Platt Perspective on Business and Technology

Innovation, disruptive innovation and market volatility 47: innovative business development and the tools that drive it 17

Posted in business and convergent technologies, macroeconomics by Timothy Platt on June 5, 2019

This is my 47th posting to a series on the economics of innovation, and on how change and innovation can be defined and analyzed in economic and related risk management terms (see Macroeconomics and Business and its Page 2 continuation, postings 173 and loosely following for its Parts 1-46.)

I have been discussing innovation discovery, and the realization of value from it through applied development through most of this series, and as one of the primary topics considered here. And I have sought to take that line of discussion at least somewhat out of the abstract since Part 43, through an at least selective discussion and analysis of a specific case in point example of how this can and does take place:

• The development of a new synthetic polymer-based outdoor paint type as an innovation example, as developed by one organization (a research lab at a university), that would be purchased or licensed by a second organization for profitable development: a large paint manufacturer.

I focused for the most part on the innovation acquiring business that is participating in this, from Part 43 through Part 45, and turned to more specifically consider the innovation creating organization and its functioning in Part 46. And at the end of that installment and with this and subsequent entries to this series in mind, I said that I would continue from there by:

• Completing at least for purposes of this series, my discussion of this university research lab and outside for-profit manufacturer scenario.
• And I added that I will then step back to at least briefly consider this basic two organization model in more general terms, where for example, the innovating organization there might in fact be another for profit business too – including one that is larger than the acquiring business and that is in effect unloading patents that do not fit into their own needs planning.
• I will also specifically raise and challenge an assumption that I just built into Part 46 and its narrative, regarding the value of scale in the innovation acquiring business in their being able to successfully compete in this type of innovation as product market.

And I begin addressing this topics list with the first of those bullet points and with my real world, but nevertheless very specialized university research lab-based example. And I do so by noting a point of detail in what I have offered here up to now, that anyone who has worked in a university-based research lab has probably noted, and whether that has meant their working there as a graduate student or post-doc or as a lead investigator faculty member. Up to here, I have discussed both the innovation acquiring, and the innovation providing organizations in these technology transfer transactions as if they were both simple monolithic entities. Nothing could be further from the truth, and the often competing dynamics that play out within these organizations are crucially important as a matter of practice, to everything that I would write of here.

I begin this next phase of this discussion with the university side to that, and with the question of how grant money that was competitively won from governmental and other funding sources is actually allocated. For a basic reference on this, see Understanding Cost Allocation and Indirect Cost Rates.

Research scientists who run laboratories at universities as faculty members there, write and submit grant proposals as to what they would do if funded. And they support their grant funding requests for this, by outlining the history of the research project that they would carry out, and both to illustrate how their work would fit into ongoing research and discovery efforts in their field as a whole and to prove the importance of the specific research problems that they seek funding to work on, as they fit into that larger context. As part of that, they argue the importance of what they seek to find or validate, and they seek to justify their doing this work in particular and their receiving funding support for it, based on their already extant research efforts and the already published record of their prior and ongoing there-relevant research as can be found in peer reviewed journals.

They do the work needed to successfully argue the case for their receiving new grant funding for this research and they carry out the voluminous and time consuming work needed to document that in grant applications. And they are generally the ones who have to find the funds needed to actually apply for this too (e.g. with filing fees where they apply and grant application related office expenses.) Then the universities that they work for, demand and receive a percentage off of the top of the overall funds actually received from this, that would go towards what are called indirect costs (and related administrative costs, etc., though many funding agencies that will pay these types of expenses under one name will not do so under another, so labels are important here.)

My above-cited reference link, points to a web page that focuses in its working example on a non-research grant- in-aid funding request, and on how monies received there would be allocated. But it does offer basic definitions of some of the key terms involved, which tend to be similar regardless of what such outside-sourced grant funding would be applied to, and certainly where payment to the institution as a whole is permitted under the range of labels offered.

And with that noted as to nomenclatural detail, the question of how funds received would be allocated can set up some interesting situations, as for example where a university that a productive research lab is a part of, might in general require a larger percentage of the overall funds received for meeting its indirect costs, than the funding agency offering those monies would allow. For a university sourced reference to this and to put those funding requirements in a numerically scaled perspective, see Indirect Costs Explanation as can be found as of this writing on the website of the Northern Michigan University. Their approach and their particular fee scale here are in fact representative of what is found in most research supportive colleges and universities and certainly in the United States. And they, to be specific but still fairly representative here, apply an indirect cost rate of 36.5% as their basic standard.

The Bill and Melinda Gates Foundation, to cite a grant funding source that objects to that level of indirect costs expenditures, limits permitted indirect cost rates to 10% – a difference that can be hard to reconcile and certainly as a matter of anything like “rounding off.” And that leads to an interesting challenge. No university would willingly turn away outside grant money and certainly from a prestigious source. But if they agree to accept such funds under terms that significantly undercut their usual indirect costs funding guidelines, do they run the risk of facing challenge from other funding sources that might have accepted their rates in the past but that no longer see them as acceptable? Exceptions there and particularly when they are large-discrepancy exceptions, can challenge the legitimacy of higher indirect cost rates in place and in the eyes of other potential funding agencies too.

• Funding agencies support research and have strong incentives to see as many pennies on the dollar of what they send out, actually directly going towards the funding of that research. Excessive and perceived excessive loss of granted funds for more general institutional support, very specifically challenge that.

Universities that have and use the type of innovation development office that I wrote of in Part 46 for managing the sale or licensing of innovation developed on-campus to outside businesses and other organizations, generally fund them from monies gained from research grants in aid received, as payment made to them in support of allowed indirect expenses. And this makes sense as they are university-wide research lab and research program-supportive facilities. But indirect expenses also cover utilities and janitorial services and even what amounts to rent of the lab space used – among other expenses.

To round out this example here, I add that one of the most important parts of any grant application is its budget documentation in which it spells out as precisely as possible what monies received will be expended upon. This includes equipment and supplies and related expenses that would directly go towards fulfilling a grant application’s goals but it also includes salaries for postdoctoral fellows who might work at that lab and it usually includes at least part of the salary of the lead investigator faculty member who runs the lab too, as well as the salaries of any technicians employed there. And I freely admit that I wrote the above with at least something of a bias towards the research lab side of this dynamic, and at least in part because I also find the one third or more cut taken by the universities involved for its use, to be excessive. And this sentiment is reinforced by the simple fact that very little of the monies coming into such a university as a result of innovation sales or licensing agreements actually goes back to the specific labs that came up with those innovations in the first place, and certainly as earmarked shares of funds so received.

• Bottom line: even this brief and admittedly very simplified accounting of the funding dynamics of this example, as take place within a research supportive university and between that institution and its research labs and its lead investigators, should be enough indicate that these are not simple monolithic institutions and that they are not free of any internal conflict over funding and its allocation.

Innovation acquiring businesses are at least as complex and certainly as different stakeholders and stakeholder groups view the cost-benefits dynamics of these agreements differently. And that just begins with the questions and issues of what lines on their overall budget would pay for this innovation acquisition and in competition with what other funding needs that would be supported there, and what budget lines (and functional areas of that business) would receive the income benefits of any positive returns on these investments that are received.

• Neither of these institutions can realistically be considered to be simple monoliths in nature, or be thought of as if everyone involved in these agreements and possible agreements where always going to be in complete and automatic agreement as to their terms.
• And these complex dynamics as take place at least behind the scenes for both sides to any such technology transfer negotiations, shape the terms of the agreements discussed and entered into, and help determine who even gets to see those negotiating tables in the first place.

I am going to continue this discussion, as outlined towards the top of this posting by considering a wider range of organizational types and business models here, and for both the innovation source and the innovation acquisition sides to these transfer agreements. And as part of that, I will at least begin to discuss the third to-address bullet pointed topic that I listed there, and organizational scale as it enters into this complex of issues. Meanwhile, you can find this and related postings at Macroeconomics and Business and its Page 2 continuation. And also see Ubiquitous Computing and Communications – everywhere all the time 3 and that directory’s Page 1 and Page 2.

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