Archive for incentives
A former technical expert at one of the world’s most famous consumer product companies told me of a hiring decision that made $80,000 for one executive, hurt several careers, cost the company millions of dollars, and crushed innovation in a once-promising unit of the company. This recipe for innovation fatigue has numerous variations, but they all combine poorly considered incentives coupled with selfishness in those who can exploit the incentives at the cost of corporate health.
In this case, the company had instituted an incentive program for senior management to promote its hiring goals. Unfortunately, the result of the incentives was that one executive realized that if he hired a particular unqualified outsider for a key leadership role, he would reach his goal and get a large bonus. On the other hand, if he were to select one of several experienced employees who were ready and qualified for the promotion, he would not get his bonus. He was blunt about that in ordering one of his direct reports to hire the unqualified candidate. “I meet my goal and $80,000 if hire that person. Do it.” The leader ordered to make the hire tried explaining that this position required a knowledge of science, technology, and markets that the unqualified candidate did not have. It required experience that the candidate did not have. It would hurt the company. But none of this mattered. What mattered was an incentive the company was offering, a perverse incentive indeed.
The outsider was hired and proved to be a disaster. Lacking the experience and knowledge needed to make key decisions, the division was run by stalling and passing the buck, with many diversions that wasted the time and efforts of numerous employees. Several highly talented people left in frustration, including one person who probably should have been given a chance to lead the group. Significant innovation projects essentially ground to a halt, a classic case of innovation fatigue and a painful reminder of how poorly considered incentives can harm a corporation.
Perverse incentives that encourage employees to harm the company for their own benefit one of the many factors that can block innovation and entrepreneurship in corporations
Related resource: A excellent business book, “The Science of Success” by Charles Koch of Koch Industries, has a good chapter on incentives that discusses the problem of perverse incentives.
For big business, life would be simpler without patents. Then success would be determined by factors related to size such as lobbying budget, marketing prowess, and the combined power of your legal team. Upstarts could be squashed and cleared out of the way or acquired for a pittance. That’s not how our economic system is supposed to work. Patents can and should be a great equalizer, allowing a small company with a valuable product and valid patent to protect itself and prevail, even against a giant. The big guys, especially in the technology sectors, hate the risk of outside patents and are much happier stirring up wrath against so-called “patent trolls” to vilify those with patents.
The assault against patents has been especially forceful in the so-called “business method” area. These vaguely defined patents generally involve processing information and using computers in new ways. While there have been some terrible business method patents issue due to the failure of the USPTO to perform serious prior art searches, the problem is not with business method patents per se, but with the office that issues them with underfunded examiners faced with absurd quotas that limit the time they can spend on a case.
The area of computer-related and software-related innovation is not something where intellectual property should be feared, but celebrated. We have moved from the industrial age, where innovation was largely with physical gadgets and chemical compounds, to the information age or knowledge economy, where unlimited progress is possible through advances in how we manage and process information. Information is every bit as real as a mousetrap, a wheel, or a new drug, and while it is intangible to our physical senses, it is tied to physical processes such as entropy and material transformation of memory and signals as data is processed. It is impossible to implement a practical business method of any kind without physical interaction with reality, but our judges, lacking a basic understanding of science and especially information science, have conjured up the concept that information and its manipulation is “abstract” and this not patentable. This ungrounded believe is based in ignorance and is a tragic departure from reality. Failure to encourage advances in IT, in software, and in knowledge management in general with fair IP will hinder our progress and limit economic growth.
The latest potentially fatal blow to business method patents comes from a Federal Circuit Court case, CLS Bank International v. Alice Corporation. Robins, Kaplan, Miller and Ciresi, a highly regarded law firm, published a somewhat humorous overview of this macabre case. The article predicts that this case will recent in many more patents coming under attack for being inelgible subject matter (this is called a Section 101 rejection) and, worse yet, creating vast new uncertainty for inventors and investors. This weakens our economy and contributes greatly to innovation fatigue in a very broad area with some of the greatest promise for the future.
The recent America Invents Act also struck a blow against business method patents, adding a severe new route for invalidating patents more easily that have some financial component to them. Why give one particular area of patents such unfair treatment? It’s an indication of the lobbying prowess of certain companies that dislike patents in this area. Congress, recognizing the harm that this special invalidity treatment can do to that particular class of patents, is thinking of taking action–to extend this easier invalidation route to even broader classes, thereby further weakening patent protection in some of the most vital sectors of the economy. Innovation fatigue squared–at a time when our economy needs to strengthen innovation and give it ample encouragement with sound IP protection and increased, not decreased, certainty if we are ever going to get this economy off the ground.
There’s an anti-patent sentiment in some parts of the public that argues that they are destroying the economy rather than helping. There is particular resentment against non-practicing entities (NPEs), often called trolls, for owning (and typically acquiring large numbers of) patents for products and processes that they don’t actually use themselves. That sentiment, naturally, is most likely to be held by large companies who want to make a lot of money by making and selling whatever they want without some little guy’s patent getting in the way. Trolls with their patents are, we are told, sucking the lifeblood out of the economy. They are especially deadly in the areas of greatest innovation such as software. The related field of business methods is one where the whole concept of patenting is viewed by some as especially dangerous and destructive.
A healthy perspective is now offered by Jeff Wild in his post for IAM Magazine’s blog, “If trolls are destroying US jobs, why is the apps sector booming?” Here is an excerpt:
Last week a shocking report was produced by an organisation called TechNet. Based in the US, it describes itself as “the preeminent bipartisan political network of CEOs and senior executives that promotes the growth of technology-led innovation”. Where the Jobs Are: The App Economy claims that more than 450,000 app-related jobs have been created in the US during the last five years and that the app economy could now be generating annual revenues of up to $20 billion. What’s more, there seems to be no sign of a let-up in the good news. “In the year ending December 2011, the average number of tech want ads containing the word ‘app’ was still 45% higher than the previous year. That’s rapid expansion by anyone’s standards,” the report states.
As I say, it’s shocking stuff. For those of us who remember the multiple news stories and blog pieces during 2011 that focused on NPEs such as Lodsys taking action against app developers in the US, the idea that the sector is actually booming and creating jobs at breakneck speed is hard to comprehend. Weren’t the “trolls” supposed to be destroying a nascent industry and driving jobs and dollars away from the US? How can it possibly be that the reverse seems to be happening? Indeed, how can a serious report on the American app sector not mention NPEs or trolls at all?
Surely, it must be an amazing oversight. Or perhaps not. Maybe all the outrage and doom-mongering last year was overhyped hysteria. Maybe the reality is that NPEs, or “trolls”, or whatever you want to call them, are really not a decisive issue in the app economy at all. And maybe that applies to NPEs and trolls generally: in the great scheme of things, they are not a big deal.
In a piece published by Forbes last week, Ken Lustig, head of strategic acquisitions at Intellectual Ventures, points out that the number of patent suits initiated in the US has remained relatively flat for the last 10 years and that only around 100 actually go to trial. What’s more, there is much less patent litigation now than there was in the 19th century, supposedly a golden age of American innovation. Indeed, says Lustig, revered names such as Thomas Edison used the NPE model to diffuse their inventions and grow rich. What is being reported today in such dramatic and negative terms is what has always happened in the US when new technologies appear:
Every major technological and industrial breakthrough in U.S. history—from the Industrial Revolution to the birth of the automobile and aircraft industries and on up to today’s Internet and mobile communications revolutions—has been accompanied by exactly the same surge in patenting, patent trading, and patent litigation that we see today in the smartphone business. This is how the rights to new breakthrough technologies have always been distributed to those best positioned to commercialize them—to the benefit of the whole nation in terms of new jobs, new medical advances, and new products and services.
He also summarizes the important research compiled by Michael Risch of the Villanova University School of Law. The bottom line is that both sides in the debate about NPEs have made mountains of molehills, though the defenders of NPEs do have a valid point in one particular area: “the evidence does support one defense of NPEs: they provide a better way for individual inventors to enforce their patents than bringing lawsuits themselves.”
NPEs don’t just include patent aggregators like Intellectual Ventures or Acacia. Universities and numerous lone inventors are often not (yet) in the business of producing and marketing goods but have significant inventions to market. Based on the research about the impact of NPEs and their patents, there is no need for alarm and no need to revise patent laws to stamp them out. Doing so could stamp out the fires of innovation that have brought us out of the stone age into the booming knowledge economy. IP needs to be protected and nurtured, not vilified and weakened. And certainly not discouraged with much higher fees at the USPTO, which the current Administration is proposing. Taxing innovation and other steps that discourage inventors by making it harder to protect their inventions are far more likely to suck the lifeblood from the economy than the existence of NPEs. More innovation fatigue is not what this economy needs.
As we discuss in Conquering Innovation Fatigue, the profit motive can be important for inventors but is often not the real incentive behind the quest to invent. Steps that eliminate the opportunity to profit from invention, though, can be serious barriers to a nation’s innovation potential. The profit motive can be important for prospective innovators. However, a focus on profits can be utterly destructive to innovation within a corporation, where the incentives to those who lead other would-be innovators can create new barriers that kill the innovation future of the company. Ironically, what can be a helpful incentive for innovation to an individual can easily become a disincentive once distorted by the internal workings of a corporation. This is illustrated in recent analysis from Clayton Christensen. See an overview in the article “Clayton Christensen: How Pursuit of Profits Kills Innovation and the U.S. Economy” at Forbes.com. Christensen argues that ratio-based metrics for profitability distort corporate thinking and reward behavior that ultimately destroys the future of the corporation by creating short-term benefits in apparent profitability. We illustrate a related problem in the book with the Apple Tree Analogy, in which metrics for short-term profitability for an apple harvester get a dramatic boost when the apple trees are toppled, making it much faster to harvest the fruit. The future, though, becomes barren.
Corporations need to carefully consider the metrics they use for profitability, as Christensen teaches, and unlearn some of the sacred concepts they were given in business schools. They should also go one step further an consider the impact of their metrics on not just the long-term growth of the company as a whole, but also the individual innovator and the innovation culture within the company. Listening to the voice of the innovator inside the corporation should be an important exercise for its top leaders.
Contests can be one of the most interesting innovation tools. With the right challenge and incentives, creative groups from across the world can help invent and innovate rapidly. The creativity of crowds fueled by a content was just demonstrated in the Shredder Challenge contest that was launched October 2011 by the U.S. government’s DARPA (the Defense Advanced Research Projects Agency). DARPA wanted to know what could be achieved with computer tools in reassembling shredded documents to recover the originals. Since many different approaches were possible, this was an excellent candidate for crowdsourcing. Rather than hire a huge team for a short while to pursue many different paths, or use a small team pursuing many paths over a long period of time, just throw this one out to the crowds for healthy competition. The objective in this competition was to create a system for reconstructing shredded documents. The system would have to demonstrate success by reassembling the shreds from five documents whose shredded remains were posted on a website. As reported at Gizmag, the “All Your Shreds Are Belong to U.S.” team won the $50,000 prize for this contest by assembling all five documents two days before the Dec. 4 deadline. Given the hours that the winning team put into this competition, $50,000 was a very good deal for DARPA (and the American taxpayers) and not such a good deal for the winning team. If you consider all the thousands of additional hours put in by many other teams working on the competition, DARPA got quite a lot for a small investment.
Companies can and do this kind of thing as well, with varying degrees of success. Capturing the imagination of people with the skills needed for the problem is the key. Prizes help, along with fame and bragging rights. Intellectual property issues can get in the way for some companies. I’ll point to Local Motors as one of the leading examples of for-profit crowdsourcing. Their business model is sophisticated and highly refined, something I’ve written about here previously.
As for the hilarious title of the winning group, you might enjoy reviewing the history of the classic phrase, “All your base are belong to us.”
Yesterday I had the privilege of visiting the beautiful campus of Tongji University in Shanghai where I was a speaker at a workshop on innovation and managing R&D in China. This international event was organized by a highly respected expert in global R&D management, Dr. Max von Zedtwitz, founder of GLORAD, a firm that helps companies with their R&D management issues and some of the toughest challenges of global R&D organizations. After the workshop, I had a very kind tour from a Chinese professor of the beautiful campus and the world-renowned MBA program, ranked by the Financial Times as one of the top 50 in the world.
In my remarks, I briefly touched upon what may be the biggest barrier to successful innovation and research in China: retention of talent. Indeed, companies requiring highly skilled employees repeatedly find turnover to be one of their greatest challenges. Employees gain a few months of years of experience and finally get trained to do the work you need them to do, and then they jump to somewhere else for higher pay. Large multinational companies may be viewed, for example, as good places to get trained for career advancement, resulting in those companies essentially providing training for competitors here.
There are no easy solutions to this problem, which is a challenge in most nations. But managers of skilled employees need to realize that especially in China, the guanxi or relationship between the worker and the company, or especially between the worker and the supervisor, will be an important factor. If the employee feels a sense of loyalty to the supervisor and the company, and feels that he or she is being cared for and nurtured in his or her career, the temptation to leave will be reduced, and the desire to look elsewhere may be largely forestalled.
Many things can contribute to a healthy relationship that keeps Chinese employees on your side. Managers need a great deal of training in some cases in order to be more helpful to their employees and build the respect and trust that is essentially for good guanxi. Authoritarian attitudes aren’t helpful for retention, though they can result in fast short-term results. Kindness and respect, shown in many ways, can bring out the best from employees and motivate innovators to share their best work. Good team-building events and extra-curricular activities can help, though sometimes they become viewed as a burden employees are expected to shoulder on their own time. Avoid eating into employees free time with mandatory events.
Here’s on often overlooked issue for Western-owned companies: Corporate cafeterias in Asia, if available, should have really good food. I’ve seen corporate sites with good food and noticed that the employees mention it frequently, and a site with just OK food which the employees also mention frequently. The place with the lower quality cooking has much higher turnover. Might just be a coincidence, but upgrading a cafeteria ought to be a priority for anyplace struggling with retention. If you’re in an urban setting without a need for a cafeteria, try some creative ways to make good local food affordable and readily available from time to time. If you keep food in mind as a motivator, your efforts may strike some important targets.
Western managers must be especially aware of Chinese attitudes, including the role of guanxi, the importance of family relationships, natural hesitancy in speaking out or challenging management even when truly needed, etc. Western managers really need a close relationship with key locals who can help them be aware of the feelings and concerns of team members and provide guidance in building rather than eroding relationships.
Around the world, the ways things really get done is through relationships, through guanxi. But understanding the special importance of that concept in China can help companies here find more success in innovation and new product development by retaining their star employees. And those stars can use their own network to reach out and find other stars as well. Guanxi again, not job boards, is the key to finding the right talent in the first place.
Many people in the West think of China as a copier exploiting the IP of the West and generally ignoring IP rights. In reality, China, the nation where I now live, has made steady and rapid progress in building an IP system and in enforcing and respecting IP rights. Companies are increasingly able to protect their IP in China and have it enforced successfully. Successful experiences in enforcing IP has led some Chinese consumer products companies, for example, to become much more serious about protecting their innovations in China and beyond.
Chinese companies are now racing to create strong patent portfolios not only in China but overseas as well. China’s tax incentives contribute to this as does its increasingly strong patent system, and the strong investment in R&D in this nation and the growing technical competence and creativity of China has led to a serious need to protect Chinese IP from infringement by the West and others. China is becoming the world’s leader in filing patents. In 2011, China is expected to overtake Japan and the United States for the #1 spot as top patent filer. They appear to be leading the world in terms of the number of patent law suits being pursued in Chinese courts, with significant awards being made that should encourage companies to pay more attention to patents here. In many areas, Chinese innovators are leading the world and are backing up their work with aggressive international patent filings. My own study of biofuels patents, for example, shows that China is becoming the world’s top source of IP related to biofuels and other plant-based bioproducts. Chinese universities are filing patents in many areas and have even had success in courts enforcing them. China on all fronts appears to be accelerating its move toward being a source of global IP and innovation.
The July 13, 2011 issue of the China Daily that I picked up last week illustrates the growing importance of IP. Page 5 had a story, “Courts Do More for IPR [Intellectual Property Rights] Protection.” The article reported that the Chinese government is seeking to learn from experience in the West to further improve and accelerate its legal system to strengthen IP protection. I should note, though, that Chinese courts already have a reputation for being much faster than Western courts, so I hope they don’t learn the slow part from the West. The article also reported that over 9,000 arrests have been made in the past 9-months in efforts to crackdown on piracy and other violations of IP rights. Nearly 13,000 underground factories have been closed in another campaign and nearly 5,000 gangs selling illegal goods have been broken up. In this 9-month period, 2,492 IP cases were brought to Chinese courts and 1,985 cases were adjudicated.
In the same issue, page 17 had a section called “ipscene” with IP-related news stories from around China. There were reports on China’s proprietary subway noise reduction technology being installed on Beijing’s new line 10; on the rapid growth of China’s LED industry; on the advances in diesel design from Yuchai Group which now has over 600 patents and has become a leading force in “green power”; and on a low-cost solar water heater being patented by inventors from Jinan. There was also a report on prison terms and fines for producers of counterfeit liquor. On the same page was a half-page article on grassroots inventions at a national innovation exhibit, and an article about educating Chinese children to boost innovation.
That’s a lot of IP and innovation content for a popular newspaper, and reflects the importance of these topics in China.
As the West continues to make patents more difficult to obtain and less valuable, frustrating innovators and contributing to innovation fatigue, China is doing the opposite. They are out to build a stronger IP system and make IP more valuable. They are encouraging the pursuit of IP protection and the creation of IP, and will continue to surpass the West in many measures. The pace of innovation in China continues to accelerate. Now companies, such as the one I work for, will increasingly be concerned not with copying what the West has, but in preventing the West from copying what is created here. There are further ironies to be revealed in this adventure.
Simon Sinek’s famous TED presentation, “How Great Leaders Inspire Action,” includes a great lesson on innovation. He discusses the race for flight between the well-funded, highly educated, and widely acclaimed Samuel P. Langley and the unfunded, unknown Wright Brothers. Langley was after fame and wealth while the Wright Brothers were pursuing a dream with all their heart, overcoming obstacles and “innovation fatigue factors” that Langley would never face. Their persistence and passion made the difference.
One of the most challenging areas for innovators, entrepreneurs, and businesses of any kind now is field of children’s products. Innovation fatigue has reached new heights in this area due to “external innovation fatigue”–the kind that comes when outside forces from government and others, often with the best of innovations, deliver hard-to-evade punches to the body of entrepreneurs, including some very low blows.
The problem is especially severe when the governmental forces that can shut down a business or change the playing field unexpectedly arise not from legislators accountable to the voters, but from lone appointed individuals who may not be directly accountable to anybody.
The Consumer Product Safety Improvement Act (CPSIA) in 2008 dealt with, among other things, the problem of lead that had affected some books imported from China. Rather than address the specific issue of Chinese imports, the law sought a broad “fix” by banning lead in children’s products in general. Who could oppose that? But what it means in practice is that millions of toys and children’s books were unnecessarily discarded–wasted–by small businesses around the country because they could not afford to have lead testing done for the products in their inventory. For used products, there weren’t technically required to do testing, but they still had to comply with the law forbidding them from selling products with lead above a certain threshold. In practice, it was test or toss. I know of local entrepreneurs in Wisconsin who had to discard a lot of products.
For inventors and entrepreneurs, the added cost of certifying that your product is lead free can be one more tax that stands between success and failure, even when you have diligently avoided working with companies where lead could possibly be a problem.
At least the lead ban had its roots in law from Congress. The most recent ban affecting children’s products comes from one unelected leaders of an agency who has made tough new regulations on children’s cribs a top priority. In the past decade, 32 children died from defective children’s cribs with drop-down sides. Now drop-down sides will be banned in 2011, making it illegal to make, sell, or distribute them. (See “Baby Asleep in a Drop-Side Crib? Soon They’ll Be Banned” at Time.com.) Any death is regrettable, but 32 deaths from tens of millions of users is remarkably small. Chances are the deaths are not evenly distributed among companies, yet a blanket ban on a product punishes all, including those who had a flawless safety record and had delivered innovations that made their beds more reliable and safer than the competition. Now they are out of luck, as are the millions of parents (myself included) who have found safe and sturdy drop-down beds to be a big help in safely taking care of children and grand-children.
30 deaths across a decade: all tragic, but consider those numbers in light of the risk we face every time we take a step, turn a corner, plug in a product, or take a bite of food. Far more children die each year from salmonella–do we ban chicken and meats? There are about 30,000 deaths a year in the US for accidental poisoning and about 40,000 automobile deaths a year, with thousands of children in both categories. 3.5 million children aged 14 years and under suffer medically treated sports injuries each year, with many more deaths than cribs could ever cause. Do we ban sports? About 50,000 people a year go to the hospital because of skateboards, with many more deaths than cribs. Among useful but dangerous products, consider lawnmowers, where over 150 people die each year (that’s 5 decades worth of deaths from cribs at our current rate). Time for a ban?
There are hidden costs and even injuries for safety measures that are too strict. Alternative products and alternative behaviors have their own set of consequences. Will parents now be tempted to let kids sleep on beds or without the enclosed protection of cribs because the new generation of cribs are too expensive or too inconvenient? Is there any guarantee that children nationwide will be safer because of the ban?
I love kids and want them safe, but am most comfortable when informed parents take responsibility for that. When one person in an unelected position can make broad new rules that wipe out products that millions of people have found to be safe and effective, this changing of the rules midstream is a terrible disincentive for innovation in children’s products and innovation in general. Why bother with making the safest, most innovative drop-down crib when you’re going to be lumped with inferior products and stuck with a blanket ban that wipes our your business? It’s easy to do in the name of the children, but there are a lot of more pressing problems that children face, and better ways to deal with them than having one regulator issue laws without direct accountability to the people. Chalk one up for innovation fatigue.
Anytime is a tough time to be an innovator, but it’s especially tough when government gets overly involved in helping without considering the unintended consequences of the help, or the opportunity cost from helping in areas where help isn’t really needed. The quest to protect children is one area where the temptation to be overzealous can be especially strong. Who could be against protecting children?
I am delighted to see Wired Magazine feature a story about the new book on the largely untold story of one of the original inventors of the computer. Nearly everyone has heard the standard story of the invention of the ENIAC computer at Penn State by a team led by John Mauchly and J. Presper Eckert Jr. However, as is so often the case in the world of innovation, those who get public credit for an invention may not be the original inventors. In many cases, one can make a case that key elements of a successful invention were borrowed or even stolen from a neglected inventor who deserves at least some of the credit.
In “Pulitzer Prize-Winning Novelist Tells the Tale of the World’s First Computer” by Gary Wolf, we learn that John Vincent Atanasoff with his partner Clifford Berry were already working in the 1930s on assembling a computer in the basement of the physics building at Iowa State University. Their invention was finished in 1942, four years before ENIAC was finished. About the size of a large desk, the Atanasoff-Berry computer (ABC) could do laborious calculations rapidly. It was relatively unknown, but was known and admired by other inventors working on related problems, including some of the team that would develop ENIAC.
Now a novelist will help set the record straight. Jane Smiley, a winner of the Pulitzer Prize for fiction, has written The Man Who Invented the Computer to tell Atanasoff’s story. He had a successful career, but his magnum opus, the computer, was “forgotten until the late 1960s, when a legal battle broke out over the patents that the ENIAC project leaders had filed on basic computing concepts. In the course of the bruising litigation between the Sperry Rand Corporation, which had purchased the ENIAC patents, and Honeywell, which wanted to break them, it was proven that the ENIAC team stole key ideas from Atanasoff. The patents were declared invalid by a federal judge. But Atanasoff’s achievement never became widely known or celebrated.”
Smiley learned about his life at Iowa State, where Smiley studied and taught.
[At Iowa State,] she met someone who plays a minor, ignominious role in her tale: a professor who told her that, as a graduate student, he had been the one to dismantle and throw away the prototype of some strange calculating device that had been left behind in the basement of the physics building. The first digital computer was lost. “He ultimately went on to become the head of the computer science department,” Smiley says, “and he told me that destroying that computer was one of the great regrets of his life.” It is out of such personal twists and ironies—a novelist’s materials—that Smiley builds her tale, capturing both Atanasoff’s genius and, at the same time, the forces of chance that influence invention.
It is of such twists and ironies that the journeys of many other great inventors are formed, some of whom we discuss in Conquering Innovation Fatigue. The problems that deprive inventors and innovators of the due credit and reward for their work are often part of the innovation fatigue factors that can wear innovators down and decrease incentives for innovation for many. There are things inventors can do to improve the odds of success, and of receiving credit for their work. May great inventors never be forgotten!