The Netflix Prize: Designing a market for ideas... (Also posted at HBR)

There are a couple of key lessons every business can glean from the Netflix Prize. The first is that if you have a data driven problem it is possible to tap into a vast market for talent to improve your results. The internet makes it very easy for groups from around the world to self-organize, and then to self-sychronize to solve a problem. Second, as Greg McAlpin, the leader of The Ensemble - the group that came in second, by only twenty minutes, notes - most crowd sourcing efforts fail. In the case of Netflix, there were over 51,000 contestants organized in over 41,00 teams in 186 countries. The brilliance of Netflix management was that they crafted a contest structure that made it very easy for them to "grade" the results and therefore, I bet it was not a great burden on the firm to review the entries and their results. Third, they made the goal clear - 10% improvement or more. light-bulb-idea-hand

The fantastic thing about this approach is that it is so contrary to how corporations are programmed to operate. No organizational system could afford to screen 51,000 participants and 41,000 teams! Only a market can do that. Also, the teams decided among themselves when they would collaborate. The better groups waited to see which teams were performing well, and then merged with them to improve performance - again, not something that a company can do well. Lastly, the folks who came in second did not win. They lost by 20 minutes and they lost. Again a company would have a hard time enforcing such a strict standard after all their hard work and success.

As my friend Tom Malone, over at the MIT Center for Collaboration notes, there is no magic to crowdsourcing - you need to design what you want from it. I believe that there are many problems in companies that look a lot like the Netflix prize - insurance underwriting, oil exploration, evaluating an employee's probable success. As long as the problem has lots of structured data, and clear outcome variables - and a company can successfully design a way to keep customer and proprietary data safe, then you could tap a market for ideas. The question you have to ask is how much would it be worth to you to have a 10% advantage over the competition on a key decision? If it's worth a lot, maybe its time to learn from Netflix and design a prize of your own!

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