Opening up to IP

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The idea of sharing ideas and innovation between competitors would seem to be the very antithesis of business intelligence, and yet today’s companies are looking to open innovation to ensure their future success. CPA’s John Pryor explains why

In-house research and development (R&D) has traditionally been a guarded affair; not least because any subsequent innovation has to be protected in order to provide the developing company with the opportunity to make back (hopefully with profit), the initial expenditure spent on the R&D in the first place.

In this context, the idea of opening the closed doors of research for others to learn from would seem foolhardy, and yet the concept of ‘open innovation’ is becoming increasingly prominent, necessitating new thinking in both the IP industry and the company boardroom. But why?

At its heart, this change has come as a result of major advances in technology and society, which in turn have facilitated the diffusion of information. Not the least of these advances are electronic communication systems, including the Internet. Today information can be transferred so easily that it seems impossible to prevent. The open innovation model is built on the idea that since firms cannot stop the transfer of information, they should take advantage of it.

Opening up to innovation
It’s important to note that open innovation is a different concept to open source. Open source is a practice that promotes access to the design and production of goods and knowledge; particularly, the source codes of software, which supporters believe should be available to the general public, with relaxed or non-existent IP restrictions.

Open innovation, however, is a much broader idea. It is not merely a matter of pooling patents, for which it is often best known, but instead has risen organically as a new method of working, as a result of changes to the global marketplace.

Its central idea is that in a world of widely distributed knowledge and fast-moving innovation, companies can no longer rely entirely on their own R&D efforts to ensure market dominance. Instead, they need to buy or license processes or patents from other companies, as well as to sell or license their own internal IP Rights for profit. Most importantly, they also need to share invention processes and ideas in order to satisfy consumer needs for interoperable technologies. In this sense, IP is a bridge to collaboration, not just a means of exclusion. As Microsoft’s Marshall Phelps explains: ‘The idea of using patent and trademark rights to stop others competing in your marketplace is short-sighted. Look at a Blackberry or a piece of Microsoft software. There are thousands of pieces of IP in a single technological product, and it’s virtually impossible to stop someone working around your technology. Allow them to license that technology, however, and you both win.’

Traditionally, new business development processes and the marketing of new products took place within firm boundaries. However, several factors have led to the erosion of closed innovation, according to Henry Chesbrough, who coined the term in 2003 in his book Open Innovation: The New Imperative for Creating and Profiting from Technology.

He highlighted a number of key factors to explain the shift. First of all, he pointed to the fact that the availability of highly educated people has increased over the years as employees move between companies and industry sectors. Large amounts of knowledge now exist outside the research laboratories of large companies as a result of this flow of staff. When employees change jobs, they take their knowledge with them, resulting in a flow of information between companies – and even competitors.

Chesbrough also pointed to the growth in IP-based venture capital funding, which has increased significantly in recent years. The ability to fund businesses based on an IP Right makes it possible for new ideas and technologies to be developed outside the firm; for example, in the form of ‘spinoffs’, or through licensing agreements.

As a result of all of these factors, many companies have started to look for other ways to increase the efficiency and effectiveness of their innovation processes. For example, they are now actively looking outside their own R&D departments for new technologies and ideas that can be brought in or licensed. Similarly, many firms are also looking to co-operate and collaborate fully with suppliers and competitors, in order to create customer value – and save costs.

Its central idea is that in a world of widely distributed knowledge and fast-moving innovation, companies can no longer rely entirely on their own R&D efforts to ensure market dominance.

A change in mindset
Findings from a survey published by the Economist Intelligence Unit (EIU) in January 2007, support this change in mindset. It found that executives no longer see IP merely as an R&D tool, but also as a business aid. According to the report, the majority of those surveyed support the idea of a more open IP strategy and some 68% of them found that increased R&D collaboration with other companies and organisations was central to improving their own firms’ innovation. It reported: ‘Collaboration is crucial to IP value maximisation. It is now beyond the means of any single company to monopolise the best knowledge of any particular industry. Realising the full potential of ideas means letting them flow in and out of organisations to where they can be most efficiently handled at each stage of their development.’

Procter & Gamble’s Connect + Develop is often cited as the perfect example of this. It has pledged to source half of all its innovations from external suppliers, and to offer its patents up for others to license if they remain unused after three years of being granted. ‘If you sit on an idea, you’re likely to have it stolen, duplicated or rendered obsolete long before you develop the competences and capabilities needed to unlock its true value,’ comments Andrew Gaule, an expert on open innovation and director of the H-I Group, a London-based forum for senior executives. Far better, he argues, to get external partners to accelerate your innovation processes in return for royalties’.

But what does that mean for the management of IP Rights? How can companies ensure they protect their market share, if they are also sharing their knowledge and expertise? And, in cases of collaborative research, how can they be sure they obtain the necessary share of IP that comes as a result?

Patent pools are a case in point. A patent pool is a group of at least two companies who agree to cross-license patents relating to a particular technology for mutual benefit. Its central idea is to save both patentees and licensees time and money; however, it can be a difficult minefield to navigate if the agreement isn’t clearly set out before entering into the contract. Nonetheless, many companies (for example, the auto industry or the software industry) could not function in a global marketplace without entering into such an agreement, due to the often prohibitive cost and risk
associated with R&D.

Ultimately, of course, it comes down to your business model, as that should drive how and when external knowledge is required and where you should source it from. It should also influence how you maximise the value of your own innovation – and when and what you should license out to others.

Companies manage the building of strategic alliances in very different ways, but certain models are coming to the fore. GlaxoSmithKline and Unilever, for example, both manage this process through a ‘Want, Find, Get, Manage’ WFGM) framework pioneered by the Alliance Management Group. Its over-riding focus is on being clear about what external resources the firm wants to meet its strategic aims, what mechanisms the firm will use to find them, what processes the firm has in place to obtain the necessary agreements and
how they will manage the relationship when it is established.

Maintaining an advantage
But if everybody is working with everybody everywhere, then how can you retain your competitive advantage?

‘I think you have to start asking yourself that question now, also in order to be ahead of the game next time. And in the end it does come down to your own identity, your own core competences and your ability to envision the future, and then certainly in the future you have to then find the right place to join in to create that new future,’ says Unilever’s Graham Cross. In other words, you need to monitor how and in what way you open up to external collaboration to ensure that you retain ownership of your company’s technology and its future.

What is clear, however, is that companies who do not open up to collaborative approaches to industry and business growth risk being left behind the innovation curve. In today’s intensely competitive environment, joint ventures and strategic alliances can ensure the success or failure of a business.

Five key benefits of open innovation:

1 The ability to leverage R&D developed on someone else’s budget

2 Extending the reach and capability of new ideas and technologies

3 The opportunity to refocus internal resources on managing the implementation of new technologies, and products and services

4 The ability to conduct strategic experiments at lower levels of risk and resources, with the opportunity to extend core business and create new sources of growth

5 The opportunity to create an innovative culture, from the ‘outside in’, through continued exposure and relationships with external innovators.

For more information on open innovation, visit www.cpaglobal.com

This article first appeared in IP Review, issue 20

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