On Growth

IP Development: Beware of These Potential Pitfalls

The next stage of growth in the partner ecosystem is IP development, but firms should be mindful of its hurdles before making the transition.

• By Mike Harvath
• June 13, 2014

We're beginning to see (and, in fact, we're working with) a number of IT services firms that have set their sights on mastering the art and science of creating and selling intellectual property as a way to grow their businesses. It's the next logical stage in the constantly evolving partner ecosystem.

The dawn of the tech revolution saw a small yet burgeoning partner community of VARs, resellers, and ISVs selling and implementing the technology products provided by the hardware and software vendors that sit atop the tech food chain. Over time, as this partner community grew larger and more competitive, these companies sought to differentiate themselves and grow by evolving into services companies, providing customized solutions and managed services around the software of said tech giants. Now this services community is significantly larger and even more competitive, so the quest begins for the next platform for growth, which is IP development.

For most firms, making this transition is going to be decidedly more difficult than making the transition to a services-based model, and not everyone should try to do so. That being said, for those with the chops to take on this initiative, there are rewards to be had, including (in no particular order):

• New sources of profitable revenue
• Competitive insulation
• More relevant company differentiation
• Accelerated development time
• Offensive counterbalance to offshore competition

These benefits (and a host of others) won't come easily as executives will find themselves faced with a set of hurdles and pitfalls unique to IP development, among them:

• IP not working without a specialized, focused services offering. Specialization is what we've been preaching for years, and it's the foundation for effective IP development. Technology and vertical are two of three pillars around which an effective specialization strategy can be built. (Geography is the other, but it's less relevant for IP development.) Having a technology and vertical focus gives you the credibility and experience base for justifying your IP service offering.
  
  
• Not contracting for the IP properly. IP development isn't your standard "work-for-hire" kind of contract, in which the customer who paid for the service owns the work. In order for you to reap the rewards of your IP, you're going to need to construct a contract in which you're the co-owner, along with your customer.
  
  
• Mistaking IP as a product. It isn't, and if you look at it that way, you're looking at it the wrong way. The IP that's created will only ever be as good as the service you provide around it. It's why we call this offering a product-enabled service.
  
  
• Not knowing how to quantify and articulate the value of IP. Creating an IP service offering involves finding the right mix and balance of the existing code structure of the software platform -- CRM or SharePoint -- and the new customized code that becomes your IP. How you determine this mix, how you price it, and how you sell it is where the heavy thinking and experimentation comes together. This is new territory and there are no magic formulas for determining this value.

Having now created a unique IP offering, the next phase is how you go about creating a new sales channel, enlisting others to sell this service. Right now there are no hard and fast rules for determining the point at which you can realistically begin to market your IP to others. That being said, we're suggesting as a good rule of thumb to hold off approaching new channel partners until at least half of your new customers have bought into your IP. You'll need this base of acceptance to credibly demonstrate the appeal of your IP.

One last benefit, especially for those executives looking to sell their company at some point and who have effectively created and marketed a unique IP service offering, is that you become highly attractive to the acquisitive set. Companies will pay dearly for your company and be glad they did.

More Columns by Mike Harvath:

• CEOs: Have a Succession Plan Ready
• Finding Your Company's Growth-Rate Sweet Spot
• Column Archive