IfM Insights
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IfM Insights

Open innovation: Solving IP challenges for SMEs

Dr Frank Tietze, Head of the Innovation and Intellectual Property Management (IIPM) Lab at the Institute for Manufacturing (IfM), and co-author of a new European Commission report looking at IP and Open Innovation (OI), explains how SMEs can use IP more strategically to gain competitive advantage.

As a hotbed of creativity, small and medium sized enterprises (SMEs) drive growth by developing new technologies, products, services and software. Intellectual property (IP) can play a crucial role in helping to leverage the value of these innovations.

SMEs are very good at inventing and innovating. And as new solutions become more technologically complex, SMEs are more likely to collaborate in different forms of open innovation projects in efforts to drive long-term growth. Open innovation provides SMEs with key benefits such as access to new markets, new customers, and market knowledge; as well as access to complementary expertise and other technologies needed for innovation. Open innovation can also help SMEs to build their credibility and brand reputation.

But some studies (Is intellectual property important for future manufacturing activities? UK Government’s Foresight Future of Manufacturing Project — Hall, B H 2013), suggest that only six to eight percent of UK manufacturing firms own patents and other forms of IP rights, which leaves them potentially vulnerable to IP theft by partners or competitors, particularly when entering collaborative innovation processes.

This potentially poses a substantial threat to SMEs’ competitiveness and survival. For SMEs to really gain from open innovation, understanding how to use and manage IP, particularly soft-IP (such as data, know-how, algorithms), is crucial in helping them to achieve their objectives. Put simply, those that understand how to use IP strategically have a greater probability of experiencing growth than those that do not.

While there is a lot of support around understanding IP essentials, there is very little available to help SMEs think about IP strategically, and to understand and manage it. So, what are the main challenges surrounding SMEs, open innovation, and IP? And what can be done to improve SMEs’ IP capabilities?

The Top 4 challenges of managing IP in open innovation (according to SMEs)

A new report prepared by the Institute for Manufacturing (IfM) and published by the European Commission, drew on evidence from SMEs (mainly from the EU) and uncovered four major reasons as to why they lack understanding and confidence in navigating and negotiating IP terms during open innovation collaboration. Let’s unpack these in more detail:

Lack of strategic thinking around IP

A lot of SMEs we interviewed understood some ‘IP essentials’ but lacked in-house expertise/experience in managing IP strategically. This lack of a strategic understanding of IP creates challenges, for instance, when negotiating collaboration agreements not only with other SMEs, but particularly with partners that are organisationally different, such as large firms and institutions.

These partners typically have established in-house IP capabilities. While there are options for SMEs to access external IP expertise, existing IP experts are mostly ‘IP specialists’ focused on particular types of IP, e.g., patent or trademark attorneys/lawyers. Lack of strategic thinking may mean that negotiation leverage from IP is lost, and the SME may miss opportunities to derive value from their background-IP (IP that the different parties possess before a collaboration starts).

2. Difficulties in identifying and articulating background-IP

It’s important that SMEs know and understand what background IP they possess before they begin collaborating. Ideally, they should undergo an audit or due diligence to understand what IP they already own. In the context of open innovation, not being clear about the comprehensive bundle of IP, including hard-IP and soft-IP needed for innovation, could undermine a collaborative project.

For example, data is a form of soft-IP that SMEs find particularly challenging to deal with. For instance, when developing digital solutions that require the integration of the developed digital component within the client’s system and use of client data, SMEs can face challenges in determining the ownership of the foreground-IP (IP which is generated during a collaboration).

The study showed that SMEs find this particularly tricky. However, if they don’t get this right, then the risk is that IP, which could and should have been background-IP suddenly becomes subject to the foreground IP sharing conditions negotiated in the open innovation agreement and it suddenly ends up being claimed by the collaboration partner. So, for SMEs, it’s important for them to take stock of the background-IP they have and to understand what models exist and are preferred for sharing foreground-IP.

3. Lack of IP-specific negotiation skills

For SMEs, negotiating with partners who typically have established in-house IP expertise can be a daunting prospect. But it becomes particularly important to possess these negotiating skills when a SME’s product is close to market and they are collaborating with a larger organisation, i.e., negotiations where there is a high commercial risk.

We spoke to SMEs who described weaknesses related to their lack of contract negotiation skills, inexperience with IP risk assessments and a lack of experience with dividing responsibilities amongst open innovation partners. Most importantly, SMEs said that they need IP negotiation skills to be able to arrive at favourable foreground-IP sharing terms which requires knowledge about possible foreground-IP sharing models, their advantages and disadvantages. Large firms appear to have a tendency of wanting to claim all IP, while SMEs advocate equal and fair IP sharing terms while also wishing to restrict exploitation opportunities.

4. Organisational differences

SMEs tend to engage with other, larger firms, mainly because such collaborations offer competitive, commercial and market advantages. But differences in culture and mindset due to varying IP openness, difference in approaches to contract formality, overall pace of progress, and risk tolerance all emerge as challenges when engaging in open innovation with such organisationally different partners.

What can be done to support SMEs in building strategic IP management capabilities?

There is a lot of IP support out there. However, much of it is very basic, and it’s not focused on developing strategic thinking. Given this gap, in the short-term, SMEs can use simple tools such as cross-tables which can be used to allocate the IP they possess to their different products, technologies or services.

This can be a really useful exercise to do before they enter into collaborations. In the longer-term, to build in-house strategic IP thinking needed for negotiating high commercial risk contracts for open innovation projects, we recommend SMEs access training programmes where they can learn and develop these skills.

For example, IfM Engage offers IP Strategy courses aimed at SMEs that helps them to build IP strategies and align their IP with business goals. Certain courses are aimed at C-level executives and do not require deep technical knowledge of IP, but rather seek to address IP as a strategic firm matter. IfM Engage also offers bespoke IP Strategy consulting to support SMEs with maximising the value of their innovation.

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The Institute for Manufacturing (IfM) is part of the University of Cambridge’s Department of Engineering. Our vision: manufacture a better world.

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