What is crowdsourcing and why it differs from other forms of open innovation?
Cappa: Open innovation is an innovative approach that is spreading over the last decade and that is opposed to the traditional closed innovation approach, because it’s based on the sharing of ideas and resources for innovation. Open innovation aims to involve people from outside the company boundaries as companies, suppliers, universities, research institutions from all parts of the world in order to foster an innovative process. At the base of this phenomenon there is knowledge diversity, that is a diversity of backgrounds and thoughts that favors the birth of new ideas. Crowdsourcing is a particular form of open innovation in which, in particular, individuals connected through web platforms from all parts of the world are involved. It intends to involve a large number of individuals from all over the world and not a few players – like companies, suppliers, universities. Involving so many people, with different backgrounds and knowledge, can facilitate problem solving and the design of new products and services. In the literature, such piece of evidence is referred to as crowd wisdom, i.e. the distributed knowledge that individuals have that can foster the innovative initiatives of companies.
Crowdsourcing differs from other forms of open innovation because involves many individuals and not selected few entities. In addition, crowdsourcing is based on collecting lots of ideas and lots of feedback of people because there is a direct link between quantity and quality of ideas collected by individuals, otherwise, in other open innovation initiatives, the focus is on a smaller number of initiatives with recognised organisations. Thus, crowdsourcing gathers a large amount of information among which to look for those of greater value, identified as extreme outcomes. In addition, this amount of data involves both a series of organizational steps to manage the ideas collected also in terms of privacy, databases to collect and manage, and the commitment in human resources to search, among the myriad of information received, the few that are of great value for innovation. Another difference is that open innovation can sometimes lead to disputes over intellectual property when advances in knowledge are made: for example, when a patent is registered, other forms of open innovation – therefore collaboration with suppliers or other companies – could lead to paternity problems of the idea or impediments in using the patent in the future. Otherwise, with crowdsourcing people who participate since the call for ideas, from the beginning, know that they renounce to any right on the development of the work and in return the best ideas receive a prize. In fact, crowdsourcing is based on the involvement of people who give ideas and solutions to problems in exchange for prizes, often in money, that are awarded to the best. An example is what Google does with its products: it asks the crowd to help find bugs and solutions to its programs and, in return, those who find these security flaws receive cash prizes.
The article opens with an example of crowdsourcing of the sixteenth century and immediately appears connoted by an aspect of profit by those who provide the service. So yesterday it worked just like today?
Cappa: The idea of resorting to solutions proposed by people outside organizations goes back hundreds of years as in the case of longitude problem. In fact, the solution to the problem of understanding the precise position of ships in the sea did not come from a scientist or naval engineer but from a clockmaker. Even then there was a cash prize and it is still one of the reasons why people participate. Today, unlike yesterday, you can reach a much higher number of people and they participate for the prize money but also because they are passionate and have an inherent pleasure in contributing to a company, sometimes a company to which they are very devoted.
The paper states that it is not always profitable for a company to resort to crowdsourcing. What kind of study have you conducted to understand when it benefits the performance of the stock market?
Oriani: The motivation of our study is born from the fact that the academic literature had always seen the crowdsourcing like an activity that created value for the company. However, the costs of crowdsourcing in terms of definition and organisation of the campaign, collection and evaluation of proposals and implementation of any winning proposals have always been neglected, also considering the terms of heterogeneity of the quality of the proposals, activities that require much more careful selection work. Therefore, we have placed the problem to understand as the crowdsourcing can create value for the company. In trying to answer this question, we developed theoretical hypotheses but, then, it was difficult, from the methodological point of view, to isolate the specific performance effects linked to a crowdsourcing project from those related to all other activities undertaken by the company. In addition, crowdsourcing projects generally do not require a very high budget while being potentially very important in terms of results, and for these reasons it turns out to be difficult to isolate inside of a budget of the enterprise the effective economic impact brought about by crowdsourcing. The only way we could isolate the effects of a crowdsourcing project was to see how it was seen by financial investors. By observing them, we have been able to how they appreciated or did not appreciate the decision of the enterprise to launch a crowdsourcing call. Also in this case, however, the problem was always to isolate the effect of the crowdsourcing project compared to other information that instead, at the same time, investors could consider, evaluate and incorporate in the stock price. In order to isolate the effect of crowdsourcing projects from other information that investors receive about the companies, we have therefore decided to refer to a consolidated methodology in the field of finance studies that is the event study. This methodology allows, through the appropriate controls, to isolate as far as possible the long-term effects of a specific announcement on the price of the share compared to other information. In our case, the application of the event study required to go and identify a sample of crowdsourcing announcements made by listed companies because, by definition, the event study only works if the company is listed. Once these announcements have been identified, we calculated the so-called the abnormal returns, returns specifically related to the announcement of the campaign of crowdsourcing. In this way we have estimated the impact on the stock market that the single crowdsourcing campaign announced from the company had on the value of the same company in terms of abnormal returns. We are talking about expected performance and ex-ante evaluation by investors as it is much more complex and not feasible, at the moment, to go and reconstruct the ex post balance sheet effects, because at the level of the balance sheet it is not possible to identify the effects directly attributable to crowdsourcing project and isolate them from the effects of all other activities. So, resorting to the event study and the evaluation of the reaction of stock market investors is a way to try to isolate the impact of the single announcement of crowdsourcing campaign ad and to assign to the same ad a certain value.
What are the factors that allow the company to extract value from crowdsourcing?
Oriani: The methodology of the event study, as told, allows to isolate the effect of the announcement on the value of the action and this is the premise necessary in order to make the successive analysis that has consisted in putting in relation the abnormal returns that have happened in proximity of the event, and therefore of the announcement of the crowdsourcing, with the theoretical factors that could influence the value of the project. The event study allows to estimate the expected value of the single project, the second step was to relate this estimated value with the enabling factors that should explain the creation of value. These factors were first identified from a theoretical point of view, building hypotheses, and then they were tested taking into account the model of all the other possible control factors that could explain the value created by a crowdsourcing campaign.
Cappa: The methodology is a salient point because we applied it in a particular context like crowdsourcing in which it had never been applied and it is the only way, as the professor said, to try to estimate the effect brought by crowdsourcing; therefore the event study was necessary to try to measure the effect of crowdsourcing because, with other balance sheet indicators, it is difficult to isolate it and because the effects of crowdsourcing that bring innovation are in the long run, while the stock market reaction allows us to immediately also assume what happens in the long run. In particular, once identified the methodology, we have theorized that crowdsourcing is positive for companies when they manage to create value from the crowd so that the benefits exceed the costs we mentioned. Costs are often not considered by previous studies that mostly theorized on the benefits of crowdsourcing, while we, through empirical tests, have pointed out that there are many benefits but also costs. When the company succeeds in creating value from the crowd, the benefits exceed the costs and there can be a positive impact on the stock performance: this happens mainly when the companies succeed to collect ideas of value from the crowd and to implement them for commercial purposes; they could also collect valuable ideas without being able to implement them. We measured the presence of these two aspects with two variables:
- the brand value of the company: the more the company has a strong brand, the more it is able to have visibility of its call for ideas, to involve many people and therefore to collect many ideas. Thanks to a strong brand it is possible to have greater diffusion and visibility of the crowdsourcing campaign and also a greater number of customers and enthusiasts who participate and spread the initiative. This aspect turns out to be crucial because there is a link between the amount of ideas submitted and the quality of some, of the best: if you collect 100 ideas it is less likely that there is an idea of extreme value than if you collect 10,000 ideas.
- dividend yield: this is the second variable we have considered, in this case to measure how much the company can then implement for commercial purposes the ideas collected. The dividend yield tells us how much companies pay dividends to shareholders to share their profits or how much they use financial resources to make new investments. Whereas crowdsourcing is a methodology for collecting ideas for distant search, for radical innovations, companies that have more resources to implement in new investments are more likely to be able to effectively bring ideas to the market for the radical innovations they have collected.
These two aspects determine the conditions that allow crowdsourcing to be positive for the enterprise. The identification of these two factors, on the one hand, contributes to the scientific knowledge of crowdsourcing, and on the other, also provides important indications for the managers about when it is convenient for their companies to start these campaigns of crowdsourcing.
Considering your experience of co-authoring, we would like to ask what is the added value that the sharing of a research brings to a young researcher, on one side, and to a full Professor, on the other. How does the interaction happen?
Cappa: This is a difficult but very interesting question since for me working with the professor was a very positive experience. In this particular case, we worked on a paper of high scientific rigour and managerial relevance: it was published in the journal Research Policy, which is the most prestigious in the field of innovation and among the best in the world in the area of management. I think our collaboration has been useful and crucial where, on the one hand, the young researcher can channel more resources in terms of time, research ideas, data collection and empirical analysis and, on the other hand, the professor is crucial in directing research with his guidelines, with his know-how of both methodology and relevance of the topics and, finally, with his experience. I think the young researcher and the full professor are two complementary parts and, we could say, crowdsourcing is like our knowledge diversity coming together to form a small crowd of two so that scientific output can benefit in terms of rigour and relevance. It certainly was a positive collaboration for me and we have indeed continued to work profitably together in this direction by publishing other scientific papers as co-authors.
Oriani: From my point of view, the collaboration with Francesco was born within the framework of his Phd, which was brilliantly completed. If the collaboration between Phd student/Postdoc and Supervisor works well – I would speak more of this than of a young researcher and full professor – it certainly leads to two complementary profiles that I lived with a supervisor who guided me in this path. The role of Francesco, in this case, was to study with passion the theme of crowdsourcing in the field of open innovation, to work on data very effectively (building a database is not simple), apply the methodology to the event study that is a time consuming methodology and that still requires commitment and dedication. Francesco did this in a very disciplined way. From my point of view, clearly, my role was to raise Francesco’s awareness of research questions. When Francesco told me he wanted to address about crowdsourcing, I considered that analyzing the value of crowdsourcing investments could be an interesting aspect that could be relevant not only from the point of view of research but also managerial and that was not yet studied in a way adequate. I suggested to Francesco the methodology we could use and, in general, the structure of the paper and the writing of some parts because with the previous revise and resubmit activities and with the publications in international journals there is an experience that concerns the procedure that has to do with the writing of the introduction, with some passages of the theory, with the way in which the conclusions are written and the way in which the answers to the reviewers and the editor are managed. The element that a supervisor puts at stake in these cases is a process experience that has lived in the past years and has sometimes left some sign and some error that tries not to repeat when he does the same job collaborating with a Phd student and a Postdoc. This was the model of interaction. In the case of the work done with Francesco it is a work that has worked in a particularly effective, fluid way. So much that beyond this work that we did together that was part of his Phd dissertation, we had other experiences with good publishing results.