Innovators Must Co-create with Customers
Excerpted with permission of the publisher, John Wiley & Sons, Inc., from Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era by Henry Chesbrough. Copyright (c) 2011 by Jossey-Bass, A Wiley Imprint. All rights reserved.
Another aspect of advancing innovation in services is to change the role of customers in the innovation process. Instead of treating customers as passive consumers, many companies are now involving customers in the innovation process. In many cases, customers are actually co-creating new products and services.
In the world of products, companies create future products based on information received from their customers. The suppliers develop specifications to describe the product to potential customers. Once we
start to think about offering experiences, though, it becomes much harder to develop specifications because much of the knowledge involved in providing, or buying, experiences is tacit. Tacit knowledge is knowledge gained from experience, and it is both difficult and expensive to write down. Learning to ride a bicycle is a classic example of the difficulty of acquiring tacit knowledge. Cooking a recipe for the first time also highlights the difference between knowing what to do and how to do it versus following the written recipe. Customers vary in their prior experiences, and suppliers vary in their prior activities as well. Tacit knowledge interferes with the ability of suppliers and customers to communicate with one another.
Managing co-creation effectively requires developing ways to manage, and perhaps overcome, tacit knowledge. We already looked at the role that the package tracking tool plays for FedEx in helping customers know where their packages are at all times. Another company that has dealt with tacit knowledge quite effectively is Threadless.com, which sells custom-designed T-shirts to customers via the Web. In contrast to most other clothing makers, the company does not design the shirts. Instead, it invites anyone who wishes to submit a design for a shirt. These designs are then displayed on the Web site, where visitors can vote for the designs they prefer. Threadless tallies up the votes and then produces the top ten designs for that period. Best of all, the company has effectively presold much of its production, since the voters on the site are likely to want to own the shirt.
Another example of a company that is embracing the possibilities of bringing users directly into the innovation process is the personal financial software company Intuit. As Intuit’s founder Scott Cook explained in a 2008 article in the Harvard Business Review, Intuit has dramatically altered its approach to working with its customers. Instead of keeping customers out of the innovation process until the very end, it now builds in ways for customers to participate and contribute to their own experience and answer questions of other customers. Cook explains, ‘‘Such a [user contribution] system creates value for a business as a consequence of the value it delivers to users—personalized purchase recommendations, connections between buyers and sellers of hard-to-find items, new personal or business relationships, lower prices, membership in a community, entertainment, information of all kinds.’’
The importance of tacit information explains why services innovators often must co-create with customers. Tacit information is hard to convey, so repeated interaction between customers and suppliers is helpful, and often necessary, to transmit it. Suppliers must work closely with customers throughout the innovation process. Customers who are involved early and deeply in the innovation process—that is, co-creation—can share tacit knowledge with their suppliers. The key is for suppliers to change their innovation processes in ways that enable customers to share this knowledge.
Inviting customers into the innovation process not only helps to resolve the challenges of tacit knowledge. It also begins to open up the innovation process more generally. Open Innovation is a powerful tool to advance your innovation capabilities.
 Professor Ikujiro Nonaka has led the way in connecting the importance of tacit knowledge to innovation. See his excellent book with Hirotaki Takeuchi, The Knowledge Creating Company (New York: Oxford University Press, 1995). In their formulation, codified knowledge represents information that is well understood by providers and customers, such as specifications and standards. Companies can develop their offerings according to these specs and be confident that their customers will be able to use their offerings so long as the customers follow the same specs. Examples of such technical standards include the html and http protocols for the Internet and the digital video disk format for movies. Such widely shared information cannot be the basis for competitive advantage. Instead, it is the ability to elicit tacit knowledge that provides a competitive edge for firms.
 See Susumu Ogawa and Frank Pillar’s excellent article on Threadless: ‘‘Reducing the Risks of New Product Development,’’ Sloan Management Review, Winter 2006, pp. 65–71.
 S. Cook, ‘‘The Contribution Revolution,’’ Harvard Business Review, Oct. 2008, pp. 60–69. Scott Cook is one of the most thoughtful entrepreneurs. He not only founded and grew Intuit to its current success but fought off Bill Gates and Microsoft in doing so. He now sits on the board of Procter & Gamble. He is well worth reading on user contributions and other topics.
 See the prescient book by Joseph Pine and James Gilmore, The Experience Economy (Boston: Harvard Business School Press, 1999), for an early articulation of the role that subjective experiences play in advanced economies. They also develop the concept of experience points: points of contact between customers and suppliers in the exchange of services, here each entity’s respective processes interact in order to accomplish the exchange. At each of these experience points, customers select paths from sets of choices constructed by suppliers, and the exchanges branch into different areas depending on the customer’s choice. They can be thought of as moments of truth, where customers see what the service is really like for them at that moment.