Patently (un)clear

After developing a great product or process, it’s important to protect it. Markus Reitzig and Stefan Wagner have done extensive research ...

After developing a great product or process, it’s important to protect it. Markus Reitzig and Stefan Wagner have done extensive research on the benefits of using internal patent lawyers versus outsourcing the task. Here’s the inside story.

Most managers know that innovation is crucial to their firms’ success. And most also know that not all of the innovationrelated activities relevant to their firms need to be carried out in-house. In fact, recent research shows that firms are well advised to outsource parts of their R&D process and generate synergies between in-house and external technological knowledge. When deciding what to make and what to buy, however, only a few managers seem to remember that innovation is not just about value creation – through R&D – but also about value capture, notably through patenting. Yet, as of today, little, if any, textbook wisdom tells managers how to structure these value-capturing activities within and across the boundaries of their firms. Given the costliness of this expertise, the exploding number of property rights being issued worldwide and the increasing number of patents per R&D dollars spent, technology managers need answers to the following pressing questions:

  • Should I employ in-house patent lawyers to ensure that my R&D is properly protected, or should I outsource these services to external law firms?
  • What may be the long-term consequences or hidden costs of outsourcing legal intellectual property (IP) services? Can I minimize hidden outsourcing costs and benefit from external law firm expertise at the same time?

To obtain a better understanding of these issues, we carried out several large-scale empirical studies drawing on European patent data of more than 500 firms over 20 years, and we examined the effects of outsourcing patent filing on innovation performance. We then reinforced and refined these large-scale results with detailed in-depth interviews with senior corporate patent experts from three different firms – Finnish telecom giant Nokia, world market leader in diabetes care Novo Nordisk (Denmark), and Swiss pharma mammoth F. Hoffman-LaRoche.

The analyses and interviews indicate that a complex pattern exists of managerial sourcing trade-offs for patent services, whereby the short-term advantages of outsourcing patent filing to external lawyers need to be traded off against longer-term hidden costs. It appears advisable both to retain some level of patent law expertise in-house and to source legal services intelligently from internal and external experts.

Generating and exploiting R&D

“The business enterprise has two – and only these two – basic functions: marketing and innovation.” Management mastermind Peter Drucker left no doubt about how important he considered novel ideas to be for a firm’s well-being. Most of today’s senior managers would agree with the relevance of this statement in their own corporate contexts. And consistently we observe that technology corporations have massively ramped up their R&D efforts since the 1950s in order to create new products and services. Interestingly, however, it seemingly took managers far longer to actively remember the lesson of another great mentor, Joseph Schumpeter: innovation entails both the creation of a new idea and the diffusion and exploitation of the latter. Part of the blame has to be taken by management scholars. In fact, the literature contains comparatively few failed innovation stories such as EMI’s, the inventor of the CAT scanning technology, in which the actual creators of a technology were not those who profited from it in the end – simply because they did not focus on reaping the rewards of their labours. Recently, however, management scholars have shifted their attention more systematically to the strategic management of appropriating R&D rents through patenting. Yet, many questions in this domain are still unanswered; an important one is how to structure the outsourcing of patent-related activities. The picture is quite clear when it comes to making and/or buying R&D, the dominant activity in the early stage of the innovation process. Business researchers demonstrated that firms must trade off the benefits of using external R&D suppliers against transactional risks. Behavioural peculiarities affecting the desirability of external vs. internal R&D sourcing, such as the “Not Invented Here” syndrome, were studied in depth. Finally, we know that firms may want to pursue hybrid solutions (sourcing R&D from internal developers and external suppliers at the same time) in order to reap the synergies that accrue from bringing together the different types of in-house and external expertise. However, as soon as managers start to search for similar insights on how to structure the later stages of the innovation process, notably patenting, good advice becomes hard to find. In fact, apart from the few practitioner contributions considering the transactional risks of hiring external patent lawyers, hardly any related literature exists, and there is even less literature that is grounded in managerial research on the topic.

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