It’s the subtle little secret of the corporate revenue stream. Executives now recognize that intellectual property (IP) makes up the bulk of an organization’s wealth, and most chief executives will glibly claim that IP is the key to competitive advantage. Yet most CEOs pay no attention to leveraging or drawing income from those assets. How can they? Few even know what IP their company owns.
To be fair, companies have gotten wise to the sometimes significant revenues that can be gained through patent and technology licensing. In fact, by most estimates, annual revenues for such licensing have exploded from US$15 billion to $110 billion worldwide over the last 15 years. For many companies, however, that’s the easy part; the real challenge is to make their intellectual property serve the business, not be the business — that is, to benefit from valuable IP at the business unit level, where corporate strategy intersects with customers and markets. Unfortunately, very little historical knowledge or experience is available to guide executives in generating commercial advantage from what is in reality an entirely new class of assets.
At most companies, responsibility for intellectual property still resides in the legal counsel’s office rather than with the chief technology officer, chief financial officer, or some other manager responsible for guiding financial and commercial growth. In addition, virtually no models exist for assigning economic or competitive values to IP. Thus it is difficult to make a clear business case for deploying patents and know-how one way or another. Should the company use IP to try to block a competitor in its market, for example? Or should the organization use it to cement a partnership with a competitor to jointly exploit the market, as Procter & Gamble did recently when it licensed its bags and wraps technology to the Clorox Company in return for a 20 percent stake in the business, rather than compete with Clorox’s entrenched Glad brand?
One company that has had some success in connecting intellectual property to business strategy in ways that generate growth and competitive benefits is General Electric. A recent example occurred in the company’s energy division, which markets, among other things, giant natural gas turbines. This equipment is popular despite its $250 million price tag because, unlike traditional coal-fired turbines, it can be turned on or off to deliver just enough electricity to meet demand, saving utilities millions of dollars in energy costs.
The frequent recalibration of the turbine’s output created a service nightmare for the GE energy division’s business unit responsible for the sales and support of its 7FB line of turbines. The company frequently had to send repair crews out to customer sites to shut down and then retune the equipment before starting it up again. Customers were also inconvenienced by this setup. If a reset took place during peak summer energy demand, the utilities had to make up for the temporary loss of the equipment by purchasing expensive supplemental electricity on the spot market.
In short order, GE developed a novel technology to deal with this problem: a proprietary remote monitoring and calibration system that did away with the need to dispatch technicians to manually rejigger the 7FBs. A smart idea, but one that nonetheless sparked a sharp internal debate as managers tussled over how best to deploy their new slice of intellectual property.
On one side stood the services group, which favored simply integrating the remote tuning technology into GE’s existing services, saving the company $27 million in annual servicing costs and resolving the customers’ downtime troubles. On the other side was the hardware group, which argued that the technology should be adapted and sold to customers as a product. This would not only save GE the $27 million in service costs, but also bring in as much as $30 million in new revenue.
The resulting management stalemate convinced company executives that they needed a new way to think about potentially overlooked intellectual assets that could produce more growth. With the help of Don Davis and Dave Crawford of the IP consulting firm Commercial Strategy LLC, GE created a methodology and framework for mapping and assigning economic and competitive values to its technology and IP.
GE began by charting the turbine business to determine which companies made how much money in each segment of the industry. Next, the company highlighted the areas of the market where coming up with solutions to existing customer problems seemed to offer the largest rewards. Against this map of high-value possibilities, GE overlaid the intellectual property holdings — the patents and know-how — of GE and each of its rivals, detailing their respective strengths and weaknesses and placing a real competitive value on the IP.
What GE discovered, says Joe O’Shea, the company’s recently retired chief innovation officer, “blew both sides of the turbine debate right out of the water.” The analysis revealed that selling the remote tuning technology as a hardware product would eventually enable competitors to supplant GE as the service provider for the turbines. This would in turn jeopardize more than $28 billion in current and future service fees that the company expected to earn. Indeed, patent filings indicated that Siemens was already well on the road to developing a technology of its own that would allow it to exploit GE’s hardware.
But retaining ownership of the remote tuning technology and simply deploying it as a service enhancement was not a high-value solution either. Although it would certainly save GE the $27 million yearly cost of sending personnel to customer sites, it would nonetheless leave a lot of money on the table — a staggering $750 million in annual downtime costs paid by the utilities to buy energy on the spot market under the current system. GE felt it legitimately deserved a piece of this savings as a reward for producing a solution to eliminate most of the downtime costs.
The company realized that it would have to come up with a better approach. It devised an entirely new business model for its remote technology, one that leased it to customers while simultaneously licensing to them the associated IP and service procedures. GE would retain ownership of the hardware, blocking encroachment by competitors and enjoying significant licensing revenue. Moreover, GE would also retain rights to customer data from this system, which would enable the company to leverage everything it learned from operating and servicing 300 gas turbines globally to build a “predictive intelligence” platform for delivering service and supply chain improvements to the utilities. This vital intellectual asset was a key differentiator for GE that no competitor could match.
Finally, because the technology would be protected by license, GE could share proprietary knowledge about turbine operation with the utilities, allowing them to make their own adjustments to the equipment to boost performance and stability. One utility, Florida Power & Light, saved more than $18 million within just the first few weeks of the new agreement.
Over the last three years, this strategy has enabled GE to generate $300 million in new, high-margin revenue. What’s more, the division’s president, John Rice, has since been promoted to vice chairman of GE, and is now one of the few senior corporate executives with valuable experience in using intellectual assets to drive growth. But he won’t be alone for long, as corporate IP strategy innovators, inspired by the GE example, blaze similar trails one company at a time.
David Kline ([email protected]) is a writer and consultant specializing in intellectual property strategy. He is the author of Rembrandts in the Attic: Unlocking the Hidden Value of Patents (Harvard Business School Press, 1999).