pearcesby Sarah Pearce, TMT Partner at Cooley LLP in London*

What is Open Innovation?

Open innovation looks beyond internal ideas for innovation, exploring new and external routes to market and means of demarcating brands from competitors. Traditionally, getting a competitive edge required innovating through research and development, being the first to market and ensuring strong IP protection. Open innovation, on the other hand, assumes a more collaborative, and outward-looking approach.

Several factors have led to rise of open innovation and the erosion of ‘closed’ innovation: the mobility and availability of highly educated people have increased, so large volumes of knowledge exist outside the research centres of large companies and an increase in venture capital activity and licensing opportunities brings new opportunities outside the realm of companies’ internal operations. This has encouraged to companies to start to look at new ways to increase the efficiency and effectiveness of their innovation process therefore developing a new mind-set.

The 20th Century environment relied heavily upon closed innovation and the internal creation of IP: companies could be seen as individuals within economies and in order to compete, it was believed that a company must do everything to protect themselves from competition. Sharing information, co-creating and building value networks would traditionally be viewed as a threat rather than an opportunity. However, in today’s marketplace, a company can no longer rely on its own capabilities: in order to successfully compete effectively, it needs to collaborate in a network with suppliers, customers and, yes, even competitors. While it is fair to say, this trend began outside of the technology industry, it has, more recently been adopted by some key players in the tech world.

Tradition vs Innovation

It has since been proven that open innovation can enable businesses to modernise, and strengthen brand identification through collaborations, therefore opening up new avenues and markets and creating dialogue with customers.

Burberry is a leading digital and innovating luxury brand who is often cited as a successful example of adopting open innovation strategies to expand its brand reach and engagement. This is somewhat remarkable when you think that Burberry a brand heavily weighted in traditional British heritage. Indeed, luxury and innovation can sometimes be considered uncomfortable companions. A clear dichotomy exists between tradition and innovation but it is not the only one. However, with innovation and disruption rife in all fields and technology playing such a vital role in current society, can businesses afford to ignore it?

Tools for Open Innovation

With a change in the nature and function of many products prompted by new technologies, brands now have greater opportunities to explore open innovation strategies. Recent campaigns, particularly in the world of fashion and retail, have demonstrated more ‘co-opetition’ between brands. The rise of wearable technology has blurred the lines between different product categories, generally clothing and technology. With various industries and technology each expanding into the other’s field, the scope for collaboration and innovation is as much widened as the pool of competitors. Wearable technology is perhaps an obvious example, but companies are also blurring the lines between digital and physical products through marketing campaigns and e-commerce platforms, as have been demonstrated by the Swarovski Gems campaign in 2014, Pandora’s new US e-commerce platform and Burberry’s creative social media strategies. These open innovation techniques converged digital and physical products and they have enabled businesses to unlock, breakdown and share consumer data.

Technology plays an important role in a number of businesses’ open innovation strategies, particularly with the “digitalisation of retail” and with ecommerce and digital playing a key role in marketing strategies. The surge of social media activity and consumer engagement notably in the fashion arena has been remarkable and the concept of “Fashion Tech” has evolved immensely. One only has to look at one of the most high-profile developments of late: the Net Set App, for example, launched by Natalie Massenet, merges fashion with social media. Net Set is an invite-only app that is intended to make shopping a truly social experience. Users can “love” products sold on the site, share their personal photos, browse what users worldwide are lusting after, “admire” friends and the 450-plus brands sold on Net-a-Porter – and, of course, shop. Net Setters can also join Style Tribes: led by Massenet herself which, she explains, “I should be able to go in blindfolded and start shopping from that style tribe and know I’m going to love it”.

Following on from ecommerce and social media, personalisation of the consumer experience is a further strategy for open innovation which has seen a variety of embodiments in brand extension and development, particularly in the retail tech sector. Through consumer engagement strategies, brands have placed the power in the consumer to co-develop products according to their own specification. A further means of tailoring your business offering to the consumer through crowdsourcing and crowdfunding. This is of particular use to entrepreneurial start-up companies in conducting live market research and proof of concept, whilst gleaning support, funding and brand exposure in the process.

Open innovation provides companies with a shared customer base, opportunities to work and capitalise on the reputation of one another’s brands through association. Similarly, co-design enables customer base expansion through exploring new avenues and developing brand synergies. Examples of this include collaborations between high street and designer retail brands and/or celebrity endorsements of fashion or watch and jewellery brands. This provides an opportunity to capitalise on markets that brands may not traditionally have access to, expanding the potential customer base: placing a luxury brand in the mind of the high street consumer and/or younger audience as something to aspire to being a prime example.

Advantages and disadvantages of Open Innovation

A key advantage to open innovation is the ability to identify consumer needs through obtaining an outsider’s perspective, enabling improvements, designs for new products and more effective solutions to problems. This can result in reduced costs of research, development and manufacturing, with designs more easily and efficiently brought to market. Open innovation can provide access to new revenue streams, enabling businesses to tap into new or shared customer bases and expand existing bases.

On the other hand, open innovation can and does raise potential issues around the ownership of intellectual property. The sharing of knowledge and ideas can cause some confusion on who actually owns any new intellectual property. Careful management of intellectual property is required and all parties will need to benefit, identifying each party’s IP portfolios preceding the collaboration, the sharing of existing IP needed for the collaboration and defining the ownership and management responsibilities of IP created by the collaboration.

Another potential “disadvantage” associated with open innovation is confidentiality and the sharing of sensitive company information. Collaboration requires a cultural shift, demanding not only a degree of loss of control in the innovation process, but also carrying a certain amount of risk in losing one’s competitive advantage. However, with a backdrop of fierce competition between brands, the risk of reduction in the control an organisation has over its product or brand development and competitive advantage must be balanced against the risks of not innovating and getting left behind.

The future of open innovation…

The future is showing signs of continued development of shared networks which can deepen relationships reinforce brand loyalty and lead to growth. Open innovation platforms help companies to challenge traditional approaches and stand out from their competitors; however, questions about risk, brand fit and credibility should guide the right innovation and avoid excess.

The digitalisation of retail has been evolving for some time now and it is clear that technology is likely to be the key facilitator of future success in fashion and luxury brands. Though not all companies will have the resources or aspirations to innovate with new product lines, there are opportunities beyond this to reach consumers using technology. Embracing the power of the crowd and personalising the consumer experience can help innovate and develop brand identity. Equally, exploring brand synergies and collaborations, between luxury and the high street and/or luxury and technology for example, can spread the cost and risk that comes with innovation. Open innovation has become increasingly relevant and with this rising overlap between retail, even in the luxury arena, and technology, those that don’t embrace open innovation in this way may well get left behind.

* Sarah Pearce is a partner in the Cooley Technology Transactions Group and is resident in the firm’s London office. Her primary focus is on technology and her practice covers a broad range of commercial legal aspects in technology-related transactions, from the negotiation of major IT projects or outsourcings to advice regarding exploitation of a company’s IP or its digital strategy.