January 4, 2022

Your Innovation Does Not Need to be “Your” Innovation

As discussed in an earlier blog post, a successful business is built on successful products and services. Profitability through a competitive edge in the marketplace outweighs a particular number of patents, for example. In view of this basic tenet, the source of the innovation enabling such a competitive edge should not matter, provided value is maintained.

A key to advancing your innovation capabilities can be collaborating with others to leverage their expertise and intellectual property (IP). Open innovation in this manner can provide a competitive edge where internal effort has not.

Innovation is always needed in a competitive marketplace, but innovation efforts, particularly those that are outside a company’s areas of expertise, can be expensive, time consuming and carry no guarantee of success. Going outside the company for complementary expertise or already-developed technology can provide a significant head start.

Open innovation allows an organization to acquire or develop IP in conjunction with another entity. When a company realizes that not all the smart people in the world work for the company (yet!), a shortcut to innovation can be sought. To improve sales, a company can hire staff and invest in years of research, or they can go to an outside expert who already has the required knowledge. The expert helps the company develop the innovation and receives a fee, a royalty and/or use of any IP generated. The organization can cut years from its product development cycle and gain a head start on the competition because it possesses knowledge its competitors do not.

The best open innovation arrangements allow each party to contribute resources and expertise to a development and receive applicable value, potentially encompassing exclusivity in product type, supplies, distribution, geography and market type, manufacturing rights, royalties, up-front payments and IP ownership. Note that in most cases there is little practical difference between owning IP and having an exclusive license to such IP, resulting in an additional level of flexibility.

In a common arrangement, two companies together develop a product improvement that allows one company to increase sales. The collaborating company receives royalties based on sales of the improved product. Both parties receive value from the collaboration.

Open innovation requires a level of trust to which some might be unaccustomed. This can usually be overcome by a tiered approach such as the following:

  1. Tactical: A potential partner with limited or specific technology or know-how with which you can explore a potential partnership. Partners can be switched according to market competitiveness. This is typically a short-term partnership and confidential information is shared on a need-to-know basis related to a specific project. Little if any IP generated.
  2. Collaborative: A partner with which you have had previous interaction or one with which you can develop a particular technology or capability. Longer term. Broader confidential information can be shared to provide context for the development. Some IP might be generated and shared, depending on agreement.
  3. Strategic: A partner with which you work on multiple developments, particularly a partner that has a variety of technologies and capabilities to offer. Often an interdependent partnership that can take time and resources to develop and that can last for many years. To get the most value, you might share technical needs, product plans and business plans. Because IP is likely to be generated and shared, IP provisions and rights are detailed and allocated according to the interests of the parties.

The major points of discussion when establishing an open innovation partnership are, broadly, who brings what to the development and who receives what from a successful development. More specifically, a development agreement between the parties should address:

  • Resource contributions
  • The work roles of each party
  • Exclusivity with respect to the development and its results
  • Who owns and handles IP, including improvements to existing IP
  • What licenses are granted to the other party
  • How each party will benefit from a successful development

A structured development agreement will allow the parties to innovate and benefit from that innovation. Such open innovation will enable you to commercialize a higher margin product, increase your speed to market, obtain a larger share of innovation in your categories and improve your access to outside skills and resources.

It should be noted that similar advantages can be obtained through licensing existing IP if available, a subject that will be covered in a future blog post.