The idea of sharing ideas and innovation between companies and competitors would seem to be the very antithesis of business intelligence. In-house research and development (R&D) is traditionally a guarded affair, as any subsequent innovation has to be protected in order to provide the 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' has becoming increasingly prominent, necessitating new thinking in both the intellectual property industry and the company boardroom.
The move to open innovation has come as a result of major advances in technology and society, which in turn have facilitated the dissemination of information through mechanisms such as the Internet. Today, information can be transferred so easily that it seems impossible to prevent. Thus, the open innovation model states that since firms cannot stop this phenomenon, they must learn to take advantage of it.
As Henry Chesbrough, who coined the term 'open innovation' describes in his book Open Innovation: Researching a New Paradigm: 'Open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.'
This white paper will look at the rise of open innovation, examining its history and its impact on the work of IP professionals. What is open innovation? What does it mean for the protection of IP Rights? What are the critical success factors? These are all questions that IP professionals need to consider if they are to keep up with the fast-changing world of IP.
By John Pryor, Head of Data Solutions at CPA
White Paper Contents
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, as is the case with open source, but instead has risen organically in company culture, 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, patents or trademarks 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 expenditures to push forward the frontiers of knowledge and innovation, while fulfilling consumer needs for every-evolving and interoperable technologies.
'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.' Andrew Gaule
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 shortsighted. 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 theerosion of closed innovation. The mobility and availability of highly educated people has increased over the years,and, as a result, a large amount of knowledge exists outside research laboratories. In addition, when employees change jobs, they take their knowledge with them, resulting in knowledge flows between firms. The availability of venture capital has also increased significantly, which makes it possible for good and promising ideas and technologies to be further developed outside the firm. Finally, other companies in the supply chain, for instance suppliers, can play an increasingly important role in the innovation process.
As a result of all of this, companies have started to look for other ways to increase the efficiency and effectiveness of their innovation processes, whether that be by actively searching for new technologies and ideas outside of the firm or through cooperation with suppliers and competitors, in order to create customer value. Other companies, such as Microsoft, are creating their own spin offs for their own untapped creativity. Microsoft's IP Ventures created 20 companies in 2006 using technology that it invented, but didn't need to use for its own product line.
Patent pools
A new approach to managing IP?
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 industries could not function in a global marketplace without entering into a patent pool, as the cost and risk involved in R&D can be prohibitive. Patent pooling in the auto industry, telephony industry and software industry (through open source software) all enable members to pool their development costs and needs to reduce risk and lower co-ordination costs.
Findings from a survey published by the Economist Intelligence Unit (EIU) in January 2007, supports this change in mindset. It found that executives no longer see IP merely as an R&D tool, but also as a business aid. The majority of those surveyed support the idea of a more open IP strategy and some 68% of them find increased R&D collaboration with other companies and organisations central to improving their own firms' innovation.
It reports that: '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.'
It cites Procter & Gamble's Connect + Develop programme as the perfect example of this. It has pledged to sourcehalf of all its innovations from external sources, and to offer its patents up for licensing to external organisations 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. [Source: Economist Intelligence Unit survey, October 2006]
Unilever is another classic example: 'Go to ideas4unilever.com and you immediately get a bit of a feel for what's going on,' says Graham Cross, Collaborative Innovation Director (a new role in Unilever). 'We have Unilever Ventures and Unilever Technology Ventures and both institutions provide opportunities for people either with total business systems to seek investment from Unilever, or people with specific technology looking for investment.'
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?
Common Terminology
Co-Development
Working with outside partners in the development of new products and/or services. Can be a subset of joint venturing or open innovation initiative. May include peer-to-peer or supplier/customer co-development.
Collaborative Innovation
Similar to concepts contained in definitions of open innovation and co-development, but can also include formal networks or consortia that come together in an alliance to study common issues and/or develop new products/services.
Joint Venture
Usually a formal legal arrangement between partners in a joint development and/or business initiative. Risks and rewards are negotiated and shared formally.
Open Innovation
Popularised by Chesbrough's book Open Innovation, this term refers to the broad concepts of leveraging external sources of technology and innovation to drive internal growth. Also entails the spin-off and outsourcing of unused IP.
Open-Source Models
Derived from the term used in the software development industry, where informally structured collaborations take place (usually without ownership or remuneration) to create a shared outcome from which all can benefit.
Open innovation enables companies to be able to respond in a quick and flexible way to changes in the environment and to remain competitive despite the shortening time-tomarket and life cycles of products and technologies. But what does this mean in practical terms? When it comes to collaboration and open innovation, just how open is open? Companies need to choose their partners carefully, through competitive analysis, set out through contracts, the ownership of IP, as well as who maintains, manages and renews the rights.
Corporate business models play a crucial role in this. After all, how and when external knowledge is required and used is to a large extent determined by the companies' business model which describes how value can be created from innovations and which elements have to be sourced internally or externally. Within Unilever this process is managed through the Want Find Get Manage (WFGM) approach, which comes originally from Hoffmann-La Roche and comes down to being clear about what you want, before you go out to find it and search for partners and before you get the deal or build the deal and then manage the consequences. The WFGM approach gives a great opportunity for a high level of internal alignment as you go through from your innovation strategy through to deciding the targets you're aiming for and then bringing the capabilities into the company. Within that, good internal discipline is needed around how you build deals.
But if everybody is working with everybody everywhere, than where does competitive advantage come from? '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. 'Without vision nothing happens.'
In today's intensely competitive environment, opensource business models and collaborative approaches to innovation and business growth are moving beyond 'nice to haves' to 'must haves'. Joint ventures and strategic alliances are on a growth path because a company's success and even survival can depend upon them. Much like an ecosystem, companies are recognisingtheir successes depends upon a delicate balance of interdependencies within a much broader network of potential partners.
Principles of Innovation
Closed Innovation Principles:
Open Innovation Principles:
Source: Chesbrough, H. (2003), Open Innovation: The New Imperative for Creating and Profiting from Technology, Harvard Business School Press. outsourcing of unused IP.
1 The ability to leverage R&D developed on someone else's budget In most industries, R&D consumes the majority of a company's budget. After all, if a company does not choose to invest in its future products, how can it ensure it retains its space in the marketplace. In the era of closed innovation, competitors would invest similar amounts of cash in the development of similar technologies. If they chose to work together, however, that investment would be split, thereby freeing up time and resources without sacrificing the resultant technological and product innovations.
2Extending the reach and capability of new ideas and technologies During R&D and M&A processes, many companies develop or acquire ideas or technologies that do not necessarily fit within their corporate goals. Traditionally, these innovations have been secreted away in order to protect them from exploitation from a rival firm or industry. By sitting on these valuable assets, many companies are ignoring a potentially lucrative revenue stream. Licensing them out or developing spin-off companies to protect and develop them, however, can provide these companies with additional income to their bottom line. It also ensures that many much-needed products and technologies hit the marketplace earlier, rather than later.
3The opportunity to refocus internal resources on managing the implementation of new technologies, and products and services Not only does collaborative research ensure that less investment is needed by an individual company to create the same technologies, it also means that less overheads (including staff costs) are needed. Freeing up internal staff in this way can pay large dividends to a company's bottom line, as it avoids the wasted expense of recruitment and training, and also enables a company to reallocate its staff to concentrate on higher value-added tasks.
4The 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 When it comes to a company's bottom line, most senior managers are risk averse by default. As a result, the lion's share of corporate R&D budgets are generally concentrated on those 'safe' products and technologies that are most likely to succeed in the current industry. At best, only a small percentage of that budget is set aside for less 'secure' forms of innovation; for example, those technological leaps that may not currently have a marketplace. However, it is often these less-developed forms of technology that will actually influence the industry in coming years. Sharing the R&D costs on 'safe' innovation, therefore, provides risk-averse management with the cushion they need to invest additional sums into untested ideas. While some may still fail, success in this area can provide firms with new sources of growth and/or new marketplaces to trade in. Even less relevant technologies can be out-licensed to other companies for profit.
5The opportunity to create an innovative culture, from the 'outside in' through continued exposure and relationships with external innovators You can't keep up with the market if you work behind closed doors. Not only is R&D prohibitively slow if you seek to develop everything yourself, it is also misleading. To match consumer needs in a fast-moving marketplace, you have to keep one eye on what your competitors are doing; otherwise, you risk being left behind the innovation curve. What better way to tap into their ideas and business strategy than to work with them on the development of a shared technology? And, what better way to launch yourself into a new market than by hooking up with an established brand who already knows all of the tricks of the trade?
knowledge is power
In order to make those key decisions about what and who to collaborate with, you first need to ensure you have an overview of the industry and its trends. Patent analytics provides a comprehensive overview of patent publications using multiple databases, commercial domain knowledge, the latest analysis tools and IP expertise. This information and analysis is available in the form of intelligence reports which provide an overview of technology areas and competitive pressures and cover a variety of areas:
Competitive Intelligence: Reduce risk by commissioning reports on key market competitors to quickly and easily reveal competitive threats to patent protection.
Portfolio Audit: Categorise and assess a patent portfolio, including verification of assignment and status of maintenance fee payment to achieve complete insight into a companies portfolio and confidence that ownership details and payments are up to date.
Portfolio Benchmarking: Assess the strengths and weaknesses of a patent portfolio against competitors and gain insight into competitor's R&D investment and marketing strategy.
Licensing and M&A: Increase revenue by identifying buyers or sellers of patents or patent portfolios, patents to in-license, outlicense or cross license, and companies to acquire.
Case Studies
P&G's much-heralded focus on open innovation, through its Connect+Develop programme led to a double-digit sales growth. The CEO's decision to capture 50% of the company's innovation from external sources resulted in better than 50% gross margins. What's even more impressive about P&G has been its ability to deliver this increased focus on innovation, while decreasing R&D spending as a percentage of sales from 4.8% in 2000 to 3.4% in 2005.
P&G has institutionalised its Connect+Develop programme to ensure external ideas have access to the organisation and that internal IP is marketed to the outside. This also ensures that internally developed technologies have an avenue for spin-offs and licensing too. Today, P&G is the model of open innovation implemented effectively, and its financial results demonstrate the power of the approach.
Nokia Venturing
Nokia uses a very interesting corporate venturing model for finding and nurturing innovation. They've moved beyond 'not invented here' and are embracing the best ideas where ever they are. Nokia's Venturing Organisation is focused on corporate venturing activities that include identifying and developing new businesses or as they put it, 'the renewal of Nokia'. Nokia Venture Partners invest exclusively in mobile and I/P related start-up businesses. They also have a very interesting third group called Innovent that directly supports and nurtures nascent innovators with the hope of growing future opportunities for Nokia. Nokia's approach is ensuring that its organisation remains connected to the pulse of innovation within mobile technology. Technology spin-offs Look at Caterpillar, Sharp, Kimberly Clark, Philips, and again P&G as examples of corporate venturing that also includes spinouts and/or licensing of internally developed IP. The benefits include the value derived from otherwise unused knowledge; but also, useful strategic partnerships are developed that allow these organisations to leverage their core strengths in ways that otherwise would never have seen the light of day. Case in point: P&G's underlying technology licensed to Clorox and launched successfully as Glad Press'n Seal Wrap. In this approach, P&G was able to leverage the value of the patents and enter a successful joint venture with Clorox, whose Glad brand was already a leader in the category.
For further information about how patent analytics can help you go to our website www.cpaglobal.com/patents/analytics or email analytics@cpaglobal.com
About CPA
With clients in over 100 countries, CPA is a leading provider of outsourced legal process outsourcing (LPO) and the world's top intellectual property (IP) management specialist. Founded in 1969, CPA provides lifecycle management services for intellectual property such as patent, design and trademark searching, watching, renewals, and portfolio strategy in over 181 jurisdictions. CPA is also a leader in the growing market for outsourced contract management and litigation support services, helping law firms and corporations to realize value by managing risk, cost and capacity. CPA employs over 1,000 people in 16 offices in 8 countries. www.cpaglobal.com