Is your company's IP strategy crippling its open innovation?

By Oliver Alexy, Paola Criscuolo and Ammon Salter - MIT Sloan Management Review

Protecting intellectual property would seem to be at odds with pursuing open innovation. Companies use open innovation when they, looking to advance technologies, take external and internal ideas, as well as internal and external paths to market. When companies selectively use research others have carried out, they bring new ideas to their businesses, rendering them more productive and profitable, saving time and often saving money.

But if your intellectual property department calls the shots about when and with whom you should cooperate, it will limit your open innovation. Many large companies have a “no patent, no talk policy.” They won’t collaborate with other parties if they don’t have a patent application in place. That approach prevents others from accusing them of stealing technology. However, it also causes them to miss many potentially valuable external ideas that aren’t yet patented.

It’s not just large companies that use this misguided policy. Universities, too, often insist on their own IP terms prior to working with industries. Doing so creates a major barrier, preventing bright minds from collaborating. Rolls Royce plc, for instance, finds that it takes 18 months to negotiate research collaboration agreements with university partners. Having routinely experienced such delays, the company is considering whether to terminate its network of university research.

Similarly, many companies active in research and development patent everything their research labs create. Doing so entails huge costs and huge waste. Siemens Aktiengesellschaft and Procter & Gamble Co., for example, reported recently that they use only 10% of their patents, yet pay millions in annual renewal fees for the remaining 90%. And again, all these patents inhibit potential collaborators.

Open innovation suffers when capturing intellectual property becomes an end unto itself -- as opposed to a means of enhancing an innovation’s value. In fact, most companies have only moderately succeeded -- if at all -- in making money through licensing or selling their intellectual property. Companies that own 40% of all U.S. licensing patents account for 99% of the revenue. That means that the remaining 60% of patent holders receive just 1% of revenue.

Moreover, the monetary reward from patent licensing can be misleading. By insisting that IP may only leave a company if someone pays for it, then that company eliminates the possibilities of cooperating with others on those technologies and benefiting from related or second-generation innovations they may create.

In fact, focusing too much on IP will scare away the very people who could provide a company with the most benefits. Excessive patenting and overly stringent IP policies prohibit company researchers from communicating with outsiders, making collaborators look elsewhere.

In contrast, consider International Business Machines Corp., which is involved in interconnected “ecosystems”-- critically dependent on cooperating with other parties to generate innovations and profits. Until a few years ago, IBM would negotiate IP agreements with collaborators prior to beginning a project, a process that consumed both time and money. Finally, CEO Sam Palmisano questioned this process’s value. He asked if any IBM partner had ever actually sued for IP infringement. No one could recall such a case, so Palmisano instituted a new light-touch agreement to share IP (either through joint ownership or automatic licensing) arising from such projects.

Intellectual property, however, is not always bad for open innovation. There are many situations in which intellectual property facilitates collaborative research and development activities.

Take P&G’s Connect + Develop process. The company searches for other parties’ IP to put into its own product pipeline. When P&G finds ideas it wants to turn into products, transferring those ideas to P&G is much easier if a patent protects the technology. First, P&G can better understand the idea and how it works, as the patent reports that information. Second, inventors need not fear that P&G will misappropriate their ideas, because the patents prove that they’re theirs. Finally, having a patent enables easily transferring ownership rights. P&G can simply license or buy the patent.

IBM, for its part, uses its own large patent portfolio to encourage open innovation in its ecosystem. For instance, in 2005, IBM made 500 valuable patents available to the open-source software community, which could then use them for free. IBM hoped to stimulate innovation, thereby boosting its total value.

In general, intellectual property benefits open innovation when it’s used more as a signaling device than as a control right. Having a patent lets an entrepreneur improve his or her negotiations with venture capitalists, potential collaborators or large companies interested in buying the idea. The patent shows third parties that the company that has purchased it has made an inventive step in a particular area.

The IP landscape is transforming. Companies that want to prosper in this new environment must find a balance between closed innovation programs and the creation of capabilities that can be shared through open programs. Intellectual property must be a vehicle for building and sustaining communities, not a knee-jerk defense against all outsiders.

This article is adapted from “Does IP Strategy Have to Cripple Open Innovation?” by Oliver Alexy, Paola Criscuolo and Ammon Salter, which appeared in the Fall 2009 issue of MIT Sloan Management Review. The complete article is available at http://sloanreview.mit.edu/smr/.

Published on 12/1/2009

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