Can competitions and prizes get you to the Moon? Google thinks so—it’s backing the $30 million Lunar X Prize, which will be awarded to the first privately funded team that sends a remote-controlled robot to the Moon, drives it 500 meters, and collects video of the trip. Back here on Earth, the $10 million Archon X Prize is being offered to the first team that can build a device that sequences 100 human genomes in 10 days or less, and the Wellpoint Foundation is proposing a $10 million Healthcare X Prize for the first organization that figures out how to deliver a 50 percent improvement in the cost-effectiveness of community healthcare over a three-year period. Right here in the Boston area, Waltham, MA-based InnoCentive is using the prize model to attract solutions for dozens of problems, ranging from improving the fire resistance of polyurethane foam to accelerating the growth of soybean shoots.
But in Glastonbury, CT, there’s a company called TopCoder with a prize-based business model that predates all of these efforts. It’s using the model to create products that are arguably more relevant to our economy in the short term—better software applications. And it’s doing it for far less money; first-place winners rarely take home more than $3,000.
Companies like AOL, ESPN, Ameriprise, Ferguson, Geico, and LendingTree have outsourced thousands of software development projects to TopCoder’s worldwide freelance community—“from something as simple as a Web page all the way up to full-blown enterprise resource planning (ERP) systems,” in the words of company founder and chairman Jack Hughes.
The model is so successful that it’s attracting the attention of business scholars from Harvard, MIT, and other academic centers. “They’re creating enterprise-class software projects in a highly distributed setting, and for me that was an order of complexity that I wasn’t expecting,” says Karim Lakhani, an assistant professor at Harvard Business School who has written two papers about TopCoder.
You might wonder why the competition model attracts any willing participants, considering that competing takes a lot of work, and that the big money is usually reserved for the top-placing teams, while everyone else gets zilch. Indeed, I’ve always wondered whether giant prize programs like the X Prizes are an efficient way for a society to array its resources—just look at the 26 organizations that collectively invested more than $100 million competing for the $10 million Ansari X Prize. All but one of the teams walked away with nothing after Burt Rutan’s SpaceShipOne won the prize in 2004.
But TopCoder has invented a system that seems to work, both for its clients and for its community members. For one thing, the company never bought into the winner-take-all concept. For each competition, the company sets the dollar amount of the first-prize award based on the size of the job and the amount the client is willing to pay. TopCoder sets aside about half as much for the second-prize winner. The third-, fourth-, and fifth-place winners don’t get cash, but they do get points—and everyone gets paid later out of a general prize pot based on how many points they’ve accumulated.
“We wanted to avoid the problem of people submitting and always coming in third and never getting paid,” says Hughes. While it’s standard practice elsewhere in the software business to offshore software development to the cheapest available labor pool, “We just weren’t interested in that,” says Hughes. “We were more interested in
