Similar to any investment that an organization undertakes, the value of the organization’s licensing-in arrangement should be quantified to ensure that it generates the required return. Well-known metrics such as economic-value-add can assist in this analysis. The EVA or economic value added is simply the profit minus the capital charges. Profit can be the R&D, advertising and legal protection costs avoided, plus incremental profits to do accelerated market entry, less the royalty expenses, less the costs and negotiations for the license (out-of-pocket and opportunity costs). Capital charge is the incremental capital needed to exploit intellectual property that was licensed-in.
Other metrics organizations have used to measure the value of licensing-in activities are: total advertising and promotional costs avoided less royalties paid to license-in trademarks; total R&D costs avoided less royalty paid to license-in patents, know-how and trade secrets; ratio of royalties paid to patents licensed compared to the ratio of R&D cost of patents developed internally; ratio of the number of patents licensed-in to the number of patents developed internally; the total number of patents the firm has access to through licensing-in, cross-licensing and internal development; the number of patents licensed in annually. Collecting and tracking such metrics is important to ensure an effective, well executed licensing-in program.
Although this section is dealt primarily with licensing-in of technology and patents, alternative strategies to obtain access to the same assets can also be done by the purchase of entire companies, joint ventures, or partnerships. Such relationships vary only in the form of the negotiations that take place between the corporations. The preparation work for such negotiations outlined in this chapter is very similar for all of them.