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.