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STRATEGY

The Secrets of Open-Source Managing

Start treating your customers like employees.
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Computer-game maker Valve Software had high hopes for Half-Life 2, an eagerly anticipated sci-fi shoot-'em-up thriller that had been five years in the making. And when the game finally became available over the Internet last year, fans were ecstatic. There was just one problem: Valve hadn't actually released the game. Instead, the code had been snatched by hackers, who'd posted it online for anyone to download. "This could have been a real hit to our bottom line," says Valve marketing chief Doug Lombardi.

Online piracy, of course, is fairly routine. But what happened next isn't: Valve customers around the world joined forces to track down the thieves. They found them in Europe; one of them, a hacker nicknamed "Ago," was arrested in Germany in June.

Why would a posse of online gamers -- a group not known for respecting niceties like copyrights -- set out after the liberators of the program they had so eagerly awaited? The answer can be found in the open-source movement, in which software -- the Linux operating system is the best-known example -- is developed by a community of mostly volunteer programmers, and anyone is free to use or modify it. Open-source ideas are fast moving beyond the high-tech world that spawned them. And while few firms are ready to give their products away, a growing number of entrepreneurs are embracing the idea of handing over their intellectual property to a community of volunteer enthusiasts to perform tasks that have long been the province of salaried employees. Call it a "hybrid open-source" model: The company owns the product, but the customers help customize and improve it. "Having people constantly adding to a product extends its life and fills out market niches that the original product wouldn't have reached," says Lars Bo Jeppesen, a visiting scholar at MIT who has studied hybrid open-source efforts.

Valve, for example, has no intention of giving its software away. But managers at the Bellevue, Wash., company had noticed that the popularity of an earlier blockbuster game, Quake, soared when users were permitted to customize it by creating new scenery. So when Valve released the first version of Half-Life in 1998, it also made available software tools that allowed users to modify the look of the game. When the "mods" proved popular, the company put out more sophisticated tools so fans could make even more extensive changes to the game, including altering the way characters behaved. One modification grew so popular that Valve hired the two modders that had created it and spun off their handiwork as a new game called Counterstrike, which has since sold nearly four million copies. Now, Valve helps out modders with everything from technical expertise to marketing advice. "Every time we invest more in the mod community, the returns exceed our expectations," says Lombardi.

The gaming and software worlds are teeming with similar stories. How does it work outside the tech sector? Pretty much the same way. Take Van's Aircraft, an Aurora, Oreg., manufacturer of airplanes that are shipped as kits to be assembled by customers. A thriving community of Van's enthusiasts, meeting online, as well as at events known as "fly-ins," collaborates on and swaps designs for modifications and accessories -- ranging from more powerful engines to cockpit sunshades. The manufacturer's top managers spend plenty of time online checking out what its customers are doing, as well as untold hours at fly-ins to get a firsthand look at some of the innovations. The best ideas are quickly incorporated into the planes or sold as accessories. "If we see something we like, we find out who made it and ask if they'll let us market it," says Scott Risan, the firm's general manager. That happens dozens of times a year. Financial arrangements with the inventors vary. Sometimes, Van's will simply purchase rights to an innovation; in other cases, the company will serve as distributor and earn a commission on sales.

The open-source approach works best with products or ser-vices that spawn communities of passionate users. Windsurfers, in-line skaters, and skateboarders, for example, have been inventing and driving the evolution of new products for years. Even disease sufferers are banding together to shoulder some drug-company responsibilities: In 2000, when the Food and Drug Administration forced GlaxoSmithKline to take a drug for irritable bowel syndrome off the market because of side-effect risks, an online community of patients successfully lobbied the agency to reconsider.

The first step to adopting an open-source approach is to learn what your customers are up to. Unfortunately, many companies are either clueless about the existence of communities related to their products or -- just as troubling -- fail to respond to users' concerns. A good example of a blown opportunity was provided in June by Netflix, the online DVD-rental company. When the operator of a popular weblog dedicated to the company asked the firm to respond to customer comments and to give him a tour of its facilities, Netflix execs gave him a terse response. The blogger prominently posted the reply, leading to articles about the kiss-off at nine different online forums. Only after some Netflix customers threatened to take their business elsewhere did managers phone the blogger to smooth things over.

Once you're tuned in to a customer community, getting it to work is often as easy as asking.

Once you're tuned in to an online community, getting it to shoulder some of the work is often as easy as asking. Valve Software simply posted a message on its website asking for help catching the code thieves. Tasks considered drudgework by an employee often turn out to be a thrilling challenge to civilians. They certainly don't hesitate to take on jobs like providing technical support to one another -- a key activity in many online communities, says Steven Weber, a professor at the University of California at Berkeley. "Companies spent the '90s in a race for talent and paid whatever it took to retain the best people, but never ended up getting most of their energy," Weber says. "Open-source projects get about twice as much energy from people."

Of course, just because customers contribute doesn't mean you can treat them like employees. People are likely to be less willing to volunteer if company managers are going to boss them around, notes Eric Raymond, president of the Open Source Initiative, a sort of information clearinghouse for the open-source community. "To get productivity from them, you have to give up control," Raymond says. Managers also must respond openly, honestly, and promptly to questions, and create a way for public recognition of customers' efforts.

Just don't expect customers to provide an unbroken stream of great ideas. In fact, most ideas probably won't be useful at all. "Companies that can recognize which customer innovations are the ones that the market needs will have a real competitive advantage," says Sonali Shah, a University of Illinois at Urbana-Champaign business school professor who studies innovation. Plus, you never know when an army of online detectives might come in handy.

Sidebar: Opening the Code

In open-source management, customers are just as important as employees. Here's how to get the most out of them:

Pick the right problems

Projects should be challenging but doable. Don't ask people to work on something if you aren't prepared to actually implement it.

Commit

Respond promptly to questions, suggestions, and criticism, and carefully evaluate the ideas and designs users ultimately come up with.

Open up

Be clear about goals and expectations, and give straightforward feedback. Provide at least occasional online access to your top technicians and decision makers.

Respect the community

Customer groups produce their own leaders, and they need to be recognized. But don't be bullied into making dumb decisions.

Credit, credit, credit

Broadcast tributes to the best ideas -- even if you can't use them. If you do use an idea, make sure the community knows it -- even naming it after the idea's originator.




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