To business leaders, “open source” often sounds too altruistic—and altruism is in short supply on the average balance sheet. But using and contributing to open source makes hard-nosed business sense, particularly as a way of increasing innovation.

Today’s firms all face increased competition and dynamic markets. Yesterday’s big bang can easily become today’s cautionary tale. Strategically, the only viable response to this disruption is constantly striving to serve customers better through sustained and continuous innovation. But delivering innovation is hard; the key is to embrace open and collaborative innovation across organizational walls—open innovation.

Open source communities’ values and practices generate open innovation, and working in open source is a practical, pragmatic way of delivering innovation. To avoid the all-too-real risk of buzzword bingo we can consider two definitions of “innovation”:

• creating value (that serves customer needs) to sell for a profit; or
• reducing what a firm pays for services.

Innovation is both a process and an outcome, which is why it can be slippery. The outcome is important: the adoption of a new way of doing things. It’s essentially practical, rather than the mere invention of new ideas in ivory towers.

What I propose here is a story—a narrative—about how we create value today. I believe we’ve avoided this narrative, and, as a result, our community doesn’t actively communicate the value of contribution in a way that’s consumable by many business leaders. Reasons to use open source are well understood; however, the self-interested value of contributing has been a missing part of the narrative.

I believe that open innovation for public and private goods through open source offers significant opportunity to speed up the dynamism and creativity that organizations need to thrive.

Let me explain.

Creating private goods

Let’s take creating value to sell for profit.

Society allows intellectual products to function as property (IPR), primarily so creators can offset the costs of the investments they make creating those products. In return, we all gain from the increase in knowledge and access to those creations.

The simple example is a firm that employs experts to improve a toothpaste. It patents the improved formula to create an exclusive product and sells it for a higher price. These are called “private goods.” It’s a model that works through scarcity and limitation, whether by intellectual property rights or technical measures.

But what if you don’t have all the great “toothpaste people” inside your organisation?

The essence of open innovation, then, is that it tries to find ways to connect the best toothpaste experts to get the best toothpaste (or whatever form of expert you need!). In terms of value creation, it looks outside organizational boundaries. It continues to use the private goods “scarcity model,” but acknowledges that value capture can happen in ways other than producing the innovation yourself—such as spinning out the innovation or licensing it.

Open source is fantastic for value creation, as it harnesses the creativity, energy, and insight of multiple interested parties. Experts both within and outside the firm can collaborate easily and with minimum levels of friction. And open source thinking allows end-users to take part in the process, something which recent research says is the source of many innovations. It’s difficult to overestimate the level of friction-less creativity this frees up.

Here’s the challenge if you’re trying to create a profit: that same transparency and collaboration will by definition constrain value capture. Since the intellectual product is shared by everyone (under an open source license) no one party can capture the value by limiting access to the good. Using our example from above, open source publishes the improved formula for the toothpaste so now all manufacturers have the same information. This is why open source companies have to work that bit harder to help their customers, because they can’t depend on scarcity for their profits—a benefit for those customers!

Ultimately, the question if you’re a profit seeking company is: Are the strategic benefits from value creation worth the trade-off during value capture?

Creating shared goods

Now let’s take reducing the price an organization pays for things.

Organizations purchase services (e.g., outsource functions) because the cost of creating the good is higher than the cost of buying it. As part of this bargain, businesses accept that they’re paying cost plus some extra (a profit margin). But, instead of paying the profit margin (and associated risks of an external dependency) what if those businesses could collaborate with others to create a cheaper and better public good?

Lets imagine ten organizations today each pay $100,000 annually for their SaaS CRM software. What if they could collaborate to create an equivalent system for, say, $90,000, then each will make a 10% saving. But, the key here is that achieving this saving requires all ten participants. Further, as the innovation is open and co-created with the users, the final solution will fit their industry needs more precisely.

By collaborating the open source way, organizations can share the risk and investment of value creation. A common method is to create a foundation to focus on an area of mutual interest. As the outcome is a shared creation of value, there is no requirement for private value capture.

We used to view open source as a free for all without any rules or systems. But, an organized structure (e.g. a foundation) is important because the key for investment is that the individual cost to an organization must be less that it would be to purchase a private good that fulfils the same need.

Fundamentally, creating shared goods makes strategic and economic sense.

A culture of innovation

Contributing in an innovative environment also helps create an innovative organization. Not all innovation is big-bang revolutionary; although desirable, it’s difficult and risky. Practices such as “the aggregation of marginal gains” have taught us to value incremental innovation. What matters most is that innovation should be a sustained practice, across and through every aspect of the organization. We need to create innovative organizations that embed creative values and practices in their DNA. This is a significant challenge for most firms today.

Collaborating in open source can help by incubating creative values and practices. Employees taking part in open source are exposed to the practical aspects of delivering innovation. Of course, open source projects require active tending and care, but practices around transparency, reduction in hierarchy, and open communication encourage motivation and an innovate mindset.

Leaders can then apply these lessons internally—to create a more innovative organizational culture.