There are a number of potential transaction models for acquiring and developing innovative technology, each with its own benefits and challenges.
Businesses face heady decisions when it comes to acquiring and updating their technology infrastructure. Should they try a do-it-yourself approach with in-house IT staff? Should they outsource the work? Or should they take a more strategic route such as partnering with other providers?
Whichever approach seems to fit, it’s imperative to keep their technology up-to-date or risk falling behind in product development, customer service or corporate reputation. Planning for technology innovation and deployment projects requires careful mapping of strategic objectives, deliverables and realistic work-around options.
Companies should take a broad view of how they go about fulfilling technology initiatives. There are a variety of transaction models companies can use to develop new technologies and to leverage existing infrastructure. Each has its relative strengths and weaknesses in fostering technology innovation:
Perhaps the most intuitive approach to technology innovation is for a company to undertake projects using its own employees and other in-house resources. There are many positive aspects to this traditional approach:
There are, however, significant disadvantages to undertaking a technology innovation project as an in-house matter:
Against this backdrop, there are other transaction types that foster technology innovation while mitigating the downside risks and costs associated with technology development projects.
In a traditional outsourcing agreement, the customer relies on a services provider to provide relevant expertise to implement technologies outside the customer’s core functions. Outsourcing is a proven and powerful tool to achieve cost savings and technology standardization. The outsourcing model has notable deficiencies, however, as means by which to drive technological innovation.
Outsourcing agreements typically feature detailed descriptions of services and related technology as a way to ensure continued cost savings while maintaining acceptable quality of service. To facilitate that level of detail, the relevant technology must already be available. The focus then is efficient implementation, not technology innovation.
Outsourcing arrangements are rarely structured to promote innovation. Services providers want to retain sole ownership and control of as much technology as possible to leverage across their customer base.
The most expedient and low-risk way for a company to gain access to innovative technology can sometimes be to buy another company with innovative technology. Facebook’s recent $1 billion acquisition of photo-sharing application Instagram is a good high-profile example of this. Facebook faced two key challenges regarding photo sharing in its core business:
By acquiring Instagram, Facebook addressed both issues in a single stroke and bypassed future in-house development. Facebook has subsequently made a smaller acquisition of Face.com for the same reasons.
This type of innovation via acquisition can have a quick and significant impact, but it has its own set of challenges. First, the acquiring company must complete complicated and detailed work post-acquisition to integrate the acquired technology. Second, the acquired technology can underperform or be riddled with unforeseen liabilities, such as burdensome customer service contracts. Due diligence and strong post-acquisition project management can help mitigate these risks. Under the right circumstances, acquiring strategically valuable technology can be a critical tool in overall technology development strategy.
Many companies foster technology innovation by forming joint ventures with other companies. The joint venture model addresses many of the challenges associated with in-house efforts and outsourcing transactions:
The most fundamental characteristic of a joint venture—the shared economic incentives, costs and risks—helps establish a framework to encourage innovation and sharing. Joint ventures can also have significant drawbacks a company should consider and take steps to mitigate:
Dissolving a joint venture established without serious advance exit planning is a particularly sticky affair. You have to reallocate ownership of intellectual property and other assets, manage customer relationships, manage and allocate enduring liabilities and litigation, and so on. Any party considering a joint venture should engage in serious and detailed advance planning for dispute resolution and termination options, including associated exit rights and transition-support obligations.
An alternative to the traditional joint venture model is a collaboration or strategic alliance. Such arrangements often take the form of a complex services agreement. Each party acts as both a customer and services provider. Strategic alliances of this type result in integrated products or services each party would be hard-pressed to develop and market on its own.
Strategic alliance partners should describe in detail each party’s rights and responsibilities, in much the same way a customer purchasing outsourcing services would demand detailed service descriptions and service-quality protections. Give particular emphasis to contract governance and third-party customer management, so partners can track brewing issues and modify their efforts to meet changing business needs.
Companies can achieve innovation through the collaboration model by letting each party focus on improving its core technologies. When acting as a services provider to strategic allies, each collaborator benefits from a committed and interdependent customer to offset costs to develop improvements to core technologies.
Each collaborator benefits from the technological innovations of other collaborators as the services become more consistent and of higher quality. Along the way, all the collaborators benefit from the revenue generated from the third-party customers of the collaborators.
Strategic alliance agreements can be complex, so detailed planning and documentation are required. Issues relating to customer relations, revenue splitting, cost and liability allocation, confidentiality and ownership of newly developed intellectual property can prove particularly challenging in such collaborations. Some key questions include:
Work out all these issues and clearly set such guidelines forth in a collaboration agreement to avoid later conflict and unpleasant surprises.
Companies in industries marked by expensive research efforts and lengthy product development timelines—such as pharmaceutical companies—have a particular need to mitigate the costs and risks of early-stage research. Some companies have collaborated by cross-licensing intellectual property, coordinating research efforts and sharing research results. These collaborations are sometimes called “innovation incubators” or “patent pools.”
Each participant should engage in joint reviews of research outcomes to determine whether particular research should be shelved, given additional funding for further joint development, or allocated for further in-house development.
Careful allocation of intellectual property ownership, licenses and royalty provisions in such arrangements is essential. Despite the complexity of the intellectual property aspects of this strategy, the innovation incubator model has proven a valuable tool for companies faced with daunting research and development costs.
An additional wrinkle to the innovation incubator model is that because these patent pooling arrangements often involve collaboration between entities that are otherwise competitors, participating entities must be mindful of antitrust regulations. As a result, any company considering this model should complete a review of relevant antitrust regulations in advance.
Companies, technologies, industries and market conditions vary widely. The strategic benefits and challenges for each transaction model presented here can serve as a basis for a clear-eyed appraisal of a company’s technology innovation needs and capabilities. Of course, detailed planning and documentation must follow to implement these strategic decisions at a practical level.
Companies should take a wide view of how they go about innovating key technologies and products. They can acquire or benefit from innovative technologies in any number of ways. Innovation will always be a challenge, but companies need not go it alone.
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