A simple model for first order IP make/buy decisions
Jack Harding and Bill Martin
Option Theory contains many different, complex models concerning financial option pricing (stocks, derivatives, etc) between a seller and a buyer. Initial research was performed in the early 1900’s but did not accelerate until the 1960/70’s and is based upon complex math (differential equations, stochastic calculus, Monte Carlo, etc). Several Nobel Prizes have been awarded on work performed in this area. As stated, the work tries to evaluate pricing based upon an asset’s value, inherent market risks and realistic returns.
Do we need complex analysis to help us determine whether to purchase an IP asset or to internally develop IP? We believe that much of the complexity can be eliminated by analyzing two key attributes. This brief discussion might help resolve your IP purchasing decisions.
A “Make” or “Buy” IP decision can be aided by looking at two attributes and creating a map for all combinations. For two variables, this would be a 2x2 scenario matrix. The attributes to consider would be a differentiated feature and your company’s capabilities.
A differentiated feature allows your product or service to be beneficially unique from other competitors. An example might be a very high speed SERDES design with NO jitter. Another might be ‘universal’ digital controller for PCI Express, USB, Ethernet and SATA all wrapped into one RTL code with ‘on the fly’ configurability by user. To our knowledge, neither product exists. Each company determines how differentiation allows them to compete.
Your company’s capabilities help you determine how to best use your resources. Your company might have specific skills or experiences that can set you apart from your competition. Perhaps it is outstanding marketing, brand recognition, customer service, product development, engineering or operations. Few companies have outstanding logistic management. FedEx built their business on next-day delivery and this capability was used to differentiate FedEx’s service. FedEx can easily apply these capabilities to open new business lines such as Fleet Management, Outsourcing Shipping functions at large catalog companies, etc. It would not make sense for FedEx to expand into non-adjacent services. A simple example might be business process outsourcing. FedEx does not have the skills or experience to be successful in this area. If they wanted to enter this market, they would need to acquire an existing company.
How can this be applied to IP purchases?
To fill in the scenario matrix, let’s use easy questions to help guide us.
Will the IP help differentiate your product in the market? Is there a unique capability or performance that distinguishes you from other products?
If you look at common standards-based IP, the value is that it works on a worldwide defined standard. Connecting to this network (i.e. USB) ensures that your product can communicate with any USB enabled device. A USB connector alone does not differentiate your product in the market.
If however, you did have the “universal” digital controller enabled device mentioned above, your product can easily configure for any available network choosing the highest bandwidth available.
If the answer to the above questions are, “no, this IP would not differentiate my product,” you should immediately purchase IP if it is available. In Figure 1, this would be the bottom row filled with “Buy” recommendations. With a “no” answer, we have eliminated two of the four potential scenarios.
If the IP in question does differentiate your product, then you need to examine your staff’s capabilities. This will determine how to best acquire this IP. Let’s add another question to help resolve another scenario.
Does your staff have the right skills and experience to enable successful development?
If you do not have the right experiences, you would minimize your risks by finding an IP vendor with a successful track record. You might pay a premium for this but the insurance lowers your risks. In the diagram, this is the upper right-hand corner denoted “Carefully Buy”. This purchase is slightly different than the preceding recommendations. In this case, this is a differentiated capability for your product and you might consider methods to ensure exclusivity. If your competitors are able to purchase the same IP, your advantage has a low barrier.
So after two questions, we have resolved three of the four scenarios. For the above three scenarios, a user could use the GSA’s IP ROI Calculator but focus on licensing, royalty, and maintenance costs in regards to overall product costs. A user can look at different purchasing models to determine an appropriate model and price.
The most difficult scenario is when the IP does differentiate your product AND your staff has the skills/experience to develop the IP block. In Figure 1, this is the upper left-hand corner denoted with “Make?”.
To answer this, you will need to examine the opportunity or trade-off costs in how your staff is used. Which activity will provide the highest return to your company? This is complex and has many variables to trade-off. The entire IP ROI calculator can be used to help review which action will have the best return.
What other techniques do you use to analyze available options?
Option Theory contains many different, complex models concerning financial option pricing (stocks, derivatives, etc) between a seller and a buyer. Initial research was performed in the early 1900’s but did not accelerate until the 1960/70’s and is based upon complex math (differential equations, stochastic calculus, Monte Carlo, etc). Several Nobel Prizes have been awarded on work performed in this area. As stated, the work tries to evaluate pricing based upon an asset’s value, inherent market risks and realistic returns.
Do we need complex analysis to help us determine whether to purchase an IP asset or to internally develop IP? We believe that much of the complexity can be eliminated by analyzing two key attributes. This brief discussion might help resolve your IP purchasing decisions.
A “Make” or “Buy” IP decision can be aided by looking at two attributes and creating a map for all combinations. For two variables, this would be a 2x2 scenario matrix. The attributes to consider would be a differentiated feature and your company’s capabilities.
A differentiated feature allows your product or service to be beneficially unique from other competitors. An example might be a very high speed SERDES design with NO jitter. Another might be ‘universal’ digital controller for PCI Express, USB, Ethernet and SATA all wrapped into one RTL code with ‘on the fly’ configurability by user. To our knowledge, neither product exists. Each company determines how differentiation allows them to compete.
Your company’s capabilities help you determine how to best use your resources. Your company might have specific skills or experiences that can set you apart from your competition. Perhaps it is outstanding marketing, brand recognition, customer service, product development, engineering or operations. Few companies have outstanding logistic management. FedEx built their business on next-day delivery and this capability was used to differentiate FedEx’s service. FedEx can easily apply these capabilities to open new business lines such as Fleet Management, Outsourcing Shipping functions at large catalog companies, etc. It would not make sense for FedEx to expand into non-adjacent services. A simple example might be business process outsourcing. FedEx does not have the skills or experience to be successful in this area. If they wanted to enter this market, they would need to acquire an existing company.
How can this be applied to IP purchases?
To fill in the scenario matrix, let’s use easy questions to help guide us.
Will the IP help differentiate your product in the market? Is there a unique capability or performance that distinguishes you from other products?
If you look at common standards-based IP, the value is that it works on a worldwide defined standard. Connecting to this network (i.e. USB) ensures that your product can communicate with any USB enabled device. A USB connector alone does not differentiate your product in the market.
If however, you did have the “universal” digital controller enabled device mentioned above, your product can easily configure for any available network choosing the highest bandwidth available.
If the answer to the above questions are, “no, this IP would not differentiate my product,” you should immediately purchase IP if it is available. In Figure 1, this would be the bottom row filled with “Buy” recommendations. With a “no” answer, we have eliminated two of the four potential scenarios.
If the IP in question does differentiate your product, then you need to examine your staff’s capabilities. This will determine how to best acquire this IP. Let’s add another question to help resolve another scenario.
Does your staff have the right skills and experience to enable successful development?
If you do not have the right experiences, you would minimize your risks by finding an IP vendor with a successful track record. You might pay a premium for this but the insurance lowers your risks. In the diagram, this is the upper right-hand corner denoted “Carefully Buy”. This purchase is slightly different than the preceding recommendations. In this case, this is a differentiated capability for your product and you might consider methods to ensure exclusivity. If your competitors are able to purchase the same IP, your advantage has a low barrier.
So after two questions, we have resolved three of the four scenarios. For the above three scenarios, a user could use the GSA’s IP ROI Calculator but focus on licensing, royalty, and maintenance costs in regards to overall product costs. A user can look at different purchasing models to determine an appropriate model and price.
The most difficult scenario is when the IP does differentiate your product AND your staff has the skills/experience to develop the IP block. In Figure 1, this is the upper left-hand corner denoted with “Make?”.
To answer this, you will need to examine the opportunity or trade-off costs in how your staff is used. Which activity will provide the highest return to your company? This is complex and has many variables to trade-off. The entire IP ROI calculator can be used to help review which action will have the best return.
What other techniques do you use to analyze available options?
Labels: Intellectual Property, IP, SIP
posted by Bill Martin at
7:17 AM
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