Tag Archives: IP

Do You Expand Production Locally or Internationally? Five Points

Situation: A company has built a very successful specialty manufacturing business in the US. Their manufacturing operations are labor intensive, with manufacturing practices optimized using motion studies and sharing best practices developed on the production floor. The CEO is evaluating whether it makes more sense to expand production in the US or to explore international options. Do you produce domestically or internationally?

Advice from the CEOs:

  • There are trade-offs between domestic and international production. Quality labor is available internationally at lower costs than in the US. However, risks include potential loss of quality control and higher levels of waste.
  • While investigating international production options, focus first on less critical operations where savings from lower labor costs outweigh the potential cost of wasted material.
  • Do not try to move highly controlled operations. These will include critical operations which require both an elevated level of operator skill and close supervision.
  • Before evaluating international options, break down the steps of manufacturing or processing to identify specific subcomponents or subprocesses that could be outsourced at reasonable risk.
    • For example, look at high volume parts where quality and variation in tolerances is less critical. These will be the best candidates for production in a lower cost, potentially lower quality environment.
  • How critical are trade secrets or patented IP to production? In the US and Europe there are strong protections for IP. However, these protections are not as strong in all countries. If production is outsourced to countries with poor IP protection, this may enable IP theft and create future low-cost competition.

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How do You Manage a Key Partner Relationship? Five Points

Situation: A company was created from IP originally developed by the founder at a large corporation that was not interested in commercializing it. The new company has now become successful and visible, with the large corporation as an important partner. The CEO wants to make sure that she has all bases covered to secure the future of the new company. How do you manage a key partner relationship?

Advice from the CEOs:

  • There must be clear agreement between the company and partner on ownership of the original IP – a legal document signed by both parties. You can bet that should a conflict arise, the lawyers representing the larger company will argue that their client owns the IP. Once this is secured, focus on developing and licensing software that you clearly own.
  • Develop contingency plans should the key partner decide to exit the business on which your relationship is based. Identify what other companies could replace lost revenue. Start to build these relationships.
  • If the partner helps to fund current development, take the money that you save and develop your own IP, independent of the partner relationship. As an alternative, at least develop critical components of the software as your own IP, without using the partner’s funding.
    • This will free you to develop other customer segments to broaden your business base.
  • What concerns does the partner have? Strategically, large corporations can be uncomfortable if they feel dependent upon a much smaller company. There are two things that you do:
    • Makes a concerted effort to assure that you are essential to the large corporation’s overall business.
    • Make change as painful as possible.
  • How would you get paid if the large partner exited the relationship?
    • Negotiate a contract with a 2-year window to any change that partner wants to make. This will provide you with the room to develop new clientele should the partner exit.
    • Have contingency plans to rebuild capabilities that might be lost and sell it to other clients.
    • Customize your software by client. In the process, you will develop new methods to keep your edge over competitors.
    • Keep critical parts of your processes “manual” so that they are essentially trade secrets and not easily replicable if the partner were to try to take over the IP.

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How Do You Optimize Your Business Model? Six Points

Situation:  A company is in the process of shifting their business model to better address customer needs. They have three different models under consideration. Management is split between these models, but must arrive at a consensus. How do you optimize your business model?

Advice from the CEOs:

  • Right now, you are considering three different potential models:
    • Tools – your old model
    • Data – produced by your old model
    • Service – your new model
    • These are different models with different prospects.
  • The money makers in marketing focus on data, not tools. Data is information, and this is what is valuable to clients. If you want to focus on the data component of your offering.
  • Currently, you are scraping data from social media and matching this to your client’s database on a real-time basis. There’s a model and value here because you are enhancing your client’s current database by making it more useful and actionable to them.
  • You have tools to enable and add value to existing client databases by allowing them to better segment their database. Again, there is value here.
  • Your core IP is the ability to correlate diverse data sources. Have you protected this IP? If not, this needs to be a top priority.
  • How much information that you scrape from social media sources can you share without violating privacy? This is something to think about because people are becoming increasingly sensitive about companies collecting their private information.

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How Do You Finance a Ramp-up? Five Suggestions

Situation: A company has been growing within budget. In the near-term they anticipate an opportunity for significant growth. The challenge of this ramp-up is that it will sap existing financial resources as expenses associated with the ramp outpace revenues. In growth terms this challenge is known as financing the inflection point of the hockey stick. How do you finance a ramp-up?

Advice from the CEOs:

  • Investigate a number of different financing options and combinations of options. While historically the company has been financed by venture capital, as you finance your ramp think beyond venture capital as the sole source of funds.
  • Investigate corporate partners who would consider the company a strategic investment. This creates a higher valuation for the company than you will find with VCs alone.
  • Within the VC community, to raise a modest level of funds focus on 2nd and 3rd tier funds – particularly those who specialize in the company’s technology and market and who will see this opportunity as fitting their portfolio strategy.
  • Outside of the VC community, look at banking and fund options that offer creative ways of using both investment and debt to fund the company through the inflection until you are again cash positive. Examples are Comerica Bank that has been building its position among Silicon Valley start-ups and venture capital firms, and Paradigm Capital that will provide loans by collateralizing your IP.
  • Look closely at your IP portfolio to maximize IP value to either VCs or other funding sources. If your IP position is strong it boosts your ability to attract funding.

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Where Should a Company Focus – People or Cash? Four Thoughts

Situation: A small company sells consumables as its primary source of revenue and profit, and produces equipment associated with these consumables. Their challenge is that designing and producing equipment is beyond their financial capacity. They have a small, loyal staff engaged in equipment production. This is a critical trade-off that must be resolved. Where should the company focus – people or cash?

Advice from the CEOs:

  • This product/profit combination is common. HP sells printers and ink, as well as other products, but ink cartridges have long been their primary source of corporate profit. The question is how to produce the associated equipment at the lowest cost?
  • Given the shortage of financial resources, why not asks a company with expertise in equipment to build the equipment on a contract basis?
    • Offer the outsource company the designs and expertise to support the project. That company may even hire your employees who have developed expertise in this area.
    • In return for providing design and guidance, ask the contract company for a percentage of the revenue or profit on equipment that they sell. This relieves you of the payroll and cash obligations for the equipment, and provides you with a modest income stream from equipment sales.
  • There is an obvious question of how the small company retains its intellectual property position. Is it possible to look at critical sub-assemblies and retain the expertise within the smaller company to complete and install some of these?
    • If so, this will boost annual revenue. The contract partner completes all but the most critical pieces, and the small company finishes the product with its technology.
  • The small company, through its sales and marketing efforts, should maintain control of leads and sales of both equipment and consumables.

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How Do You Develop Products with a Foreign Firm? Five Ideas

Situation: A company has been approached by a foreign company that is interested in their expertise. The foreign firm says that they are only interested in their own domestic market, and want the company’s help developing new products for their existing domestic clients. How do you develop products with a foreign firm?

Advice from the CEOs:

  • There is great variability between companies in different locales and on different continents. Before proceeding with negotiations, get references from the company and check them carefully. Research the company and its local market.
  • Relationship will be critical. You want to meet with their CEO. This is an important factor working with any company. Watch the commitment level of the CEO and top staff. Take an expert with you – someone knowledgeable about local mannerisms who can read the body language in meetings. Position this individual as someone who is assisting you in the negotiation.
  • If you proceed with negotiations toward an agreement, make your enforcement jurisdiction either the US or a neutral country with a western judicial system. For example, if the company is Chinese, make the enforcement jurisdiction either Hong Kong or Macao.
  • Will intellectual property be a factor? If so, get an IP attorney knowledgeable about both the market of the other company as well as your preferred enforcement jurisdiction.
  • Could this help you to augment or fund your own development? If so, ask for rights to produce and distribute products developed through the collaboration in the US and other markets outside of partner’s domestic market.

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How Do You Optimize Supply Agreements? Seven Guidelines

Situation: A company wants to add off-shore manufactures to its supply chain. This is a new experience and the CEO seeks guidance on how to negotiate supply agreements. They want win-win agreements with their new suppliers. How do you optimize supply agreements?

Advice from the CEOs:

  • No supplier relationship is risk-free, especially if you are a small company. Be sure to cover ownership of new IP developed during the relationship. For example, assure that the supplier adds no new developments without communicating these to you in writing. You may want to fund new developments selectively to assure protection of your IP. This is essential if you need to switch or add suppliers rapidly to maintain adequate supply.
  • A service agreement is not always about cost. It’s about deliverables, and quid pro quo is important.
  • Manage your key supplier relationships as diligently as you manage your key client relationships. They are equally critical.
  • In a contract negotiation between supplier and OEM or customer, both sides need to clarify customer needs and supplier capabilities. The greater the transparency on expectations, deliverables, and contingencies, the better the agreement and contract.
  • In negotiating an agreement with a Chinese company, make the enforcement jurisdiction either Hong Kong or Macao. Why? So that courts can enforce terms of the agreement on the Chinese party in the case of a dispute.
  • Post-termination obligations are a key to any negotiation – you want this clarified in advance.
  • Contracts serve two purposes: a legal tool, and a way to drive behavior. They provide an opportunity to assure that both parties are on the same page and, under the best circumstances, serve as process documents.

Special thanks to Bijan Dastmalchi of Symphony Consulting for his contribution to this discussion.

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How Do You Reduce Risk in OEM Agreements? Four Guidelines

Situation: A company is introducing a new technology. They are evaluating an OEM licensing model. They have been advised that if they go forward independently they will be perceived as a threat by OEMs, and this may inhibit their ability to form key OEM partnerships. How do you reduce risk in OEM agreements?

Advice from the CEOs:

  • Consider moving forward with a mixed model – both seeking OEM relationships and also selling direct to the market. Because you will be actively entertaining OEM relationships the risk of threatening them will be reduced. In addition, this will help you convince OEMs that your market opportunity is real.
  • A purchaser of intellectual property (IP) will always try to go around your only offer is an IP license. They would rather own the IP than pay licensing fees. Therefore pursuing your own product applications makes sense to convince the market that you are more than just IP.
  • There is a risk to this strategy – being caught in the middle. You can end up seeking two clients, your own end users and the OEMs. They aren’t the same and don’t necessarily share common interests. Just be aware of this.
  • You must be able to succinctly explain your value proposition to client audiences, whether these are OEMS, end users or potential funding sources. In the case of the latter two, they also need to easily understand the critical value proposition to the end user, as well. This value proposition will be your 30 second elevator speech.

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What Are The Best Ways to Create a Presence in China? Six Suggestions

Situation: A company’s major customers are expanding their manufacturing in China. They want the company to be able to service their Chinese locations. If you don’t already have a presence in China, what are the best ways to create a presence in China? In addition, how do you get the cash produced by these operations out of China?

Advice from the CEOs:

  • Increasingly, multinational businesses with operations in China seek vendors who can seamlessly handle all of their domestic and international needs. In China, the objective is to be able to translate service output into English so that US managers can monitor the output and assure that Chinese operations are meeting the same or similar basic standards as their domestic and other foreign operations. If your company can’t do this large contracts are at risk.
  • Look for local partners, including partners located in Hong Kong or Japan who can deliver service in China to your standards. You want partners who you can risk-manage.
  • It is interesting to look at the Japanese approach to China. Japanese concerns known to CEOs around the table only transfer highly developed, late stage manufacturing projects to China.
  • As you look at partners who have capabilities in China there are a number of qualities that you want to investigate:
    • Competence and honesty.
    • Loyalty – a partner who will stick with your company and not just take the new knowledge and start to compete with you.
    • Absence of graft and record of compliance with the Foreign Corrupt Practices regulations.
  • If you work with Chinese partners, work with two of them. Do not give them exclusive agreements, and do not tell them about one-another. This is critical to protecting any IP that you will be using in China.
  • We’ve learned over the past year that taking cash from your Chinese operations out of China is difficult. The Chinese government imposes heavy fees and levies on companies exporting earned capital because they want this capital to remain in China. Given this, you must ask yourself whether this is important to you. [like]

How Does a Tech Company Get Beyond Its First Partner / Client? Four Options

Situation: A company has a long relationship with its initial client, which provides the company with key intellectual property. This client handles all marketing, sales and distribution for the company’s principal products, but only accesses 20% of the market. The client is concerned about having its image associated with expansion into markets that the company wishes to pursue. How do you structure a deal that enables you to access the broader market without offending the client?

Advice from the CEOs:

  • The issues for the client are public relations and liability. They don’t want to be associated with certain segments of the larger market as it may compromise customer perceptions of their core business. Further, they want to be indemnified should they face damages from your forays into the larger market. It is important that you address their concerns.
  • Sit down with the key client. Pose a problem that will generate the solution that you seek and let them solve it on their own. Then seek an agreement with the client on carve-outs within the larger target market with which they are agreeable.
  • Build an external company with different branding to approach the larger market, without jeopardizing the relationship with the key client. If ownership and management of the two entities are the same be aware that this is a thin veil.
  • You may increase opportunity for success if you build your own successor product – one tailored for the larger market – while your key client is paying you for current business. Once the product is built, ask the client whether they want to be involved and if so, on what terms. This enhances your bargaining position and reduces your downside risk.
  • Expand your offering, where current products are part of a larger offering. You have two alternatives: go there anyway, or go there with the client. If the client decides that they don’t like what’s happening and opens the market this could be ideal for you.

Key Words: Client, Partner, IP, Intellectual Property, Image, Liability, Solution, External, Entity, Successor, Product

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