Customer as Co-Innovator

"We’ve found that when we share our tools with customers rather than just demonstrate how much we’ve improved our technologies, we learn a lot more." - Randy Pond, Cisco senior vice president of operations, processes, and systems

"Several of our customers have become true partners in design with us." - Randy Pond, Cisco senior vice president

Involving customers in the innovation process can add value to new product designs. In my previous article on strategic account management, I had talked about how co-creation with customers is vital for the company. In the past I had worked on one such project where IDT Inc was co-developing a SoC router along with AT&T. The product went on to become a big seller for IDT. The idea of involving customer in developing a new product is not new to Silicon valley - but now that idea is catching up every where.

Shared Model for Innovation

In industry after industry, a shared model for innovation adoption is emerging. The most valuable "platforms" — the tools and technologies used internally to discover, design, and test new products and services — can be creatively and cost-effectively sold or lent to customers, clients, and prospects. Customers get a chance to "try before they buy." They can adopt and test new ideas and technologies before investing in them. And the purveyors of new technologies rapidly gain insights into the potential value of their wares — insights that might otherwise take years to gather.

One company that understands this is the networking giant Cisco Systems Inc. Over the years, Cisco’s architects and engineers have developed scads of internal tools that allow them to design, configure, optimize, and compare alternative network infrastructures. They often run sophisticated simulations, for example, to determine the number of routers and switches to recommend to customers, or to show prospects how a proposed implementation might work.

How did Cisco come to share this inside information? In the past, Cisco’s engineers and architects felt, often correctly, that most customers and prospects simply wouldn’t understand their internal, informally assembled aids. However, Cisco had several highly sophisticated customers who weren’t satisfied with "solutions"; they wanted to see and understand the thought process behind the company’s proposals.

Were these architectures really the best or most cost-effective that Cisco had to offer? So Cisco began showing these customers its in-house simulations. And the customers, in turn, expressed a desire to adapt these design, configuration, and optimization models for their own use.

Cisco’s marketers and innovators had not expected this. But they swiftly grasped the implications. With some thought and polish, they repackaged these tools as customer design interaction platforms. Instead of simply "selling" customers on a complete design, they now conduct collaborative meetings in which prospects literally see and play out the architectural implications of their network priorities.

There are conversion costs to changing improvised internal work tools into products accessible by external non specialists. But the challenge forces a valuable cultural change: Technological innovators become far more aware of and empathetic to customer needs and constraints. Cisco’s example may not be typical, but neither is it rare.

The Model spreads to Consumer Goods as Well

Procter & Gamble has begun to share some of its computer modeling and market research techniques with Wal-Mart, Tesco, and other distribution channels. This includes the celebrated P&G "moment of truth" research, which tracks consumer attitudes at two critical times: when the product is chosen and when it is used. To be sure, many of P&G’s biggest distributors are also rivals that offer their own private labels, so there are risks to sharing this type of proprietary innovation platform with them. But the rewards are even greater: They include ongoing close ties with retailers, who often share their own innovative tools for analyzing (for example) how store layout, shelf space, and signage influence purchase decisions.
Together, these manufacturers and retailers can develop a relationship that transcends any particular innovation tool or technique.

Also into Financial Markets

The world’s top investment banks, meanwhile, profitably peddle tens of billions of dollars’ worth of complex financial instruments, such as synthetic securities and derivatives, every year. Even sophisticated customers, such as Fortune 1000 companies and hedge funds, are often understandably reluctant to take a chance on new financial instruments. So the banks now give their customers the same computerized "wind tunnel" and "stress testing" algorithms that their own quantitative analysts have used to design the products in the first place.

"In the early days, we would run simulation after simulation demonstrating that our instruments would help them better hedge their risks," acknowledges one former Goldman Sachs and Salomon Brothers executive. "But, frankly, they didn’t fully trust either us or our simulations. It wasn’t until we started giving them the simulation tools we used ourselves that they took us seriously."

These free simulators proved to be the most profitable innovation that the Goldman Sachs derivatives group launched. Soon, clients began asking for custom derivatives and other tailored instruments. "Without the simulators, customers would never have known what to ask for, and we would never have thought to ask," recalls the bank executive. Yet, despite its success,
this innovation appeared nowhere in the bank’s R&D budget or prospectus. It was only a tacit, not an explicit, locus of value creation.

Closing Thoughts

The ongoing digitalization and virtualization of design and-test innovation tools ensures that the process of sharing innovation with the customer will grow. This will alter the innovation ecosystem, making it easier, safer, and more advantageous for suppliers and customers to take a chance on one another’s work — and to learn far more about each other, and themselves, in the bargain.

Speaking in broader terms, today, many companies resist the idea of bringing in customers as innovation partners. But the writing on the wall is clear - Its time to change the way companies think of innovation.

Also See:

CRM and Strategic Account Management
Customer Relationship Management & Sales