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Getting more from intellectual property

Companies that license intellectual property from other organizations not only develop better products but also gain a better understanding of those markets.

Getting more from intellectual property
From the McKinsey Quarterly
Special to CNET
October 10, 2004, 6:00 AM PDT

An increasing number of companies in sectors ranging from consumer products to high technology are discovering what companies in life sciences already know: The licensing of intellectual property can generate healthy revenue and bolster profits.

A recent cross-industry international benchmarking survey shows that many companies have set ambitious goals both for selling their best ideas and for buying the ideas of others to use in their own research and development.

Unfortunately, though, even companies with the most modest goals may have little chance of reaching them. Fully 57 percent of the survey respondents say that fewer than one-quarter of their recent intellectual-property deals met or exceeded initial strategic and financial expectations. In some cases, the deficit is the result of unrealistic targets: Executives imagine that their organizations can emulate intellectual-property portfolio-management leaders such as DuPont and Microsoft.

Counterintuitive though it may seem, in-licensing can drive innovation.

Many companies struggling with intellectual-property management not only processes and organizational structures that could link their financial targets for intellectual property (such as revenue from new products using licensed technology) to their strategic objectives, but also the ability to assess how much intellectual property can contribute to their overall growth and revenue. As a result, they can't even define what, for them, would be good performance in this area.

Furthermore, most companies attempt to measure their performance through standard financial metrics--patents filed, gross licensing revenues, or the number of commercial deals close--but only a handful use metrics that tie intellectual-property licensing to business goals. This lack of strategic focus, combined with accounting practices that roll licensing revenue into existing business-unit activities, shrouds the value of intellectual property and de-emphasizes its management.

The most common organizational shortfall is a failure to recognize that in-licensing (the licensing or purchase of intellectual property and related assets from external organizations) can boost a company's performance and growth as much as homegrown R&D. Often, research leaders regard in-licensed technologies as competition for internal innovation--an unhealthy mind-set that isolates top management and technical teams from new ideas and technology.

Bridging the gaps
Counterintuitive though it may seem, in-licensing can drive innovation, for successful in-licensors better understand the gaps--ideas or technologies they need to improve processes, create new products, or complement current one--in their own intellectual-property portfolios. These companies also know how to find partners to close the gaps. In addition, in-licensors are more likely than other companies to meet their financial and strategic expectations for intellectual property and to rate intellectual property management as a source of competitive advantage.

In many organizations, in-licensing receives fewer resources and less managerial attention than the out-licensing of products or technologies. Only 36 percent of the companies we surveyed do any in-licensing at all. But for them, it had a significant impact on both product development and the overall performance of the licensing function: 63 percent earn more than 10 percent of their total corporate revenues from intellectual-property licensing in all its forms.

Companies can raise their overall licensing revenue by using in-licensing specifically to generate out-licensing revenue: that is, incorporating in-licensing ideas and technology to improve their own products and processes and then turning around and out-licensing the improved products. Of these in- to out-licensors, 64 percent earn more than 10 percent of their total corporate revenue from licensing. All this suggests that in-licensors are more skilled at identifying their intellectual property markets, at managing their internal and external intellectual property consistently, and at commercializing intellectual property through their own products or services and through secondary licensing.

Given the high expectations and relatively poor results thus far, how should companies approach intellectual property management? Executives ought to set explicit goals that reflect the talent, infrastructure, and assets they expect to allocate to both in-licensing and out-licensing. To be successful, they will have to build and maintain a good reputation among their intellectual-property partners and to work hard at extracting value from a deal after it has been struck. As executives move intellectual-property management to the core of their business strategies, it will become an ever more important contributor to overall financial performance and growth.

For more insight, go to the McKinsey Quarterly Web site.

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