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Valuation of Intellectual Property for Open Innovation

Assessing the value of intellectual property (IP) is one of the most complex and dynamic aspects of open innovation and technology scouting. In today’s value-crazy world, IP may be worth very little — or worth more than entire companies! 

Take Kodak, for example: “Despite its $576 million market value, the company’s digital imaging patents are worth $3 billion on their own,” according to an expert interviewed in a NY Times article (before Kodak declared bankruptcy).The same article discussed Google’s $12.5 billion offer for Motorola Mobility. “Patents are now driving mergers and acquisitions and that’s driving up valuations.”

On the other hand, just a couple of years ago, Amy Achter (Kimberly-Clark’s Director of Corporate Intellectual Asset Management at the time) said:“While intangible assets (including patents) comprise an increasingly high percentage of corporate value, only 30% (at best) of patents actually provide profitable returns.”

So how do you value your IP or the patent(s) of potential partners? Should you even consider co-innovation if you’re potentially sacrificing company value? 

According to valuation expert Mike Pellegrino, key factors in assessing patent value are:

invention status, status of current art, patent utility/value proposition, patent quality, and patent age.  

Current art can indicate patent importance, e.g. pharmaceutical patents are generally most valuable. Current art also affects risk profile– little current art indicates potential design freedom, but may indicate little value in patenting. Patents must ultimately bring utility to the market that people are willing to pay for. 

You should consider the amount of technical uncertainty. Has the inventor reduced invention to practice? Inventions that have working embodiments are worth more than those that do not. Prototypes are worth less than production ready inventions. Can it scale up for commercial use? These are the kinds of questions to ask about patents, both internal and external. 

For innovation partnerships, further questions must then be asked about how value will be shared.

Example:

Praxair* asks these questions in analyzing IP opportunities:

  1. Where will IP result in competitive advantage?
  2. How can value be extracted?
  3. How will value be divided?
  4. How are development efforts divided?
    1. Costs
    2. Risks
  5. How will IP rights be allocated?
  6. What are the terms for early termination?

Technology Landscaping and Other Tools

One of the more common tools used by firms to analyze the value of IP is technology landscaping.

Dr. Paul Germeraad of Intellectual Assets, Inc., recommends using “the Intellectual Property (IP) Landscape” to assess the business value of technology– both internal and external

This is a simple matrix to evaluate technology and IP as a function of benefit and cost. The x-axis on the matrix represents the relative cost to create and deliver a product. The y-axis measures the “relative performance of the product as perceived by customers.” Patents (and perhaps other types of assets as well) are placed on the matrix one-by-one according to their perceived cost and benefit.  The matrix may then be divided into four quadrants. High-value assets will appear in the upper left quadrant. Items in the lower right are low value and it may be best to abandon them. Items in the upper right and lower left may be “licensed per a company’s brand image.”

Example PepsiCo uses the following matrix to assess its IP landscape

Overall, the valuation of IP is challenging and can be subjective – tools and matrices can help. Ultimately technology scouts and R&D managers will be working closely with legal, financial, technical and business experts and will use collective judgment in this important, albeit imperfect, aspect of innovation.

Footnotes:

1.Stewart Mehlman, Director – Licensing, Alliances and Emerging Technologies, Praxair, Inc. at recent MRT workshop

2. Margaret H. Dohnalek, PhD, Global Head of Technology Scouting, PepsiCo

3. Books and articles about valuation of early stage technologies by Mike Pellegrino

 

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Making Open Innovation Work

We recently talked with Dr. Gene Slowinski, Director of Strategic Alliance Research, Rutgers University, author ofReinventing Corporate Growth and top-rated instructor on how Open Innovation partnerships have transformed the nature of competition in industry. With the right partner(s), it is possible to not only develop innovative products and services, but to enter new markets and achieve significant growth. Still, it’s a well-known fact that most alliances fail to meet expectations – and many just plain fail.  So we asked Gene how firms can avoid this fate – or at least minimize the risk. He offered the following 5 insights:

1.     Strategic alliances, open innovation and co-development can be very powerful but are not always the best approach to innovation. They must be chosen, screened and monitored carefully; otherwise they can drain resources, create IP problems, and cause unnecessary headaches. On the other hand, if done well, they can create significant advantage and improve NPV (J&J, Air Products, and GSK are examples).

2.     To determine whether an alliance is worth it, ask “What did customers like and love in my market? Was it the result of collaboration?”   If so, the alliance is a success. Seek out the opportunities that will make a difference. Strong alliances can change an industry! A corollary: if this year’s strategic plan looks like last year’s – it’s broken. External thinking should be built into your strategic plan.

3.     The model “Want – Find – Get – Manage” has proven effective in numerous companies. The basic steps are as follows:

a.     Want: What external resources do we need to succeed in our mission?

b.     Find: What mechanisms will we use to find these resources?

c.     Get: What processes will we use to plan, structure and negotiate an agreement to access the resources?

d.     Manage: What tools, metrics and management techniques will we use to implement the relationship?

4.     WANT sets the stage. The equation is simple, but powerful: A+B=C. C is what customer really wants, A is your IP, skills, capital assets, systems etc., and B is your partners’.  Be sure to define want at a level of granularity that allows you to find it.

5.     The Alliance Framework ™ is a rigorous process for planning and negotiating an alliance. The idea is to put together – or kill – a deal within 8 weeks. If you don’t kill the alliance by 8 weeks, it deserves to live. If it doesn’t live, you can part on friendly terms with the door open for future deals.

What is the Alliance Framework?

The Alliance Framework ™ is most effective if used by both partners. The key areas to reach alignment on are:

1.     Objectives (ours, theirs)

2.     Roles (ours, theirs)

3.     Overall resources

4.     Boundaries

5.     Market model

6.     Strategic exclusivity

7.     Intersections with the potential alliance

Once alignment on these points is reached, the following ‘below the line” items should be discussed:

1.     Detailed objectives and detailed resources

2.      Financial pie-split

3.      Intellectual property

4.      Working process and governance

5.      Term and termination

6.      Alliance structure

Most alliances fail because they skip the first 7 items and go to the others first – this is not the sequence that leads to success. If not aligned on the first 7 items, part ways now!   (For more details on how to use the framework, see The Strongest Link by Slowinski and Sagal.)

Key Conclusion: Go for alliances that shake up an industry, it is very easy to underestimate resources.

It is much better to do a few powerful deals than many which are marginal. Be sure your goals and strategic intent are aligned with your prospective partner’s – you should be able to make a deal or kill it within 8 weeks.

Further Reading

Reinventing Corporate Growth, Gene Slowinski 

The Strongest Link: Forging a Profitable and Enduring Corporate Alliance, Gene Slowinski and Matt Sagal

About Gene Slowinski

Gene Slowinski is the Director of Strategic Alliance Research at the Graduate School of Management, Rutgers University and Managing Partner of the Alliance Management Group, a consulting firm devoted to the formation and management of strategic alliances, mergers and acquisitions. Prior to forming the Alliance Management Group, he held management positions at AT&T Bell Laboratories, and Novartis Corporation. In addition to a Ph.D. in Management, Gene holds an MBA, and a Masters Degree in the sciences. He is a member of Los Alamos National Laboratory’s Technology Commercialization Advisory Board. For the last 25 years Dr. Slowinski has consulted and conducted research on the formation and management of strategic alliances, joint ventures, mergers, and acquisitions. With Matt Sagal, he co-authored the book The Strongest Link. His new book, Reinventing Corporate Growth is the leading book on growing the corporation.

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Stuck?

Ever feel like you’re spinning your innovation wheels? That the more your company does to generate growth, the more things stay the same?  How do you deliver the results your CEO is looking for?

‘Stuckness’  – and plateaus – are pretty common. This brief self-quiz (excerpted from Collective Disruption) lists some typical signs and causes.  See which ones are true for you – and then what you can do about them:

  1. You may be turning out the same number of new products every year, but that method of innovation is just keeping you at base level. It’s preventing a backward slide, but it’s not growing your margins, and it’s not growing your top line. There’s no point blaming the slow economy or some other outside force for this stasis you’re in.Lack of growth is often a sign you are stuck in incremental mode.
  2. You’re identifying needs to support today’s business but are missing the major shifts with your customers and new segments of customers that you could have captured.
  3. You’ve been surprised too often by disruptive solutions, sometimes introduced by your major competitors but increasingly by new players you’ve never even heard of.
  4. Funding is over-allocated to incremental ideas at the expense of breakout ideas. Others may argue that you have some truly breakthrough projects on the drawing boards. Look, for a moment, at which projects in your innovation portfolio really get the support to come to fruition. Do you find that incremental ideas get a lot of support quickly while the breakthrough ideas stall, stay in a zombie state with no real financial support, or get killed off outright?
  5. Management talks about innovation but doesn’t really want it to happen. This can be a problem as high up as the C-suite. If company leaders are talking about transformative innovation but making no change in process or policy to support the new behavior, then it’s just talk.

If any of these are true for your company, you’re not alone. Big companies are terrible at risk taking and disruptive innovation, and they need much more than theory on how to innovate in this new world. They need partners—partners who run toward risk with arms open wide, partners who haven’t been around long enough to develop a cannon of behavior that favors optimization over innovation. Big business needs to partner with entrepreneurs, and do it in new ways.  One of the best ways to get unstuck is having a strong young team to push your metaphorical car out of the snowbank.