Co-creation as cost reduction

Co-creation is getting other people to do the work and love you for it. While most people think of co-creation as a way to innovate and change the competitive rules, it is also a way of cutting cost. Why is Apple so profitable? Among other reasons because it gets its customers to market to each other. If my friends sell me on the latest Black Eyed Peas release by sharing their play list with me on iTunes, Apple doesn’t have to spend marketing dollars to promote it to me. And by the way, my friends love selling me on this new release because it allows them to show how far ahead of me they are in their understanding of latest trends in rock music. Why is IBM able to reduce its R&D cost? By setting up “collaboratories” where its partners not only bring their expertise in specific domains, but also underwrite some of the cost of that research. Not only do these partners do what would have been IBM’s work in the past, but they also see unique value in engaging IBM in a proprietary development from which they will benefit.

Many companies are in retrenchment mode in this down-cycle. In their renewed attention to cost, they are reverting to the quality and re-engineering paradigm of the last century, attempting to take cost out by streamlining business processes, shortening cycle times, or implementing enterprise resourse planning software packages. While this approach is helpful to create a performance baseline, the traditional efficiency reserves in most organizations have been tapped out. Most of these companies will die completely healed.

A more fruitful avenue is co-creation. In general, organizations bite off more than they can chew. They think of themselves as having to control and optimize a wider set of one-sided processes than is necessary. They want to single-handedly deliver predictable outputs from those processes using only company resources, failing to recognize that people at the receiving end of those processes no longer want to be passive, but want to engage in the design of the process and the co-creation of their experience. And they’re willing to do the work required to get there, therefore allowing companies to externalize some of that cost. The cost saving opportunity lies in letting go.

The two areas best known for co-creation are at the two extremes of the value chain: in customer-facing processes (like Apple) and in the product or service development area (like IBM). We routinely see companies able to cut their marketing, advertising, sales, or customer service costs by 30% or more by involving customers in the design and delivery of those processes. We witness the same order-of-magnitude improvement when companies engage third-parties in their product and service development processes.

Ultimately, though, the greatest gain lies in applying the principles of co-creation inside the company. Individual functions inside a company suffer from the same evil as the company as a whole. They try to do too much on their own, attempting to create value by defining themselves as “process owners” responsible for delivering a repeated and predictable output to their “process customers,” typically another function in the firm. Whenever sourcing views manufacturing as its client rather than as a co-creation partner, it inevitably generates too much cost for itself and for manufacturing, and destroys some experience value for both. The same is true when an actuary in an insurance company views marketing as its client, when a chemist formulates a product “for” marketing, or when the Human Resources department views the management team as its client for coaching services. Most cost to be “engineered out” lies at the intersection between company functions.

Eliminating this cost requires setting up platforms that engage both parties in a dialogue where the processes on both sides are made transparent, enabling a new dialogue between them and leading to the development of new experiences beneficial to both parties at a fraction of the cost. Unlike in the old re-engineering and quality paradigm, these platforms do not attempt to create a deterministic process that optimizes the flow of goods and information between functions based on some perceived need. Instead, they enable faster, more contextual decisions that dramatically reduce cost and improve cycle time by tapping creativity on both sides in continuous fashion. These platforms sometimes require some form of information technology investment, but they often involve a simple reconfiguration of basic day-to-day interactions between people.

In that sense, co-creation is the new frontier of productivity.