CEO, yet2.com, Inc.
research and development managers, finance managers who only see patent maintenance costs, purchasing managers who too readily give in to IP demands from suppliers, and salespeople who freely give away knowledge IP to customers. Of course, this support comes with an investment cost.
Secondly, there is no single right strategy for technology licens-ing. Whatever strategy is chosen for your company must fit within the overall corporate and business strategy as well as the internal research and development and exploitation strategy. Too often cen-tral licensing groups are asked to drive licensing success despite business unit strategies actively opposed to licensing.
Finally, most technology powerhouses have driven their general business success through fiercely competitive environments where protecting internal knowledge is central to the very culture. As a result, technology exchange runs against the current and requires the companies to develop reward systems and incentives that cele-brate licensing success.
In our survey of our founding member companies two years ago, we asked IP executives about the senior executive support for licensing along three dimensions: outlicensing core technology, outlicensing non-core technologies and technology acquisition. The answers are posted on this chart. Looking at the center bar, over 90% of the managers reported senior management that strongly or modestly advocated non-core licensing, but only 54% were sup-porters of technology acquisition and only 36% supported licensing core technology.
However, core technologies are where the majority of the value exists. Strangely enough, while most managers will not support active licensing of core technology, they generally would support assertion of patents against their competitors. Well, unless you are going to seek an injunction against that competitor and stop them from practicing, the eventual license that you generate from that assertion is just another form of core licensing. In fact, we have seen many clients make money on non-core licensing but none that have built a truly successful business around it. And if you are determined to extract the most value from your IP assets, you should license know-how and the other types of IP such as trade-marks along with the patent rights. Perhaps as importantly, compa-nies often only reluctantly agree to license core assets when their markets are in decline. However, the most valuable IP is in markets that are growing, where the claims are the broadest, and where they really offer revolutionary change.
One of our clients, Procter and Gamble, has stated that their strategy is moving from “I have it and you don’t,” to “I have it, you have it, but I have it faster,” “I have it, you have it, but I have it cheaper,” “I have it, you have it, but every time you sell something, I make some money on it.” These core assets, when licensed, are most valuable when fully developed. As an example, in a study by Degnan and Horton, they determined that the royalty rates for tech-nology declined 20% if it is only at the pilot or prototype state.
Discounts for completed designs and lab-based technologies decline 35% and 50% respectively.
So, what is necessary? What is required to gain access to this core technology? That is internal corporate alignment between the licensing function and the business areas. Involving the business units in strategy development and execution ensures that the prod-uct and organization knowledge will be available when necessary.
The best central licensing groups have staff with depth of knowl-edge, about both the market and underlying technology, but also the organizational politics and how to get things done, because often the best opportunities for licensing are the hardest ones for
the business unit to accept. As a result, the central licensing group must creatively find a way for this coordination to happen. We believe this is best accomplished when both the central licensing group and the business units actively invest in people as licensing resources with business, technical and transactional experience.
The job is multidisciplinary requiring intellectual property, legal and deal-making capabilities.
In fact, according to our survey, alignment with the business units was one of the biggest differentiators between the more suc-cessful and less sucsuc-cessful licensing companies. In this chart, I have shown the results of that survey. Two thirds of the more suc-cessful companies reported that most business units supported licensing while this number was only 30% for the less successful companies. But as a practical matter, hope exists even when only a few business units support licensing. We often advise clients to focus their efforts on those supportive business units and to seek the change in culture through their successes there.
Finally, it is our belief that while it is often difficult to measure, technology acquisition is important as licensing out. Few compa-nies have succeeded in changing their culture to drive technology acquisition. As our client at Philips Corporation noted, they—and I am sure many of you—face a strong culture of “not invented here,”
and they are trying to change that attitude to “proudly found else-where.” In fact, reward systems often provide an incentive to develop technology internally, when in fact they should be promot-ing findpromot-ing a solution to challenges wherever that solution may come from.
Some interesting research from a leading management consult-ing firm, McKinsey and Company, indicates that openconsult-ing innova-tion processes to the outside world creates higher returns to share-holders. In McKinsey’s research, they found that openness to out-side technical solutions was related to innovation pressure as indi-cated by product life cycles—that is on the y-axis. Some of the most innovative industries, such as the semiconductor chip and computer gaming businesses, had the shortest product life cycles and were most successful at accessing external innovation.
Specifically, those companies in an industry that open their innovation processes to the outside world tend to have higher shareholder returns. In this chart, we have compared the total return to shareholders (TRS) of the leaders in open innovation to the followers. In the pharmaceutical industry, where accessing and external development is more the norm, the leaders outperform fol-lowers by a smaller margin of only 16%. But in industries such as chemicals, software, semiconductors and automotive, the share-holder premium for those companies ranges from doubling to even tripling the followers’ performance. So technology acquisition leading to rapid innovation, unique innovation, is a critical part of any licensing strategy.
Of course, these strategic considerations must be complemented by excellence in execution. I will focus my comments on the exe-cution on the foundation of that, which is the assessment of the opportunity that lies in the technology portfolio. While the licens-ing process is a lengthy one, no step is more important in maklicens-ing the transition from ad hoc and reactive licensing to proactive IP management than effective technology evaluation and opportunity assessment. But often, companies make the mistake of believing that this can be done by a computer algorithm or a purely internal technical evaluation.
In fact, we believe that licensing is much more a game of “What does my potential customer need?” rather than simply “What have I got?” All too often companies focus on a technology push
approach rather than a market pull approach. This understanding of the external environment extends to the scope of the IP and how that IP fits into the marketplace. More than just reviewing the patent landscape, one must review the technical, legal and commer-cial environment as well.
And there is a substantial need to filter opportunities. In this chart I have shown four steps in that process: starting with 150 identified technologies, moving to 50 qualified technologies, 20-30 licensing programs and 10-20 revenue generating licenses. In order to generate maybe 10-20 licenses, it may be necessary to review as many as 150 technologies. The first step is qualifying by market need, ensuring the company has the intellectual property and that there is a possibly interesting market application. Following that is understanding the business proposition for using the technology and understanding the terms under which the technology would be licensed. Finally, making sure that that business proposition and value are understood by the licensee and the terms for technology transfer are agreeable to both parties.
What is needed to license technology? A licensable technology requires the identifiable technology assets, an understanding of the market, a growing market need and the people. That market need needs to have a strong technology match to the technical capability, a proven competitively advantaged capability. From the people side, it requires a technology champion. And it requires access to the inventors and scientists themselves, who often can have an absolutely critical role in assisting and identifying the opportuni-ties.
In summary, senior executive support to transform the culture of the organization builds the required environment, but without access to core technologies, only modest value can be achieved.
Therefore, this access is critical to long-term success. In fact, money can be made licensing non-core assets but we have seen few companies truly make a business out of it. Causing coordination within the company to happen, ensuring that the licensing depart-ment truly understands and works with the business units and understanding and creating the licensing strategy is critical to building a successful program. Finally, as I have illustrated with the data from McKinsey, licensing-in can be as critical to your companies for shareholder return as licensing-out.
In the long term, as I think has been illustrated in the previous presentation, the cycle is truly enhanced when the intellectual prop-erty department is truly involved in the front end of that asset cre-ation, in the development process. That requires partnering with the technical and legal groups to ensure that the IP that is created will be effective and useful in generating a licensing program.
These strategic factors do rest on excellence in execution. The product development cost for an IP organization—I think most of us believe that in an IP organization, the licensing group does not have a product development cost. I have tried to illustrate that your product development cost is the act of prioritization and funneling to identify the available IP assets. Seek to change the mode of operation from the technology push to the market pull. Find tech-nologies that are valuable to the market place instead of trying to find the value in the technology. All too often, companies invest too many resources in low value opportunities. Learn to say no.
Drop those low value technologies quickly.
In fact, we advise clients who are interacting with the yet2.com marketplace to focus their resources in two critical areas: one, high value technologies—market aggressively both online and offline through professional services; and two, systematically review tech-nology needs listed on the marketplace to see which ones they can
solve. Putting hundreds of technologies on the marketplace, which a few customers have done, defocuses their effort, defocuses their investment and results in companies attempting to follow up on many low value opportunities where the company is ill-prepared to support with the appropriate samples, the appropriate confidential information, that the business units have not made the decisions that they are clear to license. So putting too many technologies out for license can very much distract and defocus your effort. Finally, developing and acquiring an efficient and comprehensive business development and screening process is a critical element of the exe-cution.
The goal and the challenge for us all—for us as a market maker, we rely on companies who are capable, companies who have iden-tified their technologies, who understand their needs. We, with you, would like to build a more efficient technology transfer mar-ketplace. In working with you, we would like to help you achieve success in building proactive IP management, making IP a business for your company. Armed with the techniques I have talked about today, I hope that many of you will achieve that excellence in tech-nology transfer. I thank you very much for your kind attention.