Which kind of collaboration is right for you?

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In an era when great ideas can sprout from any corner of the world and information technology has dramatically reduced the cost of accessing them, it’s now conventional wisdom that virtually no company should innovate on its own. The good news is that potential partners and ways to collaborate with them have both expanded enormously in number.

The bad news is that greater choice has made the perennial management challenge of selecting the best options much more difficult. Should you open up and share your intellectual property with the community? Should you nurture collaborative relationships with a few carefully selected partners?

All too often firms jump into relationships without considering their structure and organizing principles — what we call the collaborative architecture. To help senior managers make better decisions about the kinds of collaboration their companies adopt, we have developed a relatively simple framework based on our 20 years of research and consulting in this area.

Collaboration networks differ significantly in the degree to which membership is open to anyone who wants to join. In totally open collaboration, or crowdsourcing, a sponsor makes a problem public and then essentially seeks support from an unlimited number of problem solvers. Closed networks, in contrast, are like private clubs. Here, you tackle the problem with one or more parties that you select.

Collaboration networks also differ fundamentally in their form of governance. In some the power to decide which problems are most important, how they’ll be solved and which solutions should be implemented is completely vested in one firm in the network: the “kingpin.” Such networks are hierarchical. Other networks are flat: The players are equal partners in the process and share the power to decide key issues.

There are four basic modes of collaboration: a closed and hierarchical network (an elite circle), an open and hierarchical network (an innovation mall), an open and flat network (an innovation community), and a closed and flat network (a consortium). When figuring out which mode is most appropriate for a given innovation initiative, a firm should consider the trade-offs of each, weighing the modes’ advantages against the associated challenges and assessing the organizational capabilities, structure and assets required to manage those challenges.

OPEN OR CLOSED NETWORK?

When you use a closed mode, you are making two implicit bets: that you have identified the knowledge domain from which the best solution to your problem will come, and that you can pick the right collaborators in that field. The big advantage of an open network is its potential to attract an extremely large number of problem solvers and ideas.

That is the concept behind Threadless.com, a largely online retailer of T-shirts, whose designs come from the masses. By operating an innovation mall where 600,000 members submit proposals for about 800 new designs weekly, Threadless gets a steady flow of unusual and singular ideas. (Mall members and visitors to the Web site vote on the designs, but the Threadless staff makes the final decision on which ones to produce and rewards their creators.)

Open modes are not as effective as closed approaches in identifying and attracting the best players. They work best when the spread between the ideal solution and the average solution is not big and the consequences of missing out on a much better solution from an elite player are small. Open modes are effective only under certain conditions: it must be possible to evaluate proposed solutions at a low cost and participating in them must be easy. The latter is possible when a problem can be partitioned into small, well-defined chunks that players can work on autonomously at a fairly low cost.

FLAT OR HIERARCHICAL GOVERNANCE?

The chief distinction between a hierarchical and a flat form of governance is who gets to define the problem and choose the solution. In the hierarchical form, a specific organization has this authority, which provides it with the advantage of being able to control the direction of the innovation efforts and capture more of the innovation’s value. In the flat form, these decisions are either decentralized or made jointly by some or all collaborators; the advantage here is the ability to share with others the costs, risks and technical challenges of innovating.

Hierarchical governance is desirable when your organization has the capabilities and knowledge needed to define the problem and evaluate proposed solutions. Consider companies that post scientific problems on the innovation mall InnoCentive.com. The problems are generally smaller pieces of the sponsors’ much larger research and development programs. These kingpins can define the system configuration and coordinate the work of various collaborators.

Conversely, flat modes work well when no single organization has the necessary breadth of perspective or capabilities. Look at open-source software projects such as Linux, Apache and Mozilla. These often develop very specific modules of code to address problems that users have encountered. In this case, the users are best positioned to devise and test solutions because they’re closest to the problem.

Flat modes are also appropriate when collaborators all have a vested interest in how a particular problem is solved and will participate only if they get some say in the decisions.

A MATTER OF STRATEGY

Choosing a collaboration mode involves more than understanding the trade-offs. A firm must take into account its strategy for building and capturing value. And as the strategy evolves, the right mode of collaboration might change, too.

Consider the approach that Apple used in developing software for the iPhone and how it changed over time. A key part of Apple’s business strategy has been to maintain the integrity of its systems. Indeed, one of the joys of an Apple product is that everything — the machine’s hardware, software and peripherals — seems to work together so seamlessly. Historically, this kept Apple more oriented toward closed modes.

However, once the iPhone was established, Apple faced the challenge of adding software functionality and applications that would fuel more growth. The company realized that there was no way that it could anticipate all the applications that an iPhone owner might find useful or just fun.

Apple opted to encourage a thousand flowers to bloom and allow the market to decide which ones should be picked. Accordingly, the company introduced a kit in March 2008 that allows a community of third-party developers to create applications based on the iPhone OS platform and provide them to users directly through the iPhone.

A NEW SOURCE OF ADVANTAGE

As with any strategic variable, collaborative approaches to innovation offer an array of choices and complex trade-offs. Open is not always better than closed, and flat is not always better than hierarchical. The new leaders in innovation will be those who can understand how to design collaboration networks and tap their potential.

(Gary P. Pisano is a professor of business administration at Harvard Business School. Roberto Verganti is a professor of innovation management at the Politecnico di Milano, Italy, and the author of “Design-Driven Innovation: Changing the Rules of Competition by Radically Innovating What Things Mean,” to be published by Harvard Business Press in spring 2009.)