If innovation and finding top talent are priorities for your company, then perhaps you've considered holding a contest of some sort--especially if your business has to do with coding or technology

Netflix, for example, famously offered a $1-million prize seeking improvements on its recommendation algorithm. The contest worked, with Netflix netting a license to use the ideas in the winning entry. Likewise, the NYC BigApps competition, which offered a $20,000 prize in its first year, yielded a variety of apps that the city put to use for tasks like locating subway stations and assessing schools. Facebook, for its part, uses contests like "The Facebook Hacker Cup" to find talent. Facebook also recruits at algorithm-coding contests held by other companies (such as TopCoder and Kaggle).

The Pitfalls of Contests

On the surface, these competitions seem like smart (if pricey) ways to lure ideas and talent from outside sources. But don't be fooled. The proper execution of a contest requires a strong attention to detail and a ruthless assessment of risks. If you're not careful, you may succumb to one of these pitfalls. 

1. Publicity backlash. As a case in point, look no further than Salesforce's disputed decision in its recent $1-million hackathon to create mobile reports for salespeople. As with most disputes, there are two sides to the story: Salesforce has its side, while many participants and observers have their side (articulated by this disappointed participant). The bottom line is that a contest ostensibly held to spur innovation (and create positive media attention) has yielded plenty of visible online vitriol against Salesforce. "At the Salesforce Hackathon, the picking of the five finalists was done completely in secret, with no clue about who did the judging, or what was evaluated," claimed one of the participants. The lesson? Posting your rules isn't enough. To avoid a publicity backlash, you'll need to make it plain that you've adhered to them. Transparency throughout the process is a must. 

2. Hidden costs. The prize or award is not the only thing you'll be paying for. "As enticing as it may be to get people to work "for free," such thinking underestimates the cost of the resources you will need to provide; the administration and operations costs often exceed the prize purse," notes the MIT Sloan Management Review. "If it can be costly to test whether a single solution is a good one, imagine the expense of evaluating dozens or even hundreds of entries."

3. Cultural fit. If you hold a contest to recruit talent, the good news is, you'll probably find a few candidates with the requisite technical skills. What the contest cannot determine is whether the winning entrants will blend with your organization's culture. The solution is simply to view contests as one of many tools in the recruiting arsenal. Use contests to find gifted candidates, but rely on more traditional measures to evaluate cultural fit.