Bill Taylor, in an article in the NYTimes published March 26, 2006, told the story of Rite Solutions, a software company that has a market for ideas - internal to the firm. Like other "information markets" such as the Iowa Electronic Markets which are real time markets that predict the outcome of political events (or even now the possible outbreak of bird flu) based on contract payoffs, and the Hollywood Stock Exchange, which allows you to buy shares of actors, and movies, the Rite Solutions idea market allows the wisdom of the market to surface the more potentially successful innovations. The notion of having an active market for innovative ideas inside a firm is vital because inventions and innovations are incredibly dependent on people who have local knowledge of the customer needs, customer setting, technology, likely implementation issues, and so forth. All of these factors are "impacted" to use the agency theory description of local knowledge. In other words, the expertise that resides with those people close to the problem, and close to the customer is very hard to transfer to others. Most organizations put their innovations into a budgeting system that allows people to "translate" their expectations into proposal that compete for funding. There are many benefits to the classic budgeting approach, it helps the organization focus on fewer things, it allows for senior executives to see what is going on in the organization, it is a great means for prioritization, and enacts the actual strategy of the organization through approval, or non-approval of individual projects.
The trouble with innovative ideas within traditional budget mechanisms is that those reviewing the proposal are usually inexpert, and in fact they are probably more inexpert in those projects that are innovative, for senior executives usually climb to the top of an organization through previous innovations which means that the very expertise which was the basis of their success is often outdated. This is evidenced in Taylor's article where Joseph Marino, President of Rite Solutions says that if it had been just up to the senior executives they would not have supported the creation of Rite-View, an innovative display of information, which accounts for 30% of their sales. Furthermore, it is hard to get a robust idea of how the rest of the organization would make the tradeoffs if they saw the different alternatives. Usually, the executives are the only ones who see the panoply of projects, for each project group is busy making their project presentation convincing. The opinion of others, who are not close to the project, but are close to the customer and the technology, are not part of the information that influences the decision of the senior executives.
The key issue is The Architecture of Participation, as Tim O'Reilly has pointed out. The best solutions come when it is easy to contribute and there is a social process for sorting out the good from the bad, efficiently, as there is in idea markets, and in open source software. An idea market inside the firm allows an excellent complement to the budgeting process which is the primary architecture of participation in today's companies. Why is it useful? Well, the market allows more voices to be heard. It also allows individuals to give more weight to the things they really believe in. At Rite Solutions, each person has $10,000 nominal innovation bucks to spend. This means that a single individual feel strongly, he or she can bet a lot on it. This is better than democratic style polling, or departmental approval, for the weight of a single person's level of belief in an idea is at least as important as the fact that they are supportive, or non-supportive of the new initiative. Put another way, the market allows you to show how deep your faith is. Over time, more successful people should be given even more "nominal" money to spend, because they have shown an ability to judge well. In the stock market, Warren Buffet gets a lot more "votes" than I do, because his track record is so good. This should happen inside companies too, when it comes to innovations.
But, as Bill Taylor notes so well, it takes a courageous management team that is willing to have a market in ideas, for it is far less "controllable" than the capital budgeting process, but much more accurate!