When should you license your technology to other companies? This can be a complicated question since one of my core beliefs is “no one sells your product as well as you do.” So technology licensing is no simple topic.
Depending upon your personal tendencies, there may be a bias toward holding everything you develop close to the vest, unwilling to give that hard-earned technical advantage to another company. Or you may be on the other side of the fence and want to very quickly “cash in” on technological developments. The thinking here is that there are very large companies or others with more appropriate distribution channels that can do a much better job selling the product than you can.
So really, what’s the right approach? Just like most other decisions facing technology company management, there is no one simple answer with respect to technology licensing. It really does depend on the specifics of your situation.
Have a Process
The best way to approach a technology licensing decision is through a methodical, logical process. It shouldn’t be done emotionally or without proper data. To come to the optimal answer to this question you need:
- objectivity about the position of your own company in the market
- understanding of your priorities, company strengths, and weaknesses
- knowledge of the level of resources available to you
In addition, you also need:
- a solid understanding of the potential of the technology in the market
- knowledge of whom might be an attractive licensee
- a feeling for how interested potential licensees may actually be
- in some cases “can you license to someone else and still sell your own version of the technology”?
These and many other questions should be answered before you reach a conclusion. All too often, however, I see companies make a snap decision on whether to pursue a licensing strategy or not, with little data. This is such a strategic question for a company. Yet I have seen the decision made on a whim, with less thought than “where should we have lunch today?”
What have you got?
So let’s walk through an example process. First of all, what have you got that’s valuable to others–really? Is this IP something that is a substantial step forward, or a “nice to have?” With things that are fundamentally unique, you will want to think very carefully before sharing with others. It may be the best thing to do. But I would recommend thinking it through most carefully if you have something truly unique and desirable. Lesser inventions carry lesser risks of lost opportunity costs if they are licensed out.
Does it fit the Core Business?
Second, how well does it work with your current business? If it doesn’t fit with your core business and you have no reason to “run away” from your core business, the decision often becomes a lot easier. If your current business is thriving and you have significant runway left to pursue in that market, opening up a second business may become a distraction. This potentially can harm the core business by taking up resources and attention.
Plus, it is very possible in this instance that you will not be able to do the new opportunity justice, anyway. Maybe you have the resources and bandwidth to do both, but care should be taken in this instance. The old adage of Hitler and two front wars applies here. We might all be speaking German now if Hitler hadn’t impulsively invaded Russia, stretching his resources beyond their capabilities. So to avoid sub-optimal outcomes in both business areas, it may make more sense to license the technology to another player whose business is a better fit. One who will be able to dedicate the resources required to gain success.
Can you “sell your cake and eat it too”?
Third, if it does fit well with your core business, can you license it to other segments on a non-exclusive basis? This is an important question to consider. If the answer is yes, this is “selling your cake and eating it too.” Whether this is possible is dependent upon a fundamental marketing question: Are there “fences” that can be set up between your own market segment and that of the potential licensee?
As an example, let’s say you have a new enterprise application that is different, but complementary, to your existing core product. This new product can be sold to the same type of large corporate customer that your existing product is sold to. But this new application also has strong potential in government markets, where you have no current presence. The government market is very different and personal contacts are crucial to success. Trying to build distribution into this new government market from scratch can be time-consuming and fraught. It may be wiser to license the new product to a company with an existing, strong government business. They can sell it under their own label, put marketing money behind it, provide support, etc. In this way, you have accessed that market without entering into an area outside of your core competency, potentially spreading your scarce resources thin.
Non-exclusive technology licensing can be a great compromise
This is the type of “complementary” licensing deal that can be very effective in optimizing your total return on technology investment. Again, the key to this strategy is for there to be a good “fence” so that you don’t create channel conflict between you and your licensee. In this example, you’re in the corporate market and the licensee is in the government market. So it’s very clean and complementary; basically incremental revenue with little costs.
There are other examples of non-exclusive licensing where you end up competing with your own product under a licensee’s label. This can work as well, but it’s a lot trickier to manage. You can segment on price, distribution channel, support level, etc. But you can more easily run into channel conflict issues in this scenario. This is much like selling your own labeled product through reseller channels, with the added twist of another brand involved in the competition.
Don’t forget the timing
The final major factor to consider is timing. How well protected is the technology and how fast is the technological curve moving in this market space? If the market isn’t moving very fast technologically, there may be no one overtaking you quickly. A sleepy, slow-moving market tips the scales toward keeping the technology. Here you can develop the market for it in-house, rather than aggressively licensing it to others. Regardless of your resources, it becomes more likely that you will have time to exploit the IP when there is little fear of someone leapfrogging your technology.
If on the other hand, the technology is appropriate for a brutally competitive market that is rapidly evolving technologically, the arrow moves in the other direction. In this case, IP is a fleeting advantage and one that is better used ASAP, before it becomes obsolete. This scenario begs for an aggressive strategy, in which technology licensing may play a part. The goal here is to obtain the best return possible in the short period of time that the IP will be relevant.
There is of course, much more to consider when undertaking a decision to license/not license your technology to others. This discussion provides an introduction to some of the major points that should absolutely be reviewed in any internal licensing discussion. But IP licensing situations tend to be unique and require a thorough review of the particulars prior to a decision.
I’d love to hear some stories about your own technology licensing efforts and hear points of view from a different angle. Post a comment or email me your thoughts.
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Shawn Kalin says
I agree that for most SAAS addon apps, licensing would be the best way to gain market share.
Do you see this working well for addon apps in technology partnership/integrations into larger ecosystems?
Always interested in your views.
Phil Morettini says
Hi Shawn, Sorry, but not sure that I understand your question. I don’t know that “licensing is the best way to gain market share” for SaaS apps. I actually don’t see that at all, and I don’t think that the article says that. I see licensing as a way to maximize profitability by squeezing the last bits of return out of your IP, which was expensive to develop. The qualifier is that you already have an existing branded product business using this technology.