Beyond "Imagine" – "yes, but . . ."

I’ve just finished Imagine: How Creativity Works by Jonah Lehrer and I have to agree with most of the reviews – it is a good read. One of the biggest insights being touted from the book is the need for interaction as the spark of creativity. Everyone has the ability to be creative. In part, we just need the right environment. As something that is seen as counterintuitive, Lehrer trashes the use of brainstorming. As he noted in the Washington Post Outlook’s 4th Annual Spring Cleaning — “Brainstorming: An idea past its prime“:

The reason brainstorming isn’t helpful goes back to Osborn’s prohibition of criticism. Constructive criticism is an important element of group creativity.

Interesting, since I had always thought that constructive criticism was part of the process: that the first stage in brainstorming was essentially free-association and the second stage was the more critical phase. In the book, he describes this constructive criticism as “plussing” — or “yes, but”. He notes that the constructive criticism is an essential part of the idea generation/free association phase not just the analytical phase.
Thus, in the spirit of plussing, let me add a couple of points. On the group dynamics/idea creation phase, I wish he had looked more at the process of “design thinking.” As I’ve noted before, key to design thinking is to avoid the rush to judgment. It is all too easy to let the “yes, but” process get away from the free association/idea generate phase into the narrowing down/critical analysis phase. Thus, we may need to think more carefully at how to improve the process before we completely abandon brainstorming. I can see a phalanx of executives latching on to the “brainstorming-is-bad” and rushing to a no holds barred “debate-and-dissent” model without embracing the “plussing-is-good” variation. A detailed understanding of the design thinking approach would have been a helpful addition to the book.
My second “yes, but” point concerns the size of the group dynamics. The book has a chapter on “The Power of Q”. Q in this case is the optimal number of connections for a creative team to work effectively. It is the middle ground sweet-spot between too few connections to spark new thinking and too many that overwhelms the process. Unfortunately, Lehrer seems to completely lose that insight in the next chapter on cities. There is no Q sweet spot. Rather, discussion is all about the superlinear growth model that implies more is always better. And the reverse model is then discussed in passing for company size: smaller is always better. Thus, the theories discussed in one chapter appear to be contradicted in another. Some synthesis would have been a major insight at this point, rather than just a summary and repetition of other peoples’ ideas.
My final note is one the weakness of the concluding chapter. The discussion about Route 128 and Silicon Valley is a little old and doesn’t capture all of the factors. There is a good description of the knowledge flows in the Valley (which is far different from the intense urban environments discussed earlier) and a explicit critique of the existing patent system. I have to point out the irony of criticizing the “abundance of vague patents” while basing much of his argument on studies that heavily utilize patents as a measure of creativity. Such, unfortunately, continues to be the state of the art in innovation research where we know that patents are not necessarily a good measure but like the drunk under the light post, it is where the data is.
All in all, a good read. But, as my last comment notes: yes, but more pulling of the strands together would have made this an even more powerful read.

Selected tweets – 4/22/12 – 4/29/12

Trying to keep up with all the articles and papers of interest is an impossible task. Trying to also share those with others is even more difficult. In the past I have attempted to simply list those papers I thought of interest on this blog without much commentary. But Twitter is has now evolved into a powerful tool for archiving and sharing links to articles and papers. So I have taken to tweeting material @IntangibleEcon that I would have posted on this blog. And I share blog postings by tweeting on them. To complete the circle, however, I need to share tweets with the blog. So, this week I am starting a new weekly blog posting of the selected tweets for the past week. I will not be all of my tweets for the week (and will not contain the tweets of the previous blog postings — that is too much like an infinite loop). It will contain those links which I would have previously tried to post here – but now tweet.
So, here is the first installment:
Last week’s selected tweets
27 Apr Day Marked By Initiatives On The Benefits Of IP, Open Technology http://shar.es/2mPLh Can we find the space between proprietary and open?
27 Apr Reclaiming the American Dream: Community Colleges and the Nation’s Future http://www.aacc.nche.edu/AboutCC/21stcenturyreport/index.html Revitalize a key in human capital formation
27 Apr China Digs It http://fam.ag/I6xKAg via @ForeignAffairs How China’s tech strategy and “rare earth” materials combine
27 Apr And look esp. at photo of smelting lanthanum in Inner Mongolia. High tech material processed in pre-industrial fashion http://fam.ag/I6xKAg
27 Apr How to replicate Silicon Valley in Washington http://www.washingtonpost.com/business/onsmallbusiness/to-replicate-silicon-valleys-success-focus-on-culture/2012/04/25/gIQAzFQkhT_story.html Key intangible: relational capital!
27 Apr Take My BlackBerry–Please! http://www.washingtoncitypaper.com/blogs/citydesk/2012/04/27/take-my-blackberryplease First Palm then Blackberry; so how long with the iPhone’s ride last?
27 Apr
Publicizing science on the Hill “The Golden Goose Awards” http://wapo.st/Iqqlvi Magic of science: you never know where it will lead . . .
27 Apr
… Even studies on the sex life of the screwworm: http://wapo.st/Iqqlvi
25 Apr Stick to the Mail: Postal Reform Means Radical Cost Cutting, Not “Product Innovation” http://bit.ly/I627L1 Disagree – USPS need to innovate
25 Apr RT @HarvardBiz – Stop Trying to Delight Your Customers http://s.hbr.org/Ik06aG Amount of effort customers make is key intangible, not extras.
25 Apr Crook: Conservatives Need Better Blueprint for New Economy http://bloom.bg/I9bLP4 “next economy is going to demand unaccustomed flexibility”
24 Apr Who Is America’s Top Job Creator? The Globalist http://www.theglobalist.com/storyid.aspx?storyid=9599 Answer: Al Gore as key facilitator of commercial use of the Internet.
24 Apr Vodafone bids for Cable & Wireless| The Economist http://econ.st/I6uFoT Buying only parts of the intangibles: customer list not brand
24 Apr
Tupac Hologram Rocks Coachella and IP Laws http://j.mp/J5h0z6 Article raises good point: who owns copyright of holographic performance.
23 Apr “@robatkinsonitif: Video up from ITIF’s Innovation Consensus 2013 conference: http://bit.ly/I3Y8Nh” Great event esp. discuss on intangibles
23 Apr Post Offices Face Hurdles in Efforts to Diversify http://www.nytimes.com/2012/04/21/us/postal-service-seeks-to-widen-activities-and-revenue.html Reason why Post Office is a dinosaur — Congress! Let USPS innovate!
23 Apr Business Etiquette: 5 Rules That Matter Now http://ti.me/JzpJXN Relations are a big intangible asset: here are some rule to follow . . .
23 Apr . . . especially the one about not talking business in the elevator, always surprises me – people have no clue as to who might be listening
23 Apr New breakthrough use of 3D printing? Drugs! http://bit.ly/Jo9vNO Wow – that has all sorts of implications.
23 Apr Virginia Tech computers teach math: http://wapo.st/JjTutI Successful machine-based education, is this the future?
22 Apr Classic case of building a new business on an intangible asset by selling what you know – NYTimes – Disney Institute: http://nyti.ms/JgvpGL

1Q 2012 GDP

BEA’s advanced estimate on the 1st Quarter of 2012 is out and shows the economy grew by 2.2%. I should say “only” 2.2% since final number of 3% GDP growth in 4Q 2011. It is below the 2.6% economists had expected, according to the Wall Street Journal. However, as the New York Times notes, it is “maintaining what many economists have started to call a “sustainable” pace of recovery.” And the Washington Post concludes the data on increased consumer spending “suggests that the economy will continue to expand, slowly but steadily.”
Declines in federal, state and local government spending continue to be a drag on GDP growth. Another worrisome issues is the downward blip in nonresidential fixed investment (i.e. business spending). Investment in nonresidential structures dropped by 12.0%. Equipment and software increased by only 1.7% compared to an increase of 7.5% in the previous quarter. And, as I have noted before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.
Note: these are advanced estimates subject to potentially large revisions. The next revision will be released on May 31.

Is R&D funding distorted by accounting rules?

Research and development (R&D) activities by companies is vital part of the American innovation ecosystem. Company R&D funding is the vital link between basic research (often government funded) and product commercialization. Economic policy promotes company R&D funding in a number of ways, such as through a tax credit and through direct funding using public/private partnerships. But U.S. accounting rules may be creating a barrier to and distorting company R&D activities.
At first blush, the issue may seem straightforward. Under U.S. Generally Accepted Accounting Practices (GAAP), company research and development expenditures are considered expenses. They are treated as day to day operating costs, similar to workers’ wages or the electricity bill. As such, when it comes time to calculate the company’s profit, these expenses are subtracted directly from the bottom line. The higher the spending on R&D, the lower the profit.
However, there is an alternative way of looking at R&D spending. Rather than a day to day operating expense, R&D is an investment. This view sees R&D as similar to a new piece of machinery or a building which have long term payouts for the company. Under GAAP, these investments in tangibles (equipment and buildings) are depreciated over time. Their costs are allocated not as an expense the year they are purchased, but apportioned over a number of years. Known as capitalization as it treats the spending as a form of capital improvement rather than an immediate cost. As a result, the immediate expense is lower and profits are recorded as higher.
Current accounting rules for companies do not allow for R&D spending to be capitalized. However, our accounting rules for the national economy shortly will. Beginning in 2013, our System of National Accounts will start incorporating R&D as a capitalized investment in the GDP statistics (see earlier posting and the BEA article “Toward Better Measurement of Innovation and Intangibles“).
To complicate matters, internal R&D spending is treated differently than R&D acquired from outside. If a company spends $1 million to develop a new technology, that is counted as an immediate expense. If a company spends $1 million to buy another company to acquire that technology, it is counted as an investment and must be capitalized. From an accounting point of view, this process may make sense because an internal expense is different from an acquisition. However, from an operating perspective, this difference between R&D expensing and R&D capitalization can be profound.
There are two possible problems: a decrease in R&D spending (a “lock up” effect) and a distortion of R&D spending toward acquisition versus internal R&D (the “balance” issue). The lock-up effect occurs when a company is hesitant to spend funds on R&D for fear of lowering reported profit — and thereby having a negative impact on shareholder value. The case of the stock market’s reaction to the divergent paths of Pfizer and Merck is a illustration of how increased R&D can be viewed by investors as a negative. This effect may be more pronounced for the small to medium sized (mid-capitalized) companies where stock analysts may not have the time to dig far beyond the profit and loss statements.
The balance issue affects where R&D takes place and who is making the research decisions. If acquired R&D is treated more favorable from a shareholder’s perceptive, there may be incentives created for existing companies to acquire technology from outside the company rather than development the technology in-house. Because of that incentive, the decision (consciously or unconsciously) regarding to what research is undertaken may not be made on the nature of the research but rather by who does it. For example, a company may decide not to pursue a certain line of research because it would have to be done in-house. Instead the company may wait to see what is developed externally and then seek to acquire that technology.
The balance issue may also impact the financial situation of startup companies. Startups are not well capitalized and are not in the position to acquire R&D from others. While startups may have access to R&D from universities and other public-private platforms funded by R&D activities flowing from the government or corporations, it is typical that a new, small business is creating their own R&D internally. As a result of the accounting rules, the smaller company which is reliant on internal R&D may be disadvantaged in the capital markets because of an appearance of lower profitability.
All of this has serious implications for the interaction between startups and existing companies — and the dynamics of the innovation process. Ideally, research decisions should not be biased one way or the other; the rules should be balanced or neutral between internal and external R&D. If a bias is to exist, there should be a solid public policy reason for that externally imposed bias. There may be good policy reasons to encourage the start-up/acquisition model of R&D over the in-house R&D model. But the possible existing bias toward acquisition due to the account rules exists because of historical circumstances, not a deliberate policy choice.
It is time to look more carefully at this issue to see whether the way in which account rules treat R&D (and intangibles in general) have become an impediment to innovation. And we need to ask a fundamental question: if we can treat research as an investment in our national accounts, why can’t we do the same in our company accounts?

New IP awareness assessment tool

The MEP program and the USPTO have teamed up to create a new on-line IP Awareness Assessment tool. According to the press release:

The tool enables users to measure and increase their awareness of IP issues, relevant to their creative projects and business goals. Users answer a comprehensive set of questions regarding IP, after which the tool provides a set of training resources tailored to specifically identified needs.

The tool can be run either as a pre-assessment or in full assessment mode. The pre-assessment is 5 questions designed to start you thinking. The full assessment is 10 categories, 62 questions that go in to greater detail. At the end of the process, a report is generated with a review of the user’s answers, suggestions for possible follow up actions and some reference materials.
Important note: this is an awareness tool, not an IP evaluation tool.
I’ve played around with the tool (click here to start) and find it is a great way for helping companies think through their IP issues. Some of the questions are of the “wait a second” common sense type: e.g. “Do you test your non-patented products in public?” and “Do you have an agreement with your employees dealing with intellectual property issues?” Some are a little more sophisticated “Do you show products you are working on to people who are not employed by you without requiring them to execute a confidentiality or non-disclosure agreement?” Importantly, many of the question allow for a “not sure” answer. This helps guide the suggestions and references at the end.
In full disclosure, I’m on a panel at the Manufacturing Innovation 2012 conference next month to talk about the tool and the next steps in understanding both IP and IC/IA (Intellectual Capital/Intangible Assets). There I will be talking about another tool to assess awareness, developed by my colleague Mary Adams at I-Capital Advisors. The early version of that tool is available at the IPR Plaza website — click here to run the tool.
Try the tools out for yourself and let us know what you think.

Beyond an industrial revolution

The Economist recently published a new special report on manufacturing and innovation: “A third industrial revolution” (see also introductory video below).
http://c.brightcove.com/services/viewer/federated_f9?isVid=1
The report looks at the dramatic changes occurring in manufacturing, including new materials, advanced production processes, additive manufacturing and other changes:

The consequences of all these changes, this report will argue, amount to a third industrial revolution. The first began in Britain in the late 18th century with the mechanisation of the textile industry. In the following decades the use of machines to make things, instead of crafting them by hand, spread around the world. The second industrial revolution began in America in the early 20th century with the assembly line, which ushered in the era of mass production.
As manufacturing goes digital, a third great change is now gathering pace. It will allow things to be made economically in much smaller numbers, more flexibly and with a much lower input of labour, thanks to new materials, completely new processes such as 3D printing, easy-to-use robots and new collaborative manufacturing services available online. The wheel is almost coming full circle, turning away from mass manufacturing and towards much more individualised production.

This blog has looked at a number of the same trends (most recently just last week) and made similar arguments over the years. But I would also argue that much more is going on than just a third industrial revolution. The changes we are seeing will add up to more than just the next phase of the industrial age. It is the beginning of a new information age.
The Economist report hints at this. As the above quote notes, the first and second industrial revolution were based on the rise of mechanization and driven by economies of scale. This new trend breaks away from economies of scale and from increased use of machines. Rather, this new economic wave is based on the increased use of information to drive customized production. It is almost a return, as the report notes, to the pre-industrial craft production using post-industrial techniques.
The consequence of this shift is far greater than just a return of manufacturing activity to the currently rich countries such as the United States. Take as an example what happened with the rise of the railroad. The marrying of the steam engine to a carriage on iron rails brought about far reaching changes in many difference areas. The railroads spurred on development of a number of other industries, most notably the steel industry. They changed opened up vast new markets and changed the retail and wholesale industries. They even gave rise to new management practices and the shift from ownership capitalism to managerial capitalism. I would also argue that this shift in business practices moved the government from the political “spoils” system to a professional civil service. Likewise, the shift in the production system and the increased “informationization” of the economy will have far reaching implications for many parts of our society.
So, enjoy this insightful piece, but don’t let the title limit your thinking. The report does a good job of talking about the changes in manufacturing. But there is so much more going on than just a third industrial revolution.

Two takes on Twitter and IP

Last week, Twitter announced that it was creating a new Innovator’s Patent Agreement (IPA). According to the announcement posted on the company blog:

The IPA is a new way to do patent assignment that keeps control in the hands of engineers and designers. It is a commitment from Twitter to our employees that patents can only be used for defensive purposes. We will not use the patents from employees’ inventions in offensive litigation without their permission. What’s more, this control flows with the patents, so if we sold them to others, they could only use them as the inventor intended.

This has set off a host of commentary in the blogosphere. I won’t even begin to try to get into all the details, but I would like to contrast two takes on Twitter’s action. The first is from Jon Low (The Low-Down — full disclosure, Jon is on the Athena Alliance Board) – “Twitter Promises to Behave. Patently.”:

In promising not to use patents or other forms of intellectual capital in an ‘offensive’ way, Twitter has taken a stand with two strategic benefits. First, they have demonstrated as an executive team that they are addressing variables they can manage, not embracing aspirational platitudes which sound arrogant, unrealistic and over which they have little in the way of leverage. That speaks to their sense of purpose and their focus. Secondly, this acknowledges that for web-based software, the interrelationships of discovery and development are often difficult to unravel. Identification of who owns what is a mug’s game won only by lawyers.

A contrasting view comes from Joff Wild (IAM Magazine — full disclosure, I have written articles for Joff) – “Twitter has decided that patents are not strategically important assets; good luck with that!”

Whatever the IPA means for the value of the patents the company owns, whatever it tells investors about Twitter’s commitment to differentiating innovation, has been deemed to be worth it. I find that extraordinary. For the sake of a few days of positive headlines and a bit of good karma among some programmers in Silicon Valley, Twitter has essentially thrown away any commitment to patenting and patent strategy beyond the accumulation of rights for defensive purposes.
That may look like an attractive option now, but how will it seem to those running the company in five years time when a potentially valuable invention they have patented is fair game for infringers? The likelihood of Twitter being able to develop a decent licensing revenue stream is now significantly reduced; while, as we saw yesterday, the chances of it ever selling patents for a meaningful sum has virtually been eliminated. Using patents to facilitate collaborative agreements or open innovation is now a forlorn hope, as third parties know they can pretty much use the company’s inventions with no comeback. And as for using patents as collateral in any financial transaction at any time: forget it.
Twitter clearly does not believe that patents are assets with any strategic value at all; they are just there to protect it from litigation. How very 20th century.

(See also Jack Ellis at the IAM Magazine blog – “Has Twitter just wiped millions off the value of its patents?”)
I’m not sure where I come down on this. As usual, the devil is in the details — in this case the details of what the IPA really means. Leonid Kravets has a raises a good question in his blog posting (The Twitter IPA: What Does “Defensive” Really Mean?) where he points out that the terms of the draft agreement are broad enough to allow a lot of leeway on “defensive” assertion. In addition, the agreement does not completely rule out “offensive” use of patents, but requires employee/inventor agreement with such actions. Thus, as Kravets notes:

While this initial draft appears to be an interesting first step to a new assignment system, I expect this draft to change significantly as Twitter begins implementation. It will be worth monitoring what effect this new agreement has other than giving Twitter some good press and a recruiting boost in the short-term.

In other words, this is an experiment: let the experiment and the debate begin!