Magazine Winter 2011 Research Highlight

How to Develop a Successful Technology Licensing Program

Six practices can help companies implement licensing as part of an open innovation strategy.

Ulrich Lichtenthaler, Holger Ernst and James Conley Reading Time: 6 min 

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Massachusetts Governor Deval Patrick (left) and Massachusetts Energy and Environmental Affairs Secretary Ian Bowles (right) at advanced battery maker A123 Systems.

Image courtesy of Flickr user Office of Governor Patrick.

In today’s challenging economy, many industrial companies are trying to capture additional value from their technologies by licensing their intellectual property to other organizations, including direct competitors. Such outward transfer of a company’s own proprietary technology has only recently become an important dimension of corporate strategy, as part of a trend toward open innovation. (Open innovation can involve both bringing knowledge from outside into the corporation and also transferring technologies from within the corporation to external partners.) By licensing their proprietary technology, companies attempt to achieve a sufficient return on R&D, and licensing often goes beyond a marginal activity involving residual technology.

Some companies license technology primarily to achieve additional revenues. A few, such as Hewlett-Packard and Dow Chemical, generate hundreds of millions of dollars in annual royalties. Other companies license technology primarily to achieve strategic benefits, such as establishing a technology standard in an industry, entering new markets or cross-licensing to gain access to external knowledge. Despite these potential benefits, licensing also involves substantial risks. In particular, a company that transfers its “corporate crown jewels” — in other words, competitively relevant technology — may weaken its strategic position by strengthening potential competitors. For that reason, many companies traditionally have been reluctant to transfer technology.

Even companies that are actively seeking to license technology frequently fail to reap benefits from their efforts. Companies often have difficulty identifying licensing opportunities and potential licensees. A company owns a potential technological solution for specific problems, yet it faces the challenge of identifying other profitable applications, which may be in completely different industries. What’s more, transferring technology is a complex process, and the licensor often needs to actively support the technology adoption at the licensee. These managerial challenges underscore the importance of organizing technology licensing activities effectively.

To identify organizational success factors for technology licensing, we conducted a benchmarking study in medium-sized and large industrial European companies. After analyzing the academic and managerial literature on technology licensing, we carried out exploratory interviews with 35 experts in 25 companies to gain a detailed understanding of organizing for technology licensing.

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About the Authors

Ulrich Lichtenthaler is a professor of innovation and organization at WHU — Otto Beisheim School of Management in Vallendar, Germany. Holger Ernst is a professor of technology and innovation management at WHU — Otto Beisheim School of Management. James Conley is a clinical professor at the Center for Research in Technology & Innovation at the Kellogg School of Management at Northwestern University in Evanston, Illinois.

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Comment (1)
Dr. Isabelle M. Gorrillot
This article has the merit to bring Licensing as a driver of the Open Innovation model branded in 2003 by Henry Chesbrough whose role in thereby promoting Academia’s pioneering role in partnering its inventions remains largely overlooked. Indeed, as early as 1925 WARF sought protection of the University of Wisconsin’s inventions, Stanford University created the first Technology Licensing Office in 1970, and the Bayh-Dole Act of 1980 channeled these initiatives into a widespread strategy for the commercialization of Federally-funded research.  By 2003, non-profit research had translated into 470 commercial products, over 26,000 licenses, and thousands of start-ups (AUTM data). Yet, this article is silent on this contribution, especially its illustration of successful (yet challenging)mitigation of cultural misalignment between prospective or established partners.  Non-profit research institutions still struggle internally in adopting commercialization as a widely-accepted research outcome.  In Partnering, “it takes two to tango”, from negotiation to execution, management and possibly termination.  Finger-pointing whether inward or outward, does not benefit Open Innovation, and corporations should mirror non-profit research organizations’ organic effort toward cultural consensus, down to human capital management.  Indeed, core to Partnering is the human component, in terms especially of creativity and risk tolerance, which this article also overlooks.  A number of critical recommendations for successful Technology Licensing and effective Open Innovation are therefore missing, including 1)- to catalyze (vs. shun) recruitment and empowerment of innovative people both in scientific and business roles;  2)- to effectively manage creativity risk, including in assembling teams, to promote enterprise-wide adoption of Innovation and innovativeness.