Innovation on overtime

With the right strategic management approach, you can get a lot more value from your intellectual property. Understand what you have and you will profit. Here’s how.

By Debbie LeVailliant

Innovation is considered the cornerstone for economic growth today, and yet we rarely define what it really entails. If we consider it carefully, we see that innovation includes all types of intellectual capital and intellectual property - from know-how to patents - and includes high tech and low tech inventions of all kinds.

But innovation isn't limited to the direct results of research and development, or to companies that set out to invent something. There are all kinds of innovation in all kinds of companies, but some of it goes unnoticed because it’s not the direct object of a company’s business activities. It's imperative that we get a better grasp of what innovation is on all levels so that we can make it work for our businesses. Once you take an inventory of what valuable intellectual capital and intellectual property you have, you can begin to capitalize on that.

There are two basic ways to capitalize on innovation:

• Transform the innovation into a product and manufacture that product, which is possible when the innovation consists of intellectual property such as a patent in a widget or copyright in software, etc., or
• License the innovation, which is possible with most intellectual property and which can apply to most products and most services.

Manufacturing was the mainstay of the old economy.

Licensing is the key to the new economy. The key to success in the new economy is to turn licensing into a business in its own right. The case study below will highlight the need to understand what licensing is all about, which is a rare commodity today. Licensing is surprisingly misunderstood and, therefore, licensing activities are often poorly planned and poorly managed.

Licensing is a business

As simple as those four little words may appear, licensing isn’t simple in practice. As the case study here will demonstrate, licensing is generally approached by Canadian innovators not as a business matter but rather as a property matter. The distinction is critical if you want to capitalize on innovation.

There are many professional advisers who believe that they approach the licensing of technology as a business, when in fact they don't - at least not in the way it’s defined here. This misunderstanding is also widespread in the literature. A careful review of the literature¹ will reveal certain business aspects, but these aspects are rooted more in law than business, as highlighted in the second of the three parts of the following case study.

What is now needed is an appreciation that licensing is indeed a very important business activity in every sense of the word business.  Making that case is the purpose of this article. The case study consists of three scenarios, as follows:

1. Traditional property-based licensing: This involves simply licensing the technology away in hopes that it will bring in substantial amounts of money.
2. Property-based intellectual property management: This is a protective approach, used either offensively or defensively, as a tool for certain competitive advantages. This treats licensing as a business in some respects but is rooted primarily in legal thinking.  This is the so-called ‘business approach’ described in most of the literature.
3. Business-based licensing management: This approach treats licensing the way it should be treated: as a business activity worthy of business planning and ongoing business management. It means securing the best possible licensing arrangements and managing those relationships in a proactive way to drive revenue. It also involves investigating alternative channels for your intellectual property and pursuing those unique opportunities.

To demonstrate the differences outlined above, see how the three distinct approaches affect the business of Portal Technologies Inc. (a fictional company) in the case study below. Portal Technologies is a composite based on my experience as the CFO and CEO of a Canadian technology company, and my experience assisting third party clients in my present capacity as an innovation strategist. It’s therefore quite real but, as a composite, provides the flexibility needed for such a case study.

SCENARIO #1:

Traditional property-based licensing

Portal Technologies is a small, late-stage start up located in Southern Ontario. Over a four-year period they have developed software that provides a secure portal for data sharing over the Internet. The software is called PortalSecure7.

The CEO has identified a large U.S. marketing consulting firm to increase the visibility and credibility of the product and the firm has asked Portal Technologies to participate at Portal World, a major trade show in California. Portal Technologies is excited about the potential to gain interest from large companies at Portal World.

Portal Technologies’ current business model is to license their technology to a major player and collect royalty income, partly because the company has all but exhausted its initial supply of venture capital and partly because there is a competitor in Costa Rica with emerging technology that might eclipse PortalSecure7. Licensing is viewed as the quick and easy way to leapfrog into the marketplace.

During the trade show Portal Technologies encounters several parties, all of which express an interest in licensing PortalSecure7. One interested party, ACME Enterprises, stands out and, in a private meeting, Portal Technologies provides ACME a copy of the standard license agreement prepared by Portal Technologies’ intellectual property lawyer.

The license agreement provides for a long-term, exclusive, worldwide license of the intellectual property in return for a modest lump sum payment and an ongoing royalty of 5% of gross sales. There are basically no business provisions in this document other than standard legal clauses such as confidentiality and dealing with the intellectual property in an appropriate manner. There is no business planning behind this document. It’s a “property-based” license agreement as opposed to a “business-based” license agreement. Moreover, Portal Technologies has established no criteria for selecting a licensee and no thought has been given to building and managing a licensing program.

Portal Technologies’ CEO proudly announces the signing of a final version of the license agreement 10 days after returning from Portal World. The initial euphoria wanes, however, when little or nothing happens with PortalSecure7 at ACME headquarters. Phone calls are only sporadically returned. No one seems to be in charge of licensing down there. Time passes. No royalties are forthcoming. The Costa Ricans are nearing the marketplace, apparently unimpeded.

Legal proceedings aimed at breaking out of the license agreement commence when a group from Europe expresses interest in licensing, but litigation will take a lot of time and money. The European group abandons Portal Technologies and deals with the Costa Rican group instead. Portal Technologies’ opportunity is lost.

Although there are no statistics available on such licensing failures, both experience and anecdotal evidence indicate that the approach Portal Technologies has taken, although it is quite common, fails to generate successful results in excess of 80% of the time. And no wonder. Licensing is a business matter, and Portal Technologies has approached it as a property matter relying, basically, on law and luck.

SCENARIO # 2:

Property-based intellectual property management

Property-based licensing management is a step above the pure property-based approach to licensing described in scenario #1 above. It is also well documented in the literature², although it’s usually couched in business terms as opposed to property terms. While this approach has some important business elements, they are by no means tantamount to the business-based licensing management approach described in scenario #3.

Property-based licensing management, which is commonly the responsibility of the in-house legal department of established corporations, views the management of intellectual property licensing as strategic in nature, either offensively or defensively. However, the strategies are limited in scope and don't consider broader licensing opportunities that would arise with the use of a thoroughly developed licensing business plan.

In the case of Portal Technologies, for example, one defensive strategy could be to combine forces with the Costa Rican company, perhaps by some form of in-licensing or cross-licensing arrangement, to ensure that Portal Technologies’ market is not wiped out by the Costa Rican technology. Another example would be to register Portal Technologies’ intellectual property and then sit back and watch for infringers to appear, and then sue those infringers for large sums of money. Portal Technologies is unable to use either of these approaches, however. The Costa Rican company simply refuses to meet, and cash reserves do not permit the luxury of sitting and waiting.

This property-based intellectual property management approach is not unlike a chess match in certain respects, and it falls naturally to an in-house legal department to manage this type of process and this type of business activity in tandem with the engineering and marketing departments. From my experience, however, this method, as important as it can be in certain circumstances, is generally more appropriate for larger and more established corporations and, in any event, is just one part of a much larger picture - business-based licensing management.

SCENARIO #3:

Business-based licensing management

This scenario is based on the fact that licensing is a business and that Portal Technologies should be in the business of licensing. The key to the licensing business is to deal with it as such, replete with business planning and ongoing business management with the objective of securing the best possible licensing arrangements and managing those relationships in a proactive way to drive revenue.

Portal Technologies’ CEO has determined that this is the approach to take to exploit PortalSecure7. The CEO issues a management directive to prepare a set of business materials to be termed The Portal Technologies Global Licensing Program.

The CEO appreciates that, by entering the licensing industry, Portal Technologies will no longer be exclusively in the software business; it will also be in the licensing business, in the same way, by analogy, that McDonald’s is not so much in the food business as it is in the franchise business. Moreover, the CEO appreciates not only that licensing is a business but also that it is a unique business requiring special business skills and extensive experience.

This global licensing program will include the following:

• A licensing business plan, including strategies for building the business.
• Market and competitive intelligence.
• Criteria for identifying, qualifying and negotiating with licensees.
• Business and technical training programs.
• Marketing support programs.
• Business support programs.
• Motivational support programs.
• Field representative programs.
• Technology spinoff programs.
• Other programs as appropriate.

The Portal Technologies global licensing program will encompass all aspects of running the licensing business. It will be researched and it will be managed, with measured results. It will be business-based licensing. This approach has proven successful with other firms in the past - Disney is the prime example - so it makes sense that Portal should be encouraged by it.

With that objective in mind, the Portal Technologies CEO engages a consulting firm, innovation strategists well versed in the business of licensing. The business planning process begins, based on market and competitive intelligence gathered and analyzed from a licensing perspective, with PortalSecure7 specifically in mind.

In the initial stages of this process, several key points quickly emerge:

• The market for PortalSecure7 is much larger than originally anticipated and should probably be licensed in geographic sectors.
• There is a spinoff opportunity for the technology in the banking sector, an opportunity that should probably be treated as a separate licensing matter, and planned and executed accordingly.
• A second version of PortalSecure7 could probably neutralize the Costa Rican competition.
• The largest player in the industry (ACME from scenario #1) should be avoided because they have a history of underachievement with licensing of all sorts. Other possible licensees would appear to be more appropriate.
• There is, in addition to PortalSecure7, other valuable intellectual property at Portal Technologies that could perhaps be licensed to other software companies around the world.
• It may be appropriate, especially in certain markets, for Portal Technologies to partner as well as license. (And partnering - strategic alliances and joint ventures - deserves the same type of attention that licensing does in this article.)

On this basis, the preparation of the global licensing program continues and eventually is ready for implementation, opening a wonderful business opportunity in which Portal Technologies can compete and prosper globally.

To date, Portal Technologies has been extremely successful with its global licensing program. It now has six highly motivated and well-managed licensees around the world. PortalSecure v-27 will soon be released. The banking industry aspect is being negotiated for a very large lump sum transaction with residual royalty revenues. Certain other Portal Technologies intellectual property has been licensed to one major software company and looks very promising. The venture capitalists have been repaid but wish to invest much more with a view to an IPO. The Portal Technologies CEO has revealed that, from now on, these venture capitalists will determine whether to invest in innovative companies based on the strength of their global licensing programs.

A management accounting initiative

The three Portal Technologies scenarios above highlight the advanced thinking that is possible in innovation. I know from experience, however, that something as obvious as approaching licensing as a business actually meets resistance from some quarters deeply entrenched in treating innovation as a property matter, including as a legal and accounting matter, instead of as a strategic business consideration.

My challenge to management accountants is to champion this more dynamic approach to licensing practices. Yes, there will be resistance. Companies hesitate before such new ideas. They view licensing as a legal issue and an area that doesn’t make money. They consider it a risk to approach venture capitalists with such ideas, and fear resistance from engineers within the company.

The case, however, has to be made for its benefits. The new economy demands such new approaches, and so should venture capitalists. With a good business case, management accountants can prove to the naysayers that licensing can make money, not lose it, and can be managed more effectively and more robustly outside of the legal department. Resistance will fade once the substantial value of the proposition is clearly made.

CMAs are well positioned inside companies. They have special training in management accounting and, because of this, have a special voice. As management accountants, it is our duty to bring new and novel approaches to business enterprises for the benefit of shareholders.

Innovation is literally all around us. I recently visited a printing company in the Toronto area that was printing materials on innovation and stopped by to take a tour. I mentioned that innovation was literally everywhere and was advised that this probably didn’t apply to this long-established operation. But I could see lots of innovation at work and, once I talked to them further, management there did too. We will be meeting in December to explore the matter further, with a view to licensing some of this innovation domestically and internationally.

Innovation is literally all around us, and it is a key to prosperity in the new economy. And the best individuals to champion it are management accountants.

Debbie LeValliant, CMA, is president & CEO of Innovation Strategies Inc., with offices in Toronto and Halifax. She may be contacted through her Web site: www.innovationstrategies.biz.

One notable exception is a new Canadian business book by Ted LeValliant, entitled Capitalizing On Innovation: Licensing & Transfer Pricing Strategies for Canada’s New Economy (Ottawa: Ditronix Press, 2003). 

See, for example, the book by Parr, R.L. and Sullivan, P.H. entitled Technology Licensing: Corporate Strategies for Maximizing Value (New York: John Wiley & Sons, Inc. 1996).

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