Tactical vs Strategic Licensing

Part I

Would you like to increase your bottom line – without additional capital or research investment?

Would you like to tap into new foreign markets – without investing in property, plants, or equipment?

Would you like to develop new technologies – without expanding your existing R&D resources?

Would you like a base level of revenues to help smooth out otherwise cyclical earnings?

Would you like your technology to become the industry standard?

Is all of the above too good to be true? Well, it’s all true! For more than two decades, major corporations as well as start-ups and companies in between have enjoyed these outcomes. An important vehicle these companies have used to achieve these results is technology licensing — licensing that they approach strategically, rather than opportunistically, to maximize the commercial value of their technology.

Tactical Licensing – Why and How

Even after two decades of proven results from technology licensing, there are still many companies that have yet to recognize its potential as a significant element of business strategy.

Often companies treat licensing as a low-priority, after-the-fact tactic. This “tactical” approach to licensing is used as a means to recovering a portion of the development cost, as long as the company’s strategic market position isn’t compromised by such licensing. In these companies, the licensing staff provides services to the business units only as needed and licenses only what the business units don’t want.

Strategic Licensing

At the other end of the spectrum are companies whose approach to technology licensing (and, more broadly, intellectual property licensing) is best described as “strategic”. These companies have effectively created sustainable technology-licensing businesses based on developing and realizing value from technology-based intangible assets.

Moving from Tactical to Strategic Licensing

Moving from tactical to strategic licensing doesn’t happen at the grassroots level of the organization. The decision to incorporate technology licensing as a key part of the overall corporate strategy is most often made by the CEO, and it’s made explicitly. At some point, the CEO decides that the company is going to begin using its intellectual assets in a way that is significantly different from the way these assets have been used historically. From an operations perspective, the transformation from tactical to strategic licensing requires a supporting evolution in three distinct areas:

• Business processes

• Resources

• Organization

In Part II of “Tactical vs Strategic Licensing” (our next month’s blogpost), we’ll explore in greater detail the “right” business processes, resources, and organization for a successful transformation from tactical to strategic technology licensing.

For more on creating value by commercializing technology, see https://www.prakteka.com/category/technology-commercialization/

We at Prakteka LLC developed our expertise in market penetration strategies in the context of numerous and diverse client assignments, all focused on using technology to create business value. We are here to help you answer business-critical technology questions, too.

For a customized plan for your needs, contact us at http://www.prakteka.com/contact-us/

Maximum Affordable Royalty Rate – A Useful and Underutilized IP Valuation Method

Challenge: You have software and hardware patents that are licensable to as many as a dozen different prospective licensees already established in the industry. You have reason to believe that your patent portfolio could become a standard in the industry. How do you determine a royalty rate to maximize your royalty income ?

Approach:

  1. Think of the adoption of your patented technology as a new commercialization project within each of the prospective licensee companies.
  2. Evaluate each prospective licensee’s projected discounted cash flow resulting from commercial use of the technology.
  3. Include in the financial model a line item for royalty payment.
  4. The maximum affordable royalty rate (MARR) is the value of the royalty payment, expressed as a percent of net sales, that yields a net present value (NPV) of zero for the project.

Lessons Learned from Case Studies:

  • The maximum affordable royalty rate can vary widely across different companies in the same industry. In one case involving storage area network technologies, the roualty rates ranged from 3% to 20% of the annual revenues of the prospective licensees.
  • Inputs to the financial model can be based on public information as well as industry expert judgement regarding revenue growth rate, internal discount rates, and the percentage of total company revenues attributed to products embodying the technology
  • For prospective companies with negative free cash flow, affordable royalty rates can be assumed equal to those of peer companies with positive cash flow

A Strategy to Maximize Income

This usefulness of this technique of financial modeling to arrive at maximum affordable royalty rates company by company is that you now have a starting point for developing and quantitatively assessing various licensing (and sub-licensing) strategies for impact on licensing income. Some discrete scenarios to consider:

  • Establish your technology as an industry standard via licensing to as many prospective licensees as possible
  • “Outsource” licensing by allowing sub-licensing to one primary licensee, perhaps the one company that can afford to pay the highest royalty, based on its financial model
  • Limit the licensees to those companies with the fastest time to market

Use of MARR has been particularly helpful to companies with valuable technology-based IP but little to no experience in licensing. Interested in finding out how MARR can help you, too?  Contact us at https://www.prakteka.com/contact-us/

See also: DCF Analyses in Determining Royalty, Daniel Burns, les Nouvelles, Journal of the Licensing Executives Society, September, 1995, accessed November 7, 2018, http://www.danielburnsassociates.com/wp-content/uploads/2011/08/DCFAnalysisInDeterminingRoyalty.pdf

And for more on what matters when you’re working at the technology/business interface, see our content on technology assessment, technology commercialization, technology valuation, and “seeing the future” on our website: https://www.prakteka.com/

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