Platt Perspective on Business and Technology

Innovators, innovation teams and the innovation process 10 – acquiring innovation from outside of the organization 4

Posted in HR and personnel, strategy and planning by Timothy Platt on June 24, 2013

This is my tenth installment in a series on innovators and the process of innovation (see HR and Personnel, postings 154 and following for Parts 1-9.)

I have been focusing in the past three installments on acquisition of innovative potential from outside of the organization, and primarily through outright purchase, as for example from purchase of patent rights, or of a closely held proprietary trade secret process or formulation (see Part 7, Part 8 and Part 9.) I turn here to consider licensing agreements.

When you agree to purchase outright ownership and control of an invention or discovery or of a closely held trade secret, you need to make sure that you know what you are acquiring and what the seller in fact holds, and for considerations such as their ownership rights for this going into the sale and their exclusivity for them. But if you conduct effective due diligence, you leave these transactions holding exclusive ownership of what for you is a new source of significant business value that you can then use yourself, license or sell and at your discretion and according to your evolving needs.

Licensing changes this transaction models in a range of fundamentally important ways. When you gain access to an innovation through a license agreement, you gain access to it and rights to use it or incorporate it in your business’ products or services but you do not gain overall ownership of it or control over it, except to the extent that is explicitly conferred in the terms of the licensing agreement through agreed to exclusivity. So you need to know precisely what you are obtaining in any licensing agreement and that means asking and gaining formally stated and agreed to answers to a series of specific due diligence questions:

• What precisely are you gaining use of through a licensing agreement?

For software, as a case in point, you may be purchasing use of up to some fixed maximum number of user copies, that only up to that number of your employees can be using at any one time.

• Does this license agreement confer exclusivity of access and use of this innovation for your business, and of any dedicated supporting resources that enable it, or can the innovation owner simultaneously license this to others, including your immediate, direct competition?

Continuing with software as a source of working examples, consider sales leads software with its vendor owned and managed database back-end support. Auto dealerships actively buy outside leads to help bolster their sales and they usually seek local exclusivity of access and use to leads lists so their immediate and direct competitors are not seeing the same leads that they buy access to, and from the same sources that they buy access to them from. With that I add the question: how exclusively does a third party leads provider hold the leads it would sell access to? If they are only selling leads readily available elsewhere, buying from them might not be a good deal no matter what the cost per lead.

This second bullet point can cover a great deal of potential complexities that if not identified can significantly reduce the value of a license paid for. And to at least begin elaborating on that I ask:

• How long will a license stay in force?
• If it starts out as an exclusive license, how long will it remain so, and if exclusivity is only guaranteed for some fixed period of time, how long would that be and how would those terms be replaced and with what?
• What is the expected timeframe in which this licensed innovation would even be expected to hold value to the licensee for their having exclusive access to and use of it, or to its competitors for gaining access to it too?

And this up to here only touches upon a few of the areas of possible concern that might have to be formally and contractually agreed to as part of a meaningful due diligence evaluation of a possible technology or other innovation licensing agreement. What you have to look into and make sure is covered will depend on the specifics of your business, the business you would license an innovation from, and what that innovation entails. But to at least generically explore a few more areas of possible concern here, to round out this discussion:

• Can you relicense all or part of an innovation to another party or allow another business to utilize or develop from this licensed innovation, with for example a third party provider supplying innovation-specific components that you would more economically have built for you? Consider the situation where up-front manufacturing infrastructure would have to be developed to produce some key component of a licensed new technology implementation, and a supply chain or other business that you enter into business-to-business collaborations with, has the necessary systems in place for that. Would the terms of this license agreement allow for this partner business to manufacture these components for you when they could do so more economically than you could yourself?

And now I come to possible site of usage restrictions that might be imposed by the licensing business as it maintains ownership control over its intellectual property, and the sometimes closely related issues of governmental control over technology transfer out of country, and export control laws. And I begin with a specific organizing scenario in mind, with transfer of a new and novel technology development from a United States based business to a China based subsidiary.

• Foreign enterprises that operate in the People’s Republic of China are required by law to work through partnerships with a government approved local Chinese business and with them carrying out a contractually agreed upon portion of the overall work done.
• Technology transfer is always a required part of these agreements where new or novel technologies that would be employed in this work have to be shared with this Chinese partner business.
• These locally based partner businesses are in turn in a position to both use these transferred technologies and other proprietary knowledge so gathered in collaboration with their foreign partners, and also for their own use. And in practice this can even mean as direct competitors to their here US based, business partner.
• And this represents a direct challenge to both the spirit and the letter of most any licensing agreement that this US based company could enter into, in gaining access to this new and novel innovative technology in the first place.

For many countries, and certainly for countries and national alliances such as the United States and the European Union, and for wide ranges of technologies that might be transferred internationally out of them, governmental oversight and export control laws can become defining issues too.

• And export control laws like the law in general,
• And the legally defined standards that would define state-of-the-art benchmarks for making approval decisions based upon them,
• Are changed and updated much more slowly than the pace of development of the technology that these laws would regulate transfer agreements for.

And that all fits as a set of special cases, into the issues of trade barriers in general as governments regulate and at times restrict or block import licenses as well as export licenses, and impose tariffs and quotas and other restrictions.

Whether your business is planning on entering into licensing agreements and as either the licensee or the licenser, or enter into agreements to buy or sell innovative offerings, you need to know what issues might arise and what questions to ask. And you need to know what your due diligence would require to be formally and contractually addressed, in any agreements that you would enter into. And I have barely scratched the surface of the still much larger assemblage of possible issues and challenges that could be raised here. This is definitely a posting intended to provoke further thought.

I am going to break away from the business to business assumptions of this and preceding series installments here, to consider the role of crowdsourcing in innovation identification and acquisition. In anticipation of that, and to build a foundation for discussion to come I cite here a basic set of background references that I have already offered on crowdsourcing in this blog with:

Crowd Sourcing and the Opening Up of Open Innovation,
Keeping Innovation Fresh – 16: adding the crowd to this puzzle,
• And the series: Connecting Into the Crowd as a Source of Insight and Market Advantage, as can be found at Business Strategy and Operations – 2, postings 275 and loosely following for Parts 1-13.

Meanwhile, you can find this and related postings at HR and Personnel and also at Business Strategy and Operations and at its continuation page: Business Strategy and Operations – 2.

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