OSTP Memo on Prizes and Challenges
In his September 2009 Strategy for American Innovation, President Obama called on all agencies to increase their use of prizes to mobilize America’s ingenuity to solve some of our nation’s most pressing challenges. In March 2010, the Office of Management and Budget issued a formal policy framework to guide agency leadership in using prizes to advance their core mission. In September 2010, the Administration launched Challenge.gov, a one-stop shop where entrepreneurs and citizen solvers can find public-sector prizes. As a result, in its first six months alone, Challenge.gov featured nearly 75 prizes from more than 25 agencies, generating novel solutions for childhood obesity, advanced vehicle technologies, financing for small businesses, Type 1 Diabetes, and many other national priorities.
In December 2010, Congress passed the America COMPETES Reauthorization Act granting all Federal agencies broad authority to conduct prize competitions as called for by the President. By giving agencies a simple and clear legal path, the Act will make it dramatically easier for agencies to use prizes and challenges. This memo briefly outlines the history, benefits, and promise of prizes to spur innovation.
Prizes: History & Renaissance
From the 1714 Longitude Prize that stimulated the development of the world’s first practical method to measure a ship’s longitude to the Orteig Prize that inspired Charles Lindbergh to fly nonstop from New York to Paris to the X Prize given to the inventor who creates a car that can deliver over 100 miles per gallon, prizes have a long record of spurring innovation. In the 21st century, unprecedented levels of connectivity have given rise to a renaissance for prize competitions. A recent McKinsey report found that private sector investment in prizes has increased significantly in recent years, including $250 million in new prize money between 2000 and 2007.
Benefits of Prizes
As the Wall Street Journal recently concluded , “Theses prizes have proliferated because they actually work.” Under the right circumstances, prizes have a number of advantages over traditional grants and contracts. Well-designed prizes allow the government to:
- Pay Only for Results. In contrast to grants and contracts, prizes only pay for success. No award is made until a competitor meets each and every criteria set out by the prize sponsor. As a result, prizes shift risk from the government to the competitors.
- Establish an ambitious goal without having to predict which team or approach is most likely to succeed. Contracts and grants are awarded based on proposals for future work, forcing agencies to heavily weigh past performance and credentials at the expense of disruptive innovation. With a strict focus on results, prizes empower new, untapped talent to deliver unexpected solutions to tough problems. As the solution is delivered prior to payment, the government can benefit from novel approaches without bearing high levels of risk. For example, the Progressive Insurance Automotive X Prize, sponsored in part by DOE, offered $10 million in prizes to the teams that build production-capable, super fuel-efficient vehicles that exceed 100 MPG or the energy equivalent. As the prize did not dictate a single approach, it incented 111 teams from around the globe to spur a new generation of technologies in the field. For example, the Virginia team that won the Grand Prize used a fuel-injected internal combustion engine, but focused on building a super light car that boasts the lowest drag coefficient of any car ever tested in the GM wind tunnel. In contrast, the North Carolina team Li-ion Motors built an electric car powered by a best-in-class lithium-ion battery and 91.5% efficient battery charger. Not only did the sponsors not have to pick the winning approach, they benefitted from a gold mine of technical data collected from test track and laboratory conditions on the competing technologies under rigorous conditions.
- Reach beyond the “usual suspects” to increase the number of minds tackling a problem. As Sun Microsystems co-founder Bill Joy once famously said, “No matter who you are, most of the smartest people work for someone else.” Prizes are one tool to tap the top talent and best ideas wherever they lie. For example, when Netflix launched a \ million prize to improve its signature movie recommendation algorithm, thousands of teams from around the globe entered the race. More than six hundred of the competing teams out-performed the Netflix in-house algorithm, including 90 teams that exceeded Cinematch by an unexpected 5%.
Open to all, prizes create a level playing field for entrepreneurs, innovators, and citizen solvers to solve public sector problems. For example, NASA launched a challenge for a predictive algorithm challenge of its own, this one geared towards protecting America’s astronauts from radiation exposure in space. Over 500 problem solvers from 53 countries answered NASA’s call. Expecting no solutions for a long intractable problem, NASA received a solution that exceeded their requirements from a retired radio-frequency engineer in rural New Hampshire. The winner had never before responded to a government request for proposals, let alone worked with NASA. Yet, his winning approach forecast solar proton events with 85% accuracy, a result NASA dubbed “outstanding.”
- Bring out-of-discipline perspectives to bear. Empirical research conducted by Harvard Business School finds that breakthrough solutions are most likely to come from outside the scientific discipline. One of the most powerful examples of this phenomenon comes from the Oil Spill Recovery Institute. In cleaning up an oil spill in 2007, OSRI struggled to separate the oil from water after it had frozen together in a viscous mass on their barges. Leading experts from the oil spill response industry failed to find a solution. So, they posted the problem on an online innovation marketplace with a \•0k prize. To their surprise, the successful solver was a nanotechnology expert with no background in the oil industry. He used a tool from the cement industry that was originally designed to vibrate the cement to keep it in liquid form during massive cement pours.
Another example comes from Harvard Medical School in a prize competition funded by the NIH. When Harvard asked the question, “What do we not know to cure Type 1 Diabetes?” the winners – selected through a blind peer review process – included not only researchers in the field, but a college senior majoring in chemistry, a cardiologist, a biostatistician, and a patient with no scientific training. Harvard is now working with the Leona M. and Harry B. Helmsley Charitable Trust to solicit research proposals to pursue the winning scientific questions.
- Stimulate private sector investment that is many times greater than the cash value of the prize. Teams competing for the $25,000 Orteig Prize for the first to fly non-stop from New York to Paris collectively invested $400,000 in R&D. More recently, $10 million Ansari X Prize spurred 26 teams from 7 nations to collectively invest more than $100 million in pursuit of the prize – a 10x return.
Prizes are not the right tool for every problem, but can be a powerful mechanism when combined within a broader strategy for spurring private innovation and change. Prizes are best suited for solving problems whether there is a specific goal that can be achieved in a reasonable time-frame, where the best path is unknown and could benefit from a broader pool of solvers, and where those solvers are willing and able to absorb by risk in the absence of up-front funding.
Types of Prizes
Experts often make a distinction between “recognition” prizes that honor past achievements, and “inducement” or “incentive” prizes that encourage participants in the competition to achieve a particular goal. In a recent report, McKinsey identified six prize archetypes that provide a useful framework for identifying types of prizes that can best achieve different types of goals.
- Exemplar Prizes such as the Nobel Prize, define excellence within an area. In October, President Obama announced the Aspen Prize for Community College Excellence, a new privately-funded \ million annual prize to recognize, reward, and inspire outstanding completion and employment outcomes in community colleges nationwide.
- Point Solution Prizes aim to spur development of solutions for a particular well-defined problem. The Air Force, for example, is using an online “innovation marketplace” with 225,000 participants to seek novel solutions for problems such as accurately pinpointing the source of small arms fire in a fraction of a second, dropping humanitarian supplies into populated areas, and characterizing the demographics of a crowd from a distance. The Department of Energy’s L Prize is designed to spur the development of the next generation light bulb, defined by rigorous criteria.
- Market Stimulation Prizes try to establish the viability of a market to address a potential market failure, mobilize additional human talent and financial capital to jumpstart the development of a new industry, or change public perceptions about what is possible. The goal of the Ansari X Prize, for example, was to serve as a catalyst for the private spaceflight industry. Similarly, the Gates Foundation and USAID recently awarded a $2.5 million prize for the first company to both launch a pro-poor mobile money product in post-earthquake Haiti and successfully complete 10,000 transactions (100 transactions at 100 new retail outlets). The deployment criteria aimed at critical mass that would lead to a self-sustaining mobile money market.
- Exposition Prizes are designed to highlight a broad range of promising ideas practices, attracting attention and mobilizing capital to further develop the winning innovations. The G20 SME Finance Challenge, for example, invited private financial institutions, private investors and companies, socially responsible investors, foundation, and civil society organizations worldwide to identify the best models for catalyzing and deploying private finance to small businesses in developing countries. The winning ideas will be scaled through a new global SME Financing Facility launched in Seoul by President Obama in partnership with Canada, the Republic of Korea, and the multilateral development banks. In the private sector, GE launched the Ecomagination Challenge to crowdsource smart grid and renewable energy ideas in which GE and others might invest.
- Participation Prizes create value during and after the competition – not through conferral of the prize award itself but through their role in encouraging contestants to change their behavior or develop new skills that may have beneficial effects during and beyond the competition. As part of his “Educate to Innovate” campaign, for example, President Obama has highlighted the FIRST Robotics Competitions, which engage over 200,000 students, and are designed to motivate young people to pursue opportunities in science, technology, engineering, and mathematics. Similarly, DARPA has recently partnered with TopCoder, a competitions-based community of more than 250,000 highly-skilled software developers to launch an online community of middle-school and high-school students fueled by age-appropriate programming competitions and aimed at fostering lasting interest in CS-STEM careers.
- Network Prizes build networks and strengthen communities by organizing winners into new problem-solving communities that can deliver more impact than individual efforts. The Department of Health and Human Services has partnered with the Health 2.0 Developer Challenge to build, grow, and connect a competition-fueled ecosystem that will create data-based applications to help Americans understand health and health care performance in their communities and to spark and facilitate action to improve performance.