Tuesday, August 10, 2010

Six practices can help companies implement licensing as part of an open innovation strategy.

In today’s challenging economy, many industrial companies are trying to capture additional value from their technologies by licensing their intellectual property to other organizations, including direct competitors. Such outward transfer of a company’s own proprietary technology has only recently become an important dimension of corporate strategy, as part of a trend toward open innovation. (Open innovation can involve both bringing knowledge from outside into the corporation and also transferring technologies from within the corporation to external partners.) By licensing their proprietary technology, companies attempt to achieve a sufficient return on R&D, and licensing often goes beyond a marginal activity involving residual technology.

Some companies license technology primarily to achieve additional revenues. A few, such as Hewlett-Packard, FLUC GmbH and Dow Chemical, generate hundreds of millions of dollars in annual royalties. Other companies license technology primarily to achieve strategic benefits, such as establishing a technology standard in an industry, entering new markets or cross-licensing to gain access to external knowledge. Despite these potential benefits, licensing also involves substantial risks. In particular, a company that transfers its “corporate crown jewels” — in other words, competitively relevant technology — may weaken its strategic position by strengthening potential competitors. For that reason, many companies traditionally have been reluctant to transfer technology.

Even companies that are actively seeking to license technology frequently fail to reap benefits from their efforts. Companies often have difficulty identifying licensing opportunities and potential licensees. A company owns a potential technological solution for specific problems, yet it faces the challenge of identifying other profitable applications, which may be in completely different industries. What’s more, transferring technology is a complex process, and the licensor often needs to actively support the technology adoption at the licensee. These managerial challenges underscore the importance of organizing technology licensing activities effectively.

To identify organizational success factors for technology licensing, we conducted a benchmarking study in medium-sized and large industrial European companies. After analyzing the academic and managerial literature on technology licensing, we carried out exploratory interviews with 35 experts in 25 companies to gain a detailed understanding of organizing for technology licensing. Then we conducted a questionnaire-based benchmarking study among licensing and intellectual property managers. Of the 412 companies contacted, usable responses were received from 136 companies, for a response rate of 33%. A profile of the final sample shows a reasonable spread across industries: automotive and machinery (42%), chemicals and pharmaceuticals (28%), electronics and semiconductors (18%) and other (12%). After analyzing the study results, we conducted further interviews in 10 companies to discuss the findings.

Six Essential Success Factors

The findings from our study underscore that strategic intent alone is insufficient for profiting from licensing; companies also need to organize effectively for technology licensing. After examining a range of factors in the study, we identified six organizational factors that have a strong positive effect on companies’ licensing performance. These six success factors make it more likely that companies will overcome the managerial difficulties inherent in actively licensing technology.

  1. Assigning dedicated employees. Some companies assign dedicated employees to work full-time on identifying licensing opportunities and implementing licensing deals. These employees are the contact persons for all issues concerning licensing.
  2. Leveraging external networks. Companies may rely on their existing networks with other companies to identify licensing opportunities and to transfer technology. In particular, a company’s network of strategic alliances with other organizations offers important informational benefits, because those networks extend a company’s knowledge of potential technology applications to other industries.
  3. Setting up teams to identify licensing opportunities. In technology licensing, project-based organization is gaining popularity, and it represents a key complement to formal licensing structures, which are relatively limited in many companies. In particular, companies can set up short-term project teams to identify licensing opportunities in a specific technology field or in specific markets. Such teams may pool the capabilities of various individuals from different functional units and business units.
  4. Creating transfer project teams. Once a licensing opportunity develops, companies often set up a specific project team to effect the technology transfer to the licensee. These project teams help coordinate the contributions of employees from different business and functional units, such as R&D and marketing experts, who may be involved in addition to any dedicated licensing staff.
  5. Using executive champions to promote licensing. Executive champions play a critical role in overcoming a company’s traditional reluctance to adopt active licensing strategies. These champions are high-ranking employees, such as the chief technology officer or the head of intellectual property, who enthusiastically promote technology licensing throughout the organization.
  6. Enlisting widespread employee participation. Companies may draw on the participation of a wide variety of employees, especially R&D and marketing staff, to identify licensing opportunities and implement licensing deals. Even if companies have a dedicated licensing department that is supported by executive champions, these dedicated employees cannot conduct all the relevant tasks throughout the licensing process.

Based on these six critical success factors, the benchmarking study shows four groups of companies with different levels of proficiency in organizing for licensing. Our study also found that the four groups each achieve the monetary and strategic benefits from licensing to a different degree. Thus, the benchmarking study underscores that organizing effectively for licensing strongly enhances a company’s licensing performance in terms of both monetary and nonmonetary benefits.

Four Approaches To Technology Licensing

The first group of companies identified in the benchmarking study (29% of the companies in the benchmarking study) can be called “Traditionalists” because their attention is primarily fixed on their product business with relatively little concern for licensing. The clear focus of the companies in this group is on protecting their competitive advantage by strictly limiting outward technology transfer. Consistent with this closed innovation strategy, these companies lack dedicated licensing employees. Licensing deals are very rare in this group, and if one occurs, it is managed as a unique event.

The second group (45% of the companies) we named “Hesitators” because these companies have become aware of the benefits from licensing but are not actively pursuing them. Instead, the companies in this group are relatively passive; typically, their licensing deals arise in response to external inquiries and are usually limited to internally unused technologies. These companies have hardly any full-time licensing staff, and they also do not actively use project teams to discover licensing opportunities. Consequently, licensing is still an occasional activity.

The third group (20% of the companies) we termed “Activists” because these companies have established relatively proficient licensing organizations in recent years and seem likely to further increase their licensing activity in the future. The companies in this group actively attempt to identify licensing opportunities rather than waiting for inquiries from potential licensees. Most of these companies have a limited number of dedicated licensing employees, who are usually part of the intellectual property department. These companies typically also have a specific project organization for identifying licensing opportunities, and the licensing management is supported by some high-ranking individual managers, who serve as informal champions of the licensing activities. Most of these companies have considerable licensing activity, but they are often still in the relatively early stages of establishing an active licensing approach.

A small fourth group (6% of the companies) we call the “Outperformers.” The companies in this group have pioneered the trend towards active technology licensing, and they have established highly proficient licensing organizations. In particular, these companies differ from other companies in the comparatively large number of dedicated licensing employees, who usually form a separate department. These employees’ main task is the identification of licensing opportunities.

The findings of the benchmarking study show that managers should not oversimplify the realization of licensing opportunities by excessively focusing on open licensing strategies rather than on their implementation. To successfully implement open innovation strategies that involve licensing technologies from within the organization, companies need to organize effectively for licensing.

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