How Patent Application Costs Prove Digital Is Shrinking the Price of Innovation

Kai Goerlich

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Scott Anthony, managing partner, Innosight.

Imagine a cocktail party where conceptual characters from the world of innovation meet. In one corner, Moore’s law leads a high-energy talk about new ways for IT to get smaller, stronger, and cheaper. In another, the Internet and 3D printers enjoy canapés as they joke about the days when prototypes required shipping. A voice from the open innovation table shouts to ask a waiter how long the party is to last—the lean startup troupe is due to arrive with some fresh customer data on a test product.

This spirited mix of technology advances, organizational changes, and market needs is aligned with a decline in innovation costs. An analysis of R&D spending (as a percentage of GDP) and patent applications in the 34 OECD countries, India, and China since 2000 reveals that developing an innovation that is worth submitting for a patent has declined 5% over 15 years.

“There are a lot of reasons to believe that the cost of creating new ideas should have come down sharply over the past generation,” observes Scott Anthony, managing partner at consultancy Innosight and author of The First Mile: A Launch Manual for Getting Great Ideas into the Market. These include the invention of new technology foundations and efficiencies from new processes that companies are using to pursue their ideas.

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Source: OECD and The World Bank

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sap_Q216_digital_double_charted_images01Crowdsourcing

Procter & Gamble established Connect  + Develop, a program to bring external  collaborators into the company to  co create new products, in 2000. It was  among the early efforts in open innovation,  a trend that is now enmeshed in online  contests, crowdsourcing, and crowdfunding  projects that all seek to bring new ideas  to market. According to Scott Anthony,  managing partner at consultancy Innosight,  organizational innovations such as these are  part of the story of lower innovation costs.

sap_Q216_digital_double_charted_images02Analytics

A paper published by  Google in 2003 provided  a catalyst for the development of open  source software for  storing and processing big  datasets. The emergence  of high quality open source software, in combination  with other technologies  (such as cloud computing  and faster processors) that have emerged in the past 15 years, have pushed IT  costs down, observes David  Schatsky, senior manager  at Deloitte and author of  Signals for Strategists:  Sensing Emerging Trends in  Business and Technology. “To the degree that [R&D  costs] are shaped by IT, IT  is on a prolonged trajectory of declining costs and  improved performance,”  says Schatsky. These things enable innovation at lower capital costs than in the past, he says.  Meanwhile, he adds,“advancements in analytics have likely improved the  efficiency of innovation by  helping to surface insights faster and more easily.”

sap_Q216_digital_double_charted_images03Accelerators

Business accelerator Y Combinator was founded in 2005, spreading seed funding. Established firms have gotten into the act around the world. David Schatsky, senior manager at Deloitte, points to corporate accelerators, where companies invest their own venture capital in startups, and incubators, in which large firms nurture a cluster of related startups. Author Navi Radjou says companies like GE that have invested great sums in R&D to benefit one industry smartly will look for ways to apply that know-how to other industries. One example: using ultrasound technology developed for medical applications to examine the integrity of oil pipelines. These developments may or may not be tied to patent applications, but the goals are still about innovation. “Recombining or reusing existing technologies to create a new solution may create more value,” Radjou says.

sap_Q216_digital_double_charted_images04Cloud and Smartphones

Cloud computing began to be adopted commercially in 2006, while Apple introduced the iPhone and Google the Android operating system in 2007. These are among a series of technologies that have provided the foundation for later innovations. Such precursor inventions always set the table for future advances, notes Scott Anthony, managing partner at consultancy Innosight. And their impact accumulates. Commun ications satellites were launched in 1963. ARPANET, which paved the way for the Internet, debuted in 1969, followed by the World Wide Web two decades later.

sap_Q216_digital_double_charted_images05Digital Business Processes

India’s Tata Group introduced the Nano, a US$2,000 car, in 2008. In the process, Hindustan Times reported, the company applied for 34 patents for the Nano and more than 200 patents related to future auto developments. “Their R&D budget for a car like that was a fraction of what Ford or GM would spend,” says Navi Radjou, co author of Frugal Innovation: How to Do More with Less. “In emerging markets, companies have fewer resources for R&D but higher aspirat ons. They squeeze more from every dollar.” It’s clear that the company’s digital design process played an essential role, according to an article in Asian Engineer. India and China have seen the steepest declines in their innovation costs, in part because they have become more active, both in terms of increas ng R&D spend ng and applying for patents. Having ramped up from a relatively small base, researchers and inventors are quickly becoming efficient with practice, as we l as by reaping the benefits of lower IT costs and other developments at an accelerated pace compared to developed countries, says David Schatsky, senior manager at Deloitte.

sap_Q216_digital_double_charted_images063D Printing

University of Southampton engineers launched a 3D-printed unmanned aircraft in 2011. It’s among numerous prototypes and products that are emerging thanks to additive manufacturing technology. But it’s not just that 3D printing makes prototypes easier to produce. Or that the cloud delivers computing power to more locations. Or that communications technologies enable faster, cheaper sharing of ideas. Advances in technology and a move toward open organizations combine to amplify each other’s impact, David Schatsky, senior manager at Deloitte, notes.

Digital Pathways to New Ideas

sap_Q216_digital_double_charted_images08Digital technologies and development techniques are shaping the innovation process, whether or not patents are involved. Since GE began adopting leanstartup techniques in 2013, the company has trained more than 40,000 employees for its FastWorks program to develop early product versions and test them with customers to speed development, reports Rick Clough for Bloomberg.

And new combinations of existing technologies and ways of doing business can yield new models, says Navi Radjou, co-author ofFrugal Innovation: How to Do More with Less. In a LinkedIn blog post, he points to a joint venture by online education organization Khan Academy and the nonprofit Learning Equality use low-cost servers that run on open-source microprocessors. Low-income students in Mumbai and Pune, India, can access preloaded Kahn math content without an Internet connection. Radjou notes thattaking advantage of existing technologies to do something new for a market in need creates value. D!

Methodology
We used historical data on GDP, R&D spending, and patent applications from the OECD (for OECD member countries and China) and The World Bank (for India) to calculate average R&D spending as a percentage of GDP per patent application and charted the change over time. Patent applications provide a proxy for innovation activity, indicating that the companies or individuals who submit them have developed an idea they believe is innovative. Data for 2012 14 is estimated.


Kai Goerlich

About Kai Goerlich

Kai Goerlich is the Chief Futurist at SAP Innovation Center network. His specialties include competitive intelligence, market intelligence, corporate foresight, trends, futuring, and ideation. Share your thoughts with Kai on Twitter @KaiGoe.