Procter & Gamble Co. didn't start NineSigma Inc., but it is the key backer and most important customer of the small e-R&D company. In 2003 P&G announced a strategic relationship with the Cleveland-based firm, and in September, Paul Stiros left P&G to become its president. Meanwhile, another young e-R&D service has an even closer connection with its backer, Eli Lilly and Co. - and for similar reasons. "Lilly created InnoCentive [Inc.]," says Darren Carroll, CEO of the Andover, Mass., company, "because it wanted to be a customer."

Founded in 2000 and 2001, respectively, both these startups use the power of information technology and the reach of the Internet to connect their innovation-seeking clients with nodes of brainpower and know-how around the globe. They're not rivals, at least not yet; they have several clients in common, including P&G and Air Products and Chemicals Inc. Their approaches differ, but as businesses they face a common challenge: building their client bases beyond the relatively few leading-edge companies that now use them and shifting into a higher-growth mode, which both are now attempting to do.

NineSigma is the creation of Mehran Mehregany, an entrepreneur and professor of electrical engineering at Case Western Reserve University. Mehregany saw that unlike government, industry had no system for sending out requests-for-proposals to solve research problems. NineSigma's Managed Exchange service fills that need.

"We work with the client to define the need in a way that can be understood by people not associated with the client's industry," says Stiros, who as director of new business development and licensing for P&G's fabric and home care unit was a big NineSigma user. NineSigma searches its huge database of solution providers (which range from companies large and small to contract research organizations to the Tashkent State Aviation Institute in Uzbekistan) and sends out anywhere from 5,000 to 20,000 targeted e-mails inviting recipients to propose a solution. The client - sometimes identified in the initial RFP, but more often anonymous - then goes on to make a deal with the provider once it gets a pitch it likes. Solutions are often cross-industry in nature - as when one company with deep-sea expertise helped another that needed to cope with air pressure changes affecting its products as they were trucked over the Rocky Mountains.

InnoCentive brings a more transactional approach to open innovation - or, to use InnoCentive's term, distributed R&D. The key is the company's network of registered "solvers," who Carroll, an intellectual-property lawyer and former Lilly executive, says now number more than 70,000 in 165 countries. The largest concentration is in China (where InnoCentive's relationships include the Chinese Academy of Sciences) followed by the U.S. and India. "Seeker" companies post their challenges anonymously, along with the award they'll pay (typically ranging from $10,000 to $100,000) for a solution. The challenges tend to be narrower than NineSigma's - for example, "seeking anti-nitration additive," with an award of $15,000. Solvers must sign an agreement to turn over IP rights. As with NineSigma, it's the seeker company that decides whether a solution is acceptable.

InnoCentive's 30 client companies include the likes of BASF AG, E.I. du Pont de Nemours & Co. and Boeing Co. NineSigma's client roster includes auto supply giants Johnson Controls Inc. and Delphi Corp., as well as pharmaceuticals company Abbott Laboratories Inc. and plumbing fixture maker Kohler Co.

Both of the e-R&D startups cite worries about IP protection as one of the biggest barriers they've encountered as they try to add more clients. "One concern many large companies have is receiving information on a confidential basis and then being bound by it, when they have their own internal research in a relevant area," Stiros says.

But both also see big potential for their services. Along with Stiros, NineSigma has recently brought in other key executives, as well as a chairman, Richard Schwarz, who is co-founder of an early-stage venture capital firm and was a successful entrepreneur in the chemical industry. Stiros says he projects sales in "the several tens of millions of dollars" in the next three or four years.

InnoCentive, for its part, expects to bring in some more investors soon (it's still 100% owned by Lilly's venture unit, though it's run at arm's length), partly with a view to forging alliances that will enable it to build on its core strengths in chemistry and biochemistry. In the areas where InnoCentive is currently strong, Carroll sees an addressable market - that is, money that is spent on outsourcing-type R&D solutions - that will grow to $15 billion in 10 years.

There are other open-innovation startups as well, such as Yet2.com Inc., a Web-based IP brokerage used by both Air Products and P&G. How successful will these companies be? That will depend in part on the cultural revolution within R&D organizations their backers are trying to lead. Stiros reckons that fewer than 10% of companies are actively practicing open innovation today. - Kenneth Klee

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