In this article, Tom Fryers examines the issues and options for acquiring the next generation of products and suggests some guidelines for successful investment in technology.
It is appropriate that, against a background of rapid change in their markets, meter vendors are re-examining the role and structure of their R&D functions. Timely innovation creates huge opportunities when the business rules change, but harnessing and directing the R&D process to meet these opportunities in the utilities sector presents unique challenges.
THE R&D CHALLENGE
One can understand why: meter vendors face a market where accelerating change is normal. Each country has its own national strategy, balancing factors such as security of supply, competition, prices and ‘green’ credentials. These strategies, and the regulations that implement them, change in response to international pressures and local political imperatives. In some markets utilities want technology solutions to support increasingly complex business applications but using fewer staff, while in others utilities demand lower cost, and established meter vendors are under pressure from new players who have lower cost bases. Both opportunities need R&D input, but in very different directions. The situation is further complicated by the need to gain economies of scale by building products that map to the requirements of many different markets.
Figure 1: PCT applications 1978 – 2001
Figure 2: Cultural issues in the technology value chain
Then there are the longer-term opportunities offered by environmentally driven changes such as embedded generation, ‘green’ tariffs and demand management.
Overall, new requirements are stacking up for metering products. Utilities are interested in systems that reduce whole life costs, such as telematics (e.g. sensing meter condition and relaying the information over AMR communications for asset management purposes) and systems that open the way to possible new revenue opportunities (e.g. time of use charging). But developing such products demands an ever-increasing range of technical skills, creating a recruitment and management problem for the meter vendor. For example, the development of a modern meter might call for a deep understanding of RF design, microprocessors, anti-tamper and condition monitoring sensors and ultra-low-power electronics. The up-side of this complexity is that all these areas can deliver protectable intellectual property.
To compound this situation technology – the raw material of R&D – is multiplying at an ever-increasing rate. New technology is constantly being developed and commercialised, and the rate is increasing, with over 110,000 PCT applications in 2001 compared to fewer than 5000 in 1981 (see Fig. 1).
Innovation in fields outside utility metering generates technologies that are likely to be relevant to metering. Meter vendors can take advantage of often huge R&D spends in other sectors by ‘bending’ emerging technologies to fit their own purposes. This means that R&D teams must have broad exposure to technological advances in all fields, yet have the in-depth understanding of metering to make valid judgements about the applicability of such new technologies. Maintaining such a team in-house would be prohibitively expensive.
THE TECHNOLOGY VALUE CHAIN
Technology has no inherent value. It acquires value by being applied to a market. The value chain starts in research, progresses through product development and realises value through manufacturing and sales. All the links must function properly, or the whole process breaks down. But each link has different requirements in terms of:
- Attributes of key personnel
- Management culture
- Secrecy of ideas and protection of IP.
Businesses often think of themselves as experts in a particular market or product type. In other words, they focus their outputs on identified targets. Sophisticated businesses realise that the principle of focusing can (and should) also be applied to the technology value chain. What do we excel at? What are we poor at? What must we do internally? What can we outsource? In practice, deciding to outsource is only the first step. Businesses must also look at the type of outsourcing relationship they want and the availability of suitable partners/contractors. Fortunately, there are plenty of options to reduce the burden on in-house R&D.
In-licensing intellectual property from external sources, either through patents for specific technology areas or licensing meter designs, can fill specific market requirements relatively quickly and at lower risk than initiating in-house programmes. According to a survey by management consultants McKinsey, in-licensing can boost a company’s performance and growth as much as homegrown R&D, with 63% of respondents expecting it to make a significant contribution to their company’s growth over the next three years.
Successful in-licensors understand the gaps in their own portfolio and, in defining these gaps, may drive the process of innovation more strongly. This is particularly the case where they are working with trusted licence partners with whom they can share these insights.
However, in-licensing suffers from an image problem: it can be regarded as a threat to the in-house R&D team’s efforts, rather than an addition. This creates barriers in the very team that will be asked to evaluate any technology for in-licensing, and to develop the finished product.
A more substantial problem can arise from in-licensing a technology as a one-off transaction, without a process for properly supporting it. Long term product development and sales support will require a deep familiarity with the ‘know-how’ surrounding a particular technique, which may not be adequately transferred when the intellectual property rights are simply acquired without ongoing commitment. A good licensing deal should address this issue by aligning the interests of the licensor and licensee so that both want to maximise sales of the product. The licence should also provide appropriate mechanisms to allow and encourage the right level of support.
McKinsey’s conclusion is that, to be successful, executives must set explicit goals for their technology portfolio and work hard at building and maintaining good relationships with their IP partners to extract value from a licensing deal.
OTHER OPTIONS FOR OUTSOURCING
Alternative forms of outsourcing range from contract R&D to strategic partnering, with plenty of subtle variations in between.
Contract R&D is widely used for addressing crisis situations or technical challenges that are seen as one offs – when the new design doesn’t work, key staff have left the company, or responding to a major competitor. It is less well understood in a strategic context, but it can be an effective means of filling capability gaps in the medium term, and of importing new technology from other market sectors.
The contractor’s market understanding is key to the effectiveness of contract R&D, and his commitment to the sector is essential if the meter vendor needs long-term support for product development and manufacturing. The contractor’s size is also important – the meter vendor needs breadth and depth, but also needs to be treated as a valued customer, worthy of regular board level attention.
Strategic partnering provides a richer relationship than the simple transfer of intellectual property assets. It implies post- transfer technical support, pre-transfer sharing of market knowledge, a partner with a good understanding of market requirements, and commitment from both sides to manage the relationship effectively.
In our experience, successful strategic partnerships can’t be bought off the peg – they must be carefully nurtured over several years. Personal relationships must be encouraged at various levels in both companies. Mutual trust must be developed through trial and the occasional error, and through a clear understanding of roles, responsibilities, authority, risk and reward.
New product development is a core strength of any product company and it may seem counter-intuitive to outsource even a portion. But market and technology factors are changing the rules for investment in intellectual property.
There are more potential sources of technology than ever and we believe that strategic partnering in particular offers an important route to new product development. Making it work requires senior managers to prioritise the goals of technology management to include identifying gaps in existing technology, building relationships to cover these gaps and extracting value from the technology once a deal is struck. Crucially, it also requires the right partner – one who demonstrates commitment to the long-term success of the relationship, technical excellence and strong market awareness.