How Air Products and Chemicals "Identifies and Accelerates"
Tao, John, Magnotta, Vincent, Research-Technology Management
Air Products and Chemicals, Inc., the world's only combined gases and chemicals company, operates in over 30 countries, serving customers in the technology, energy, healthcare, and industrial markets. More than half of the company's $8.2 billion 2005 sales came from outside the United States, and external technology has long been of great importance to us.
Prior to 1995, external technology partnering was conducted by each business area and the supporting R&D group-without any coordination of efforts between business areas and R&D groups. Indeed, it was a "silo" mentality, with no coordination of work processes or central repository of best practices and the resulting contracts. In 1995, Corporate Technology Partnerships was formed to centralize our external technology efforts and to develop and implement best practices across the company; this was the beginning of our "open innovation" effort.
Open innovation is a technology management practice in which external resources are used to supplement a company's internal R&D and commercialization effort. The output of the innovation, when not aligned with the company's strategy or businesses, is used to license out or to spinoff ventures. The practice is the subject of Henry Chesbrough's 2003 book. Open Innovation (1).
Why is there a trend toward an open innovation model? There are many driving forces, of which some of the more notable are:
* Increased pressure for faster, improved and lower-cost R&D.
* Realization that no company has more than 1 percent of global R&D capacity (2).
* Reduced inflow of scientific talent to the United States (3).
* The rest of the world has surpassed the U.S. in science education as evidenced by annual doctorate degrees granted (3).
A recent article from Booz Allen Hamilton recognized open innovation as one of the three pillars of innovation and coined it, "Don't Do It All Yourself (4).
In this paper, we describe some key elements of the Air Products process for open innovation, "Identify and Accelerate." Specifically, we shall review the process of identifying corporate technical needs and the role of external partnering to accelerate the innovation process.
The external partnering strategies reviewed are: global R&D insourcing, Internet-based providers, partnering with the government, and licensing-in. We are also active with university R&D alliances and minority equity investments with start-ups, but these practices have been well covered by previous articles and are excluded from the scope of this article.
It is imperative to quantify the top needs/problems in order to focus the open innovation efforts. We have initiated a process corporate-wide to quantify and prioritize the top technical needs:
* Solicit top needs from business, marketing and technology organizations using a common problem/needs format.
* Rank-order needs that make the first cut by a specific set of criteria based on financials, risks, strategy alignment, etc.
* Senior business and technology management review and approve top needs.
Top needs are then used to broaden exposure of the needs internally and to focus the identification of external resources to meet those needs.
Technology needs are also posted on our internal corporate web site. A new system, called Needs Tracker, has been introduced as a means of identifying and logging emerging internal needs. This tool is available to all employees to identify and "post" their technical needs. Employees can also propose solutions to the posted needs. Figure 1 is a screen shot from this new IT tool.
Partnering is the cornerstone of open innovation. Although partnering also includes alliances with internal groups globally, the main focus here is on external groups. Partnering with external groups spans a wide spectrum of options as indicated in Figure 2.
It is noteworthy that as the degree of commitment increases so does the difficulty of decision making in forming the partnership, because more is at stake. The spectrum ranges from "do nothing" to "acquisition," with many options in between.
Where does partnering fit in the innovation pipeline? Innovations can be characterized as consisting of five stages: concept, feasibility, prototype, development, commercialization. External partnering typically occurs during the concept and feasibility stages, but partnering can certainly occur in the development and commercialization stages (e.g., alliances, joint ventures, joint manufacturing).
We have found some general guidelines in selecting the right partner across the spectrum of commitment:
* Identify compelling value brought by partner.
* Create clear incentive for collaboration.
* Define scope: what's included?
* Define roles: who does what?
* Contract with clear dollars and schedule.
* Define process for joint decision making when issues come up.
* Define IP: who gets what rights and where?
* Build "trust."
Mutual understanding of the "win-win," with well-defined responsibilities, project scope and budget, is key to creating an effective partnership. Quantifying the value brought by each partner is essential to developing a fair relationship. Building trust during the alliance formation phase will carry through to the execution phase.
Once the partnership is formed, there are several general principles in sustaining a successful relationship. It is important to assign an alliance manager and leader on both sides with specific accountability. It is important to establish relationships at multiple levels between the organizations. Communications, including periodic face-to-face meetings, teleconferences and email need to be frequent and sustained. It is also important to maintain a long-term vision of the relationship while keeping an eye on the need for short-term results.
We have also found it valuable to assemble a database of all contracts related to technology non-disclosure, non-analysis, research, development, commercialization, and licensing. This searchable data base, the Contract Management System, provides ready access to relevant fully-executed partnership agreements.
Global R&D Insourcing
Global insourcing of R&D and technology encompasses partnering with global suppliers of R&D and also partnering between geographies within a single multinational company. The key global suppliers of R&D with which we have had experience are based in Western Europe, Russia and China. India is also emerging as a global supplier.
Experience in Russia
Air Products began conducting research in Russia in 1992. The rationale for going there included fresh perspectives on problems, lower cost, speed, and favorable IP rights relative to U.S. universities and national labs. This rationale has been tested and proven over the years and is still valid today. For example, for a typical project, an annual cost of about $50,000 can engage 5-6 full-time technical staff (>50 percent Ph.D. level); at this same resource level, the cost for conducting this same project is over $1 million if conducted by U.S. industry (assuming a fully loaded cost of $200,000-$250,000 per professional per year).
Our initial experience in Russia was working with one institute in Siberia. This relationship has continued each year since 1992 to the present; we currently engage 57 scientists and technicians on 16 projects at this Siberian institute. In 2000, we strategically extended our reach to the over 400 technical institutes in Russia based on our success in Siberia. To date, we have partnered with eight institutes throughout Russia. The projects have covered diverse technical fields such as fuel cells, distillation, organometallic compounds, concrete additives, specialty gas synthesis, and surfactant application development.
We have used two main approaches to contract with a Russian institute: direct contracting with the institute and working through a portal group. The benefit of direct contracting is that it is simpler and faster than the portals. The benefit of some portal groups is that they will do matchmaking (linking technical needs with Russian resources) and some provide funding. There are three main portal groups to consider:
1. The United States Industry Coalition (USIC, www.usic.net) is a non-profit association of U.S. companies engaged in Initiatives for Proliferation Prevention (IPP), a program sponsored by the U.S. Department of Energy's National Nuclear Security Administration. IPP links U.S. industry and DOE National Laboratories together with former Soviet weapons of mass destruction institutes, with the goal of providing meaningful, sustainable non-weapons work through commercially viable market opportunities.
USIC members help develop new technologies and services, thereby creating civilian businesses and jobs in former Soviet nations as well in the United States. Two-year funding for IPP projects typically range from $500,000 to $1.5 million. U.S. industry partners are required to match IPP funding with cash or in-kind contributions. Of funding for each IPP project, 70 percent supports the former Soviet partner and 30 percent covers technical oversight, collaborative work, and project management by a DOE national laboratory.
2. The U.S. Civilian Research and Development Foundation (CRDF) (www.crdf.org) is another portal into Russia. Launched as the CRDF's first initiative in 1995, the Cooperative Grants Program (CGP) is the flagship of the Foundation's activities in Eurasia. The CGP provides up to two years of support to joint U.S. and FSU research teams in all science disciplines. The program offers an avenue into new research directions and collaborative opportunities for both U.S. and Eurasian scientists and engineers through $60,000 grants, which are awarded on a competitive basis. CRDF gives special consideration to proposals that include the full-time participation of former weapons researchers.
CRDF's Next Steps to Market (NSTM) program offers U.S. for-profit companies the opportunity to engage Eurasian researchers in commercial R&D projects. CRDF will match dollar-for-dollar the U.S. company's cash contribution, up to $50,000-greatly reducing the risks and costs of international R&D. CRDF's Grant Assistance Program (GAP) extends its own mechanisms, tax benefits, service network, and financial and project management expertise to other organizations seeking to support R&D in Eurasia.
3. The International Science and Technology Center (ISTC, www.istc.ru) is an inter-governmental organization based in Moscow. The ISTC has a Partner Program which offers R&D matchmaking with ex-Weapons of Mass Destruction scientists across Russia and the CIS, and can provide full project administration services. In this program, the U.S. partner (company) 100 percent funds the R&D project, which includes an ISTC administration fee of 5 percent of the total project cost. We have found the ISTC to be excellent at matchmaking.
In addition to the portals, we have found it advantageous to have "on the ground" bilingual technical support staff in Russia to assist in matchmaking, manage existing projects, assist in communications with the institutes, and assist in planning and executing visits of Air Products technologists to Russia.
We have learned several lessons from our work in Russia:
* Frequent communication is an absolute necessity
-Email, email, email.
-Face-to-face meetings in their laboratories.
* Work process development is key
-Ideas to projects.
-Template project agreements.
* Personal relationships are vital
-time to nurture trust and openness.
Experience in China
Like many of our peer companies, we are starting a technology center in China. Our business exceeds $1 billion in Asia and is growing faster than the rest of the world. We operate out of nine countries, have mostly 1st and 2nd market positions, and have close to 5,000 employees in the region.
To appreciate both the benefits and challenge of working with the Chinese, consider the competition with the Japanese in the 1980s and with China today. Aside from 1.3 billion people versus a couple of hundred million, there are world-class technologists right now who are trained mostly in the U.S., Germany, UK, and Japan and are doing a significant amount of technology development.
There are many first class, world-class, universities. Faculty members we have met recently received their Ph.D.s in countries where significant portions of their GDP are invested in fundamental research. As doctoral students, they often worked with world-class scientists and engineers, and many have done a post-doctorate. One top chemical engineering department at Tanjing we visited in 2004 had 400 Ph.D. students and another 1,000 Master students. The Chinese National Academy labs are doing quite a bit of fundamental research, and since 2000 the government has poured hundreds of millions of dollars into the infrastructure.
There are challenges, however, all related to intellectual property. The biggest complaint among people doing business and developing technology in China in recent years concerns the IP issues that one always thinks about-infringement of the patents, invalidation of your patent by somebody else when you file there, infringement of copyright and trademark, or stolen trade secrets basically leading to unfair competition (see "Protecting Your IP in China," next page).
External Internet Providers
New tools for open innovation have emerged based on the Internet. These providers work closely with industrial sponsors to identify technology globally that meets the sponsor's needs. The advantage of these tools is that there is little risk if a solution is not found. Another big advantage is the breadth of diverse thinking that is accessed through the global networks. Yet2.com, Innocentive and Nine Sigma are three major providers.
Yet2.com started out a few years ago and among all the web-based sites that listed technologies for sale or license, it is the only one left that is profitable. In the last two years, Yet2.com also invited its clients to post technology "needs."
Innocentive (www.innocentive.com) has a new business model. "Seeker" companies post a problem ("Challenge") on their web site. They also post the "bounty" for receiving a solution which meets their criteria. "Solvers" propose solutions through the web site. Seekers receive IP ownership for paid solutions.
InnoCentive's web site indicates scientists from over 170 countries around the world are registered as Solvers. Innocentive started with expertise in organic and synthetic chemistry problems but has since branched out into biology and materials science. According to a recent article, Seeker companies turned to Innocentive largely for assistance with organic synthesis problems because they were easy to define in terms of cost, yield, purity, scalability, and materials supply. One client with 12 discrete chemistry challenges reported a very high return on the investment in InnoCentive's services (5).
NineSigma (www.ninesigma.com) also has a new business model for open innovation. It is building targeted global innovation networks that identify and connect the talents and capabilities of today's most prepared minds in order to create the next generation of products and opportunities of interest to their clients. NineSigma works with clients to prepare a clear and concise request for proposal (RFP) for projects along the entire product development life cycle, including upstream technology, design, manufacturing, and applications. It then distributes this RFP to an open global network of solution providers who prepare proposals which are provided to the client. The client then makes an independent decision to fund a proposal and negotiate a business arrangement appropriate to the situation. There is an upfront fee for developing the RFP and presenting the solution provider proposals, and another fee if a proposal is funded by the client.
Partnering with the Government
Partnering with the government at Air Products has three dimensions: funding R&D at federal laboratories, being a contractor to perform R&D for the government, and acting as a consultant to third-party companies in accessing government funding opportunities.
The National Laboratories contain deep expertise in many technical areas. Some of the prominent National Labs which we have worked with include Sandia, Oak Ridge, Argonne, and Los Alamos. These laboratories have a mission to commercialize technology through collaboration with industry. Also, their technologies are often more mature than those of universities.
One excellent vehicle for transferring technology is the Cooperative Research and Development Agreement (CRADA). A CRADA allows the federal government and non-federal partners to optimize their resources, share technical expertise in a protected environment, share intellectual property emerging from the effort, and speed the commercialization of federally developed technology.
For more than 60 years, Air Products has considered the government an important customer and technology partner. This commitment led to the formation of the Government Contracts group, an integrated organization composed of engineers, scientists, technicians, financial managers, and sales and marketing professionals. The Government Contracts team interfaces with associates from all business and technology segments within Air Products to provide a gateway for government customers.
Through this integrated approach, we have successfully supplied government-specified products, developed specialized systems and services, and completed research programs that meet the technology goals of both government and private industry. The Government Contracts group also offers third-party R&D and consulting services.
Licensing-in can be a means of accelerating new product development and commercialization. If a technology had already been developed externally to a certain stage, licensing-in can be an excellent strategy versus beginning an internal project to invent around the technology; it can save time and money. Licenses can be exclusive or nonexclusive; exclusive licenses give the licensee the complete rights to a technology. For nonexclusive licenses, the licensor is free to license the technology to others. Other important provisions of a licensing agreement include the royalty rate, field-of-use, term, and geographic territory.
For exclusive licenses, payments can include an initial fee upon signing, annual minimum payments, and annual royalty payments once the technology is commercialized. For nonexclusive licenses, it is common for payment terms to be annual royalties after the technology is commercialized.
Moving into the Future
When we began introducing open innovation, we met some internal challenges. The initial problem was budgeting sufficiently to include open innovation in the R&D portfolio; over 95 percent of our R&D budget historically has been earmarked for internal development. As we have become more successful at open innovation our external budget has increased.
A second challenge is grassroots resistance from the internal technical community. Some members view open innovation as a threat to their job security. In the closed innovation model, technical community members are expected to invent everything internally-and be rewarded accordingly. One way to overcome this resistance is to reward the technical community based on its ability to solve technical problems-regardless of the source of the solutions.
Open innovation is here to stay. The fraction of a successful company's R&D budget devoted to open innovation will continue to grow. Other companies that choose to remain internally focused for solutions to their technology needs will be left behind, in the wake of the enlightened.
Our approach to open innovation is to "identify and accelerate." We are taking a hard look at identifying and prioritizing our key technical needs-corporate wide. We use a toolbox of approaches to accelerate solutions to these needs. Although we have significant room for improvement, using these tools and approaches enables us to innovate faster, better and at lower cost.
Partnering is the cornerstone of open innovation.
We learned from our work in Russia that frequent communication is an absolute necessity.
Protecting Your IP in China
Looking first at patents, the China patent administrative agencies operate at different levels. There's the state patent office and the provision office and, at the municipal level, their own patent bureaus. There are three types of patents. Inventions are no different than the patents we have elsewhere. Utility models are what we typically call paper patents; they don't really have the data that somebody has invented and reduced to practice. And the test for inventiveness is a lot lower; typically you can get those allowed easier and much quicker. The third patent type is a design patent. When you get an invention patent, it is granted for 20 years, and the other two have only 10-year terms. So you might have the strategy to first put a utility model patent in place and then follow up with a true invention patent and simply abandon the first one.
If you run into an invalidation, or if you try to prove somebody else's patent is invalid, you must first make the request, then go to the board for reexamination, and then finally proceed to court. But all this can occur within three months. It is possible to get that invalidation done fairly quickly. Once the board has made a decision, the invalidation will happen, but the opposition can still appeal it on a yearly basis.
In terms of patent enforcement, that's the bad news. It's difficult right now. However, we have to remember that the U.S. patent laws have existed for over 200 years. In China, they are relatively new, only 20+ years. There's a lot more room for improvement, and there are a lot of good things happening.
In the area of trademark and copyright, one worries about piracy. For instance, Oakley, the sun glasses and watches manufacturer, was talking about shutting down fake watch manufacturing and so on. At a recent conference, the head of Oakley's enforcement department put up a picture of two identical watches and no one in the audience could tell the difference. He said, "When I shut that manufacturing site down, I wanted to hire their designer because he's so exceptionally good."
The court systems in China are basically at three levels. There is the supreme court at the national level, then the provisional, and finally the municipal levels. Whenever you sue someone over infringement, it's at the municipal level. If you win that case, the infringer can move to another location outside of that jurisdiction and you have to start the entire process over in the next municipality. So, there are many challenges for enforcement of IP. Because the Chinese always prefer arbitration and mediation, it may be easier to settle your differences through licensing or joint manufacturing, or even outright acquisition.
The current enforcement laws and regulations need to be more Westernized and the investigations, the sanctions and the actual seizures and putting the injunctions in place are all moving in the right direction, toward the laws of the U.S. and Europe. However, right now in China everything is about relationships. Toyota spent millions and millions of dollars in a trademark litigation in 2003; it was the very first one to be filed in China, and they lost.
Everyone complains about the piracy of software and music in China. Bill Gates said, "We're not going to stop them from copying three million Windows XP every year because if you stop them, they are going to come up with something different and you may not be able to get them to use Windows later." That's the approach Microsoft is taking.
Finally, consider trade secrets. You can almost forget about them. We suggest putting in some good processes to prevent theft. Obviously, you have the traditional non-compete clause in your employment agreement with your employees. A best practice is to educate your employees about confidentiality, trade secrets, and know-how protection, but limit the specific access on a need-to-know basis.
There is also inventor compensation law in place in China following the blue LED lawsuit in Japan. Compensation is greater than or equal to 2 percent of after-tax profits for inventions, or 0.2 percent for design patents-which you might have to pay the inventors if that invention is made in China.
The number of patents being filed in China is increasing exponentially because they are getting better and better at developing technology. In our opinion, the IP problem will go away in the not-too-distant future. We had this problem with the Japanese back in the 1960s and this same problem with Taiwan and Korea in the 1970s. It is a natural evolution process as countries move up the GDP curve and improve technologies to more of their own inventions. We are confident that Chinese officials and business executives will learn the importance of the IP system and the value of preserving intellectual capital for the benefit of their people.-J.T.
Companies that choose to remain internally focused for solutions to their technology needs will be left behind.
1. Chesbrough, Henry. 2003. Open Innovation: The New Imperative for Creating and Profiting from Technology. Harvard Business School Press, Boston, MA. See also, Chesbrough, Henry. 2004. Managing Open Innovation. Research-Technology Management, Jan.-Feb., pp. 23-26.
2. Carroll, D. 2003. "Beyond the Lab: Innomediation and Global R&D." AICHE Management Conference.
3. Brez, C. and Castro, C. 2005. Putting the "Global" in Global R&D. IRI External Technology Directors Network Meeting, February 16.
4. Kandybin, A. and Kihn, M. 2004. Raising Your Return on Innovation Investment, strategy+business. Booz Allen Hamilton #35, May 11.
5. Raynor M. and Panetta, J. 2005. A Better Way to R&D?, Strategy and Innovation Newsletter. Harvard Business School Publishing article reprint S0503E, March-April.
John Tao is the corporate director, technology partnerships for Air Products and Chemicals Inc., Allentown, Pennsylvania. He has responsibilities for external technology, government contracting, intellectual asset management, and licensing. Since joining APCI in 1974, he has held management positions in technology, engineering, business development, venture development, and E, H&S assurance prior to his current position. He has a B.S. and Ph.D. from Carnegie Mellon and an M.S. from the University of Delaware, all in chemical engineering. firstname.lastname@example.org
Vincent Magnotta is manager, corporate technology transfer at Air Products and Chemicals, where he manages external global technology partnerships and licensing-in. His entire 30-year career has been with Air Products in R&D, product management, commercial development, and technology management. He developed five licensed process technologies, holds 21 U.S. patents, and has published 72 journal articles and national conference presentations. His awards include the AIChE National Chemical Engineering Practice Award (1998), Chemical Engineering's Kirkpatrick Award (1995-1997), AIChE Fellow (2000), and AIChE National Forest Products Division Award (2000). He received his B.S. in chemical engineering from Pennsylvania State University, an M.S. in chemical engineering from the University of Delaware, and an M.B.A. from Lehigh University. email@example.com…
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Publication information: Article title: How Air Products and Chemicals "Identifies and Accelerates". Contributors: Tao, John - Author, Magnotta, Vincent - Author. Journal title: Research-Technology Management. Volume: 49. Issue: 5 Publication date: September/October 2006. Page number: 12+. © 2009 Industrial Research Institute Inc. Provided by ProQuest LLC. All Rights Reserved.