X Prize goes corporate

FORTUNE -- The X Prize Foundation is like the X Games of prizes. It's all about paying big bucks to entrepreneurs who develop flashy, disruptive products that push the market, such as commercial spacecrafts and hydrogen cars.

It seems logical that the corporate world would use similar crowdsourcing methods to help solve its toughest problems. But with the exception of certain corners of the tech industry, companies have mostly kept their problems confidential, choosing to tackle them internally instead of turning to the public for help and rewarding winners.

But that's starting to change. Executives have approached X Prize and asked for help generating creativity within their corporations, says Eileen Bartholomew, the senior director of prize development at X Prize. And the foundation is responding. Over the next couple of years, X Prize will roll out a new consulting service specifically targeted for corporate innovation.

Typically, X Prize pays its winners $10 million, which is provided by private donars and big companies, such as Google (GOOG, Fortune 500), and Progressive (PGR, Fortune 500). Contestants work on their market-disrupting products for 3-7 years.

The new consulting service is part of a general trend at X Prize to solve relevant problems faster. On July 29, X Prize launched the X Challenge, a shorter-term contest that will serve as a model for its corporate contests.

In this inaugural challenge, entrepreneurs are being asked to develop better technology to skim oil off of the surface of ocean water. The purse is smaller -- the winner of the X Challenge will get $1.4 million -- and the competition will end in a year.

The shorter time span is meant to push the winning products to the market faster. New technology to clean up oil has been clogged by the process of getting approval from government agencies, Bartholomew says, and X Prize "can cut through that morass." The foundation has started working with government agencies and manufacturers in order to help get the new ideas from the contests onto the assembly line and into the field.

Changing the corporate mentality

Will this prize mentality and problem crowdsourcing work in the corporate culture? X Prize isn't the first to offer try it. A company called Innocentive has been working with companies to solve problems through prizes for nine years.

Innocentive began as part of an innovation project by Eli Lilly (LLY, Fortune 500), which was trying to figure out how to generate new ideas in pharma. Innocentive worked well -- and cheaply - since only the winner gets paid, and the cost of the prize is less than the cost of research and development that might not generate a solution.

Spun off from Lilly in 2005, Innocentive now helps executives to identify problems in their companies, phrase them as challenges, then post them in the cloud, either within the company or to a network of problem solvers elsewhere. Innocentive has posted $5.3 million of prize money to date. According to its statistics, half of all problems posted get solved.

Innocentive deals with discrete problems within a company. In order to shop out challenges to the crowd safely, it strips problems down to their essence and posts them anonymously.

X Prize, on the other hand, wants to create challenges for companies, government agencies and nonprofits that could make news. "This is all about promoting the brand name of an organization in trying to solve a critical innovation problem," Bartholomew says. "It's a lot more public facing, a lot more out of the open."

Getting companies to crowdsource can require a huge cultural shift, says Dwayne Spradlin, president and CEO of Innocentive. "Open is not a natural behavior for most of these organizations, they've got to fundamentally change their thinking quite often."

Some companies lend themselves to crowdsourcing better than others. Tech companies work well, says Bartholomew, as well as any company that is on the edge of its industry, searching for the next big thing.

The fact that people are noticing the power of prizes makes the people at X Prize nervous. "You have to be careful," she says. "A landscape that's littered with bad prizes is bad for everyone who's interested in good prizes."