BIF-3 Story: Incentives as a Catalyst for Innovation

For a while now, I've been intrigued by this concept of using incentives to spur breakthrough innovation. It's a concept we've talked about at length here at BIF and even dabbled in it last year when we spearheaded a competition for new wireless applications.

Peter Diamondis, founder of XPrize has written a good piece at the Huffington Post where he outlines the many reasons why large cash incentives work.

Peter writes:

Large incentive prizes break through market and government bottlenecks. They reach across national and disciplinary boundaries and attract the intellectual and financial capital required to achieve breakthroughs through innovation. Public competitions shape public attitudes and spur innovation adoption.

An incentive prize for achieving a specific goal stimulates entrepreneurial investment that produces a 10x - 50x return on the prize purse, and at least 100x in follow-on investment and social benefit. It offers foundations and philanthropists the opportunity to complement conventional giving strategies with low-risk, highly efficient, highly leveraged approaches. Best of all, purses are only paid on success.

Contrary to many, I happen to reside in the camp of believers. Some very smart people have absolutely no interest in bringing innovation to market. They just want to create the innovation. Challenges, competitions, puzzles and games get people involved. This year at BIF-3, Jack Hughes of TopCoder will be sharing his story about the use of incentives.

TopCoder, is a Connecticut company Hughes founded in April 2002. His company has figured out a way to institutionalize software programming competitions. It allows him to both showcase programmers from around the world for companies seeking top-flight talent, and develop computer applications for blue-chip clients who recognize TopCoder’s ability to tap a global talent pool.

So far TopCoder has 114,000 member programmers, who hail from virtually every country on Earth. Each week the company hosts online, single-match programming competitions in which developers compete for ratings and bragging rights, and hone their skills for TopCoder’s larger, multi-round tournaments, which are held biannually.

The competitions drip with computer ‘geekiness,’ with competitors trash-talking and boasting of their programming prowess while their work is critiqued and rated after each bout. The top-rated programmers come to the attention of software giants looking for the best and brightest—often from nations that don’t usually draw the attention of a Google or a Microsoft.

For these people, Hughes says, “TopCoder is an outlet for their creativity,” as well as a way to win prize money that in some places can go pretty far. Even those who don’t win relish the chance to test their skills against their peers and learn from more advanced programmers.

Highly rated members are eligible to compete when TopCoder develops software applications for corporate clients. TopCoder breaks those projects down into discrete components and then opens the floodgates to its members, in the form of a competition, of course. The winner gets paid for what he or she has developed, the client company gets the programming solution it needs and TopCoder gets another entry for its growing catalogue of reusable Java and .NET components. Reusing these bits of software on later projects allows TopCoder to shorten project timelines and decrease costs, savings that it passes on to clients.

“When we put work out we’re not concerned with who’s doing it, we only care about the quality of the output,” Hughes says. By cutting a project into smaller pieces and making the process competitive, he says, “you get a whole different feel for what work is.”

The result is a process of collaboration by competition, a for-profit twist on the open-source software approach pioneered by companies like Linux and Apache. In addition, Hughes says, “paying people on the basis of the quality of their output, rather than how much time they put into it, makes for a much happier organization,” one in which bureaucracy is replaced by meritocracy.

“I’m a huge believer in open-source, but I’m also a huge believer in capitalism,” Hughes has said. “Everything we do is designed to allow software designers and programmers to capture the value they create. We are enablers of the individual.” Hughes is looking at other fields where TopCoder’s model might be applicable; financial trading is one area he suggests. And he’s confident that in breaking down corporate walls to tap the enormous talent pool available via the Internet, TopCoder is blazing a trail that others will soon follow.

Though TopCoder’s competition format is unique, “many companies are trying to make things more virtual,” Hughes notes. “I think this is probably where the business world is headed—as much out of necessity as out of desire.”

You can hear more from Jack Hughes at the BIF-3 Summit on October 10th and 11th.
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