Benefits of leveraging an IP-Driven Business Model

Enterprises can leverage intellectual property (IP) based business models to improve their market share and achieve competitive differentiation. The IP-based business models leverages certain technology assets to drive sales and profitability in a non-linear way. The world’s top five companies by market cap (Apple, Amazon, Google, Microsoft, and Facebook) are IP driven.

The IP based business model work on two different ways:

1. Enterprises can monetize their technology assets;
2. They can source these assets from their partners or discover altogether new business models leveraging external assets.

There are different ways how enterprises can leverage engineering service providers in implementing IP-driven business models more profitably.

Three IP-driven business models—monetization, sourcing, and transformation—can accelerate outcomes

In IP monetization the existing technology assets are monetized. The two broad ways of IP monetization are conversion, and sustenance. Many enterprises have unique technology solutions that they could convert to valuable products for other enterprises. In most of the cases those solutions are used that are not a core differentiator for the enterprise. Engineering service providers with product development expertise can help productize these unique solutions to assets.

Some independent software vendors (ISVs) have products and IPs that are not growing due to lack of investment or the organization priorities for investments have changed. In this scenario,ISVs infuse cash to sustain and grow the IP as the ISVs need to support all products for their existing client base. For example, an ISV might want to focus on growing its mobile and IoT segments, but it might also still need to support legacy mainframe assets for a few existing customers. ISVs can license nonstrategic IPs to engineering service providers in a revenue sharing model. For example, IBM entered into long-term partnerships with HCL to sustain several of its IPs and then earned over a billion dollars in immediate cash flow. Here, HCL made the necessary investments to run and grow the asset. This model create immediate cash flow and over time increase the bottom-line of IBM.

IP sourcing - It is sourcing or creating technology assets to stay ahead with the help of partners. These technology assets can then be part of an enterprise’s current or future solution stack.

Companies can execute IP sourcing in two possible ways, co-creating and purchasing.

1. In Co-Creation, Enterprises build new technology assets or IPs jointly with the help of engineering service providers. These IPs can be about solving a customer’s problem or creating new revenue opportunities. Engineering service providers can also co-invest, which reduces the risk of enterprises. The co-creation can help in increasing enterprises’ top and bottom lines.
2. Alternatively, enterprises can buy IPs from engineering service providers and help reduce time to market for new products. Apart from reducing time to market, this approach can help in increasing the top line.

 IP-led transformation is the third IP-driven business model. In this model, using an engineering service provider’s IP or technology assets can improve an enterprise’s competitive advantage via the as-a-service model. In the as-a-service model, an engineering service provider can leverage IPs to change its business model from a product model to an as-a-service model or to offer new services, which could increase both the top and bottom lines for enterprises.

How to build an IP-Driven Business Model

The challenge for enterprises is figuring out how to begin crafting an IP-driven business model. Engineering service providers can help in many of these phases.

In the first phase, enterprises need to identify opportunities they can pursue with IPs. Here, both market research and subject matter experts perspectives can help. Engineering service providers can bring outside perspective and can also help filter internal perspective.

There are three broad steps in opportunity identification.

1. The first step is to develop a hypothesis. A business case has to be built on the IP Business Model that would be leveraged based on what competitors are doing, customers are demanding, and technology is enabling.
2. The next step is to use Design Thinking to align the hypothesis developed based on industry perspectives with the IP opportunities relevant to the enterprise. Key stakeholders should be involved in this stage with Design Thinking workshops informing them about the top-line and bottom-line potential of IP opportunities and addressing their concerns.
3. The last step is to choose IP models to engage engineering service providers in different models such as monetization, sourcing, transformation, or their subcategories

In the second phase, an enterprise needs to execute by working on the opportunities identified in the first phase.

1. The first step is for an enterprise to select partners from either its current set of service providers or from new ones. Partners can be large service providers with engineering expertise, pure-play engineering service providers, niche technology companies, or even start-ups.
2. The second step is contracting. Enterprises should develop contracts collaboratively with partners for IP-based business models. All parties should understand the value creation opportunity and their roles and responsibilities in both delivering services as well as risk management.
3. The third step is to implement the model. Depending upon the business model a company selects, implementation activities could include business model creation for IP assets.

The final phase is to manage continuously for delivering results and sustaining competitive advantage.

The first important step is to review financials periodically and these IP models will need oversight, periodic review, and intervention with partners. This oversight is to ensure benefits are realized and, if there are any risks, that they are identified, highlighted, and managed. Enterprises should also constantly strive to optimize. The IP-driven business models should be revisited and optimized regularly.

Key Risks

Enterprises should minimize the following four risks during the execution phase:

• Technical: The IP assets should be able to integrate with the system or a larger solution. The partner should be responsible for integration, customization, and support.
• Legal: Enterprises and their partners should ensure that their own IPs and third-party IPs don’t infringe upon the IP rights of other parties.
• Financial: IP assets should be able to generate desired financial returns. The right risk-reward incentives in the contract will ensure this.
• Strategy: Enterprises should ensure partners have the vision for the IP and are making the right investments. The partners should have a medium-term IP roadmap with a long-term vision to minimize the risk of disruption from changes in business priorities.

Conclusion

IP-driven business models can help enterprises increase their revenue and profitability non-linearly on the back of technology assets. There are three essential conditions for success.

1. First, IP strategy should align with business strategy.
2. Second, manage the entire IP-based business model lifecycle—identify opportunities, execute, and manage—diligently.
3. Third, develop partnerships with progressive engineering service providers that can help execute an IP strategy by maximizing value and minimizing risks. Then, enterprises can create the value non-linearly!

Source - HFS Research