When Licensing Software or Hardware Technology Makes Sense| By |Phil Morettini

So 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 like you do.” So technology licensing is no simple topic.

When Does technology licensing to third party partners make sense?

Depending upon your 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 a technological development—thinking that there are very large companies or others with more appropriate distributions 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 managers of technology companies, 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 to be very objective about the position of your own company in the market, your priorities, company strengths and weaknesses and the level of resources available to you. In addition, you need to have a solid understanding of the potential of the technology in the market, whom might be an attractive licensee, how interested they may be and 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. This is very 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 fundamental step forward, or a “nice to have?” With things that are fundamentally unique, you will want to think very carefully about 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 does it fit 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 quite of bit of runway left to pursue in that market, opening up a second business may become a distraction—potentially harming the core business. 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 to do both–but care should be taken here. 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 makes more sense to license the technology to another player whose business is a better fit—and one who will dedicate the resources required to gain success.

Can you “have 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, I call this “having you 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 market segment and that of the potential licensee?

As an example, let’ 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 contacts are crucial to success. Instead of trying to build distribution into this new government market from scratch (which can be time-consuming), it may be a wise move 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 and without dangerously spreading your scarce resources.

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 a technology. 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 easily run into channel conflict issues, much like selling your own labeled product through reseller channels with the added twist of another brand involved in the competition.

The final major thing 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 and developing 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 the other direction. In this case, IP is a fleeting advantage and one that better be used ASAP–before it becomes obsolete. This scenario begs for an aggressive strategy–of which technology licensing may play a part–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 out your technology. This discussion provides an introduction to some of the major points that should absolutely be reviewed in any internal licensing discussion.

I’d love to hear some stories about your own technology licensing efforts as well as hear points of view from a different angle. Post a comment or email me your thoughts.

The post When Licensing Software or Hardware Technology Makes Sense appeared first on the Morettini on Management Blog.

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