Intellectual Property: Partnering for Profit; Companies Could Earn Up to 10 Percent of Their Operating Income from the Sale of Patents and Proprietary Processes. but How?

By Elton, Jeffrey J.; Shah, Baiju R. et al. | The McKinsey Quarterly, Winter 2002 | Go to article overview

Intellectual Property: Partnering for Profit; Companies Could Earn Up to 10 Percent of Their Operating Income from the Sale of Patents and Proprietary Processes. but How?


Elton, Jeffrey J., Shah, Baiju R., Voyzey, John N., The McKinsey Quarterly


Companies whose reported earnings didn't clearly flow from actual sales and real assets found themselves punished by investors in 2002. Paradoxically, however, some companies face a different challenge: making use of assets that could generate revenues but haven't been fully exploited. These neglected assets take the form of intellectual property--patents, proprietary technologies, and processes--that could be sold or licensed to others. Certain sectors, including biotechnology, pharmaceuticals, and telecommunications, have made the licensing of intellectual property a way of life. But most of the 40-plus companies we studied had projects to develop, manage, and commercialize such assets. In general, these companies have failed to capture their full value, because management hasn't been paying enough attention.

Nonetheless, many companies--some far removed from pharmaceuticals, high technology, and other knowledge-based industries--could make substantial sums by transferring technology from a core business activity to outside industries. One consumer products company, for example, licensed a food additive as a cleansing agent in toxic-waste spills, thus recouping what had been an uncertain investment. An automaker found markets for its technology in heavy construction and health care, thus opening the door to a sustainable licensing business. Similar opportunities are more available than most executives realize.

As a rule of thumb, any company that owns at least 450 patents and spends $50 million or more a year on R&D--and several hundred companies in the United States alone fit the bill--possesses enough intellectual property to bring some of it to market; typically, 10 percent of the patent portfolio could be put to work in this way. Our study of current intellectual-property practices and valuations (1) suggests that such assets could generate 5 to 10 percent of these companies' operating income, equivalent to the improvement that might be expected from a 20 percent cut in expenses or from a successful acquisition, with little capital investment. Yet only a small number of the companies we looked at earn more than 0.5 percent of their operating income from licensing. Unlike the top performers, which on average do at least one intellectual-property deal a month and earn licensing revenues of more than $10,000 annually for each active patent, most companies in our survey complete only one or two deals a year and ave rage less than $1,000 per active patent. The good news is that some companies have closed that performance gap quickly by changing the way they manage their intellectual property.

Because so few companies have made good on their earnings potential in this area, we can't propose a best-practice list for others to emulate. But our observations and our conversations with executives in the field do permit us to offer a blueprint for best practices in the future. The heart of the emerging strategy is an outside-partner network that can increase the frequency and value of intellectual-property transactions.

The current state of play

To profit from intellectual property, companies must know whether it can be usefully and valuably applied in other industries and, if so, whether sales deals can convert that potential into revenue. At present, the market knowledge and deal-making infrastructure of most companies come up short because they rely on their internal business-development staffs and on narrow technical specialists to manage the sales of their intellectual assets. Much as companies look outside their own organizations to find the lawyers and bankers who manage their stock offerings, so too should they look outside to find the experts who can identify market applications for intellectual assets and convert these ideas into revenues.

Engineers at chemical companies, for example, aren't likely to know that the materials and processes they use to separate atmospheric gases could help semiconductor manufacturers reduce the time and money needed to manufacture the high-value integrated circuits that use ceramic rather than plastic bindings.

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