and recombine them may be able to leapfrog isolated, independent efforts. Linkages formed between competitors can foster downstream collaborations in the marketplace.

Furthermore, a race of 20 cars is generally more interesting than a solo time trial. And just as in Olympic competitions, it is not always the top performer who has the best story to tell. A broad fi eld opens up opportunities for color commentary that raises the public appeal of the whole competition.

Corporate Prizes

These opportunities raise the question: how and when might companies best use prizes? A number of companies are using prizes now to fi ll a wide range of needs:

* New-product and new-business development. From the Netfl ix Prize to GE's Ecomagination Challenge, companies are investing in prizes as ways of sourcing innovative solutions to challenges across their R&D pipelines. Perhaps the most famous platform for these challenges, InnoCentive, spun out of Eli Lilly as a means of seeking point solutions to well-defi ned R&D challenges.

* Corporate philanthropy. Progressive Insurance backed the $10 million Progressive Automotive X PRIZE, which challenged competitors to design high-effi ciency cars, because the company wanted to associate its brand with cutting-edge innovation. It wanted to be seen within its business sector as a company that does things differently. By leveraging the publicity that came with support of a high-profi le prize, Progressive was able to demonstrate a tie to broader social challenges and innovative problem-solving approaches.

* Creative idea generation. Threadless Tees, an online website for t-shirt developers, uses crowdsourced designs and community voting to maximize the creativity of the products on its site. Doritos and Pepsi partnered to launch a YouTube competition for videos to be played as part of their Super Bowl halftime advertising campaigns.

* Developer engagement. Google used a prize to engage developers when it fi rst launched its Android platform, awarding the best new applications for its emerging line of cell phones. New York City used its NYC BigApps competition to engage developers in building apps around its open-sourced municipal data.

* Marketing. Due to the large opportunities for public engagement, corporate prizes can often fi nd homes not only in R&D organizations, but also in marketing departments. The Budweiser Cup linked Anheuser Busch with the exciting challenge of launching the world's fi rst around-the-world hot-air balloon fl ight.

Within each of these opportunities, however, the decision to launch a prize is not one to be made lightly. While innovation contests are highly leveraged, a successful prize is rarely cheap, and the art of effective prize design is critical to achieving success, be that technical, social, or fi nancial.

Unlike grant campaigns and contracts, which have builtin feedback structures, prizes tend to be a bit more selfpropelled. Once a contest is set in motion, sponsors tend to get what they incentivize. Because the formulation of a contest can dramatically shape its outcome, it is important to consider how well the desired outcome can be defi ned and described. If a vision of a successful fi nish line cannot be clearly articulated, it may be diffi cult to chart a race.

Prizes may also challenge the corporate R&D organization in unexpected ways. The most powerful innovations come at the intersection of risk and reward, but many corporations' innovation teams can be highly risk-averse. Establishing a prize means publicizing information that the R&D team-indeed, the entire organization-may prefer to hold close, information about the company's challenges and intentions. And awarding a prize on the basis of a successful fi nish typically means giving up control of the pathway to that success. In this context, a company contemplating offering a prize must face some diffi cult questions: Is the organization able to share information about its thorniest challenges? Can it relinquish control of a piece of its innovation pipeline in exchange for access to a broad cross-section of innovators? Prizes are a fl ying leap into the crowd, and a prize sponsor must be willing to ride that wave for at least a time.

This does not mean that prizes must be high-risk endeavors. Small challenges can be used to test the waters. Many platforms allow for highly anonymized challenges, so that an organization can hide its true identity and reframe its challenges in less-vulnerable ways. Intellectual property terms can be set in advance of a competition to match the sponsor's need for market control. And earlystage judging criteria that provide opportunities for subjective input can help prize managers keep a fi nger in the proverbial pot.

Fortunately, prizes shine brightest when they are built around clear goals that give innovators license to be creative. If the organization can be courageous enough to take that plunge, the outcomes need not be limited by its internal imagination.

Five Lessons in Prize Design

Since 1996, the X PRIZE Foundation has launched nearly $65 million in transformational prizes and designed numerous other competitions for clients in the corporate, philanthropic, and government sectors. Through this experience, and research conducted by our academic partners at the X PRIZE Lab@MIT , we have distilled a handful of best practices for those looking to get involved in the prize ecosystem. Here are fi ve lessons that provide some practical guidance regarding when and how to deploy prizes in your own organization:

1. Use prizes to bring solvers to you. Because you need not know every competitor before launching a prize, prizes are particularly well suited to challenges where you don't have a clear sense of who can best address your needs. Leverage the power of prizes to attract solvers from unexpected sources.

2. Use prizes when there is value in attracting multiple solutions. Prizes do their best at tapping into diverse communities of solvers when there are diverse solutions that can be applied. If there is only one way to approach a challenge, a prize may be the wrong tool for the job. Use prizes when you want parallel processes and multiple ways of thinking about your challenge. And leverage that breadth not only in seeking the best solution, but because there is value in the Jamaican bobsled team coming to your race: there is value both in the color commentary that comes with out-of-the-box solvers and in the novel ideas that such solvers bring to the table, enhancing the search for solutions in unpredictable, but highly valuable, ways.

3. Defi ne the problem, not the solution. This means two things: fi rst, you must clearly defi ne the problem in a way that is understandable to competitors and spectators. It must be clear how success is defi ned. Second, whenever possible, you should begin with an open mindset about how that problem will be solved. It is this openness that enables an interesting competition, so avoid overconstraining the problem or defi ning a solution in advance.

4. Set and maintain clear criteria for playing and winning. One of the biggest places where prizes fail is when the bonds of trust weaken between seekers and solvers. If competitors are not sure that payout will come as promised, if the rules shift midstream or if there is uncertainty about the fairness of judging, the social fabric of the prize is jeopardized. Litigation is a problem in prizes that are not run cleanly. When you think about how to do this successfully in your organization, set those clear criteria, then step back and let the competition happen. Try not to be tinkering with it in the middle.

5. You get what you incentivize; measure and motivate carefully. At the end of the day, when you're thinking about the community of innovators, make sure you're very clear about what kinds of behaviors you're incentivizing and what you actually want competitors to do. This is particularly important in intramural prizes, where high spending does not amount to high leverage. Here, it is vital to tap into intrinsic motivators that get employees to bring more to the table than they would in an average workweek, to bring out employee voices that you may not have otherwise heard, and to craft the process in a way that builds capacity and networks rather than breaking them down.

If you can do all of these things, the impact of prizes can be large. Beyond their power to leverage an innovation investment, prizes engage the human element that is so vital to successful innovation. They attract maverick thinkers that the sponsor may not have known or had access to through traditional procurement mechanisms. And they draw out a wide variety of approaches that may take different risks than an organization might accept in its internal efforts, because ultimately, in a prize, the largest risks are not the challenger's own; they are the competitors'.

And that is a win-win scenario every organization should embrace.

Inducement prizes challenge competitors to meet specifi c success criteria, driving forward a given agenda.

The prize narrative taps into a broader set of innovators with a wider range of solutions, networking them in powerful ways.

The art of effective prize design is critical to achieving success, be that technical, social, or fi nancial.

Prizes engage the human element that is so vital to successful innovation.

References

Jeppesen , L. B. , and Lakhani , K. R. 2010 . Marginality and problemsolving effectiveness in broadcast search . Organization Science 21 ( 5 ): 1016 - 1033 .

McKinsey & Company. 2009. And the winner is . . . Capturing the promise of philanthropic prizes. http://www.mckinsey.com/app_ media/reports/sso/and_the_winner_is.pdf (accessed July 8, 2011) .

Dr. Erika Wagner joined the X PRIZE Foundation as founding executive director of the X PRIZE Lab@MIT . Now, as the senior director of exploration prize development, Dr. Wagner leads the design of new X PRIZES and X CHALLENGES in aerospace, oceans, and advanced transportation. She continues to teach at the X PRIZE Lab@UW , where she holds an appointment in the Evans School of Public Affairs. Her academic background includes a bachelor's in biomedical engineering from Vanderbilt University, a master's in aeronautics and astronautics from MIT, and a PhD in bioastronautics from the Harvard/MIT Division of Health Sciences and Technology. [email protected]

DOI: 10.5437/08956308X5406013