Once a corporate culture takes root inside a big company, changing it becomes the ultimate management challenge. At Procter & Gamble, where you can’t even get a job unless you’re applying at the entry level, resistance to change manifested itself over the years in a severe mistrust of outsiders. Just how closed was P&G? Last year, Nabil Sakkab, senior vice president of R&D in the global fabric and home-care group, got up in front of his colleagues and declared that they had borrowed their approach to the outside world from “the halcyon days of the Kremlin and the CIA.”
Today, P&G understands that no company — not even one as vast as the Cincinnati-based consumer-products giant — can stand on its own. That’s especially true when it comes to innovation. To transform the insularity of its culture and to build more relationships with other companies, it has rewritten its entire rule book on how it controls its intellectual property. The company holds about 27,000 patents, but less than 10% are currently used in their products. Other big companies have similar ratios, so P&G is not singularly inefficient in this regard. But for many years, a small subset of those other large organizations have come to see their own know-how as an asset, something that other companies might be willing to rent. So far, computer-technology and pharmaceutical companies have been the leaders in finding ways to license their intellectual property. Outside of those industries, it’s been much less common.
P&G has always seen itself as a technology company, so when it formed its own licensing group in 1996, no one there worried that it didn’t have anything of value to offer. “Tide is as high-tech as a computer,” Sakkab claims. “People just don’t realize it, because we don’t talk about it that way. But there’s a lot of intricate science in a product like that.” To the supporters of the licensing initiative, the biggest challenge was cultural: how to convince employees, who had worked for years hunched over a lab table, to help the new group lease the fruits of that labor out to other companies, competitors even.
That job fell to Jeff Weedman, who has run P&G’s licensing group since its launch, and the lessons he’s learned so far are applicable to any organization that is trying to make the same sort of changes. First, licensing won’t amount to much if you’re not willing to share your best ideas. Second, the innovators inside your organization need a direct incentive to share with others on the outside. Finally, and most important, sharing know-how with outsiders can actually work to a company’s advantage by giving the people who work there a push to make faster decisions about what to use and then to replace the ideas and products that have become available to others.
The New Organization Man
Jeff Weedman is a man of considerable salesmanship skills. Walk into his office, and before you even sit down to address your own business with him, he’s quizzed you about your family, teased you about your local sports teams, and offered you piles of a top-secret candy concoction that his group helped create.
Still, Weedman is quick to admit that he had little success early on convincing his bosses that the lessons he would learn could help his group alter the trajectory of the company’s culture. In fact, when he launched the group, the company constrained it in ways that prevented it from serving as a catalyst. First of all, a large part of the P&G patent portfolio was off-limits to the group and couldn’t be licensed to outsiders at all. “Our charter was to license stuff that we didn’t really want anymore,” Weedman says. “Well, guess what? The stuff we didn’t want anymore wasn’t worth a whole lot.”
Second, any revenues that the group was able to milk from the licensing of technology went into the general corporate coffers, not to the bottom line of the groups that invented it. Weedman’s bosses had ordered him to work that way, but he knew that it violated some fundamental rules of human nature. After all, why should engineers help him license their work to outsiders if their group wasn’t going to see any of the cash that came from the deals? “Getting people to do things for which they don’t see a direct benefit is a tough challenge,” Weedman notes dryly.
Weedman demanded a change in 1998, and his timing couldn’t have been better. “Our mission happened to coincide neatly with what Durk Jager, who was the CEO around that time, was trying to do to accelerate innovation,” Weedman explains. “And one of our strongest supporters at the time was A.G. Lafley [who is now the CEO], who believed that opening the patent portfolio further and giving the money back to the business units would have the additional benefit of speeding up our cycle time.”
Now every patent in the P&G portfolio is available for license to any outsider, as long as it has existed for at least five years or has been in use in a P&G product for at least three years, whichever comes first.
Once Weedman convinced his bosses that the changes made sense, he had to convince his colleagues to resist their tendency to hoard their discoveries. The best example of how a licensing deal can work to the researchers’ benefit is P&G’s agreement with Tropicana. The license allows the juice company to use P&G’s formula for helping the human body absorb supplementary calcium that gets added to juice. This technology is obviously valuable, but it was underutilized at P&G, which had only one major beverage, Sunny Delight, to use it in. P&G’s food and beverage division keeps the licensing fees, which it can then turn around and use for more research and development. “Now everything I make goes back to the business unit,” Weedman says. “Instead of being a distraction and a tax on their operations, I’ve become a strategic opportunity for them.”
Use the Past to Expedite the Future
The straight-up competitive strategy that’s involved here is impeccable. If your competitors are paying you to use your technology, then you have a leg up on them because they’re writing you checks. If you don’t let them use it, they have an incentive to innovate around you. The licensing group’s true breakthrough, however, was more profound, yet more subtle: When you open your intellectual-property portfolio to others, it forces you to make faster decisions about the kind of technology you want to keep for your own products. Plus, it encourages you to compete with yourself to make new discoveries faster in order to exceed the inventions you’ve already made available to others. In effect, you’re using the past to expedite the future, making the old patents an accelerant to the process of new innovation.
Essentially, P&G engineers now compete with themselves as they watch those three- and five-year timers tick — and sweat as they do so. “I actually argued for a much shorter expiration period,” Weedman explains. “For people in the computer industry, three years would be interminable. As it turns out, that was wasted effort because Procter people are highly rational.”
How rational? During the past 12 months, Weedman says that he’s had only one conversation with a senior research and development person at P&G who complained about the pending patent expiration date. “Most of the conversations now are around when it’s the right time to make the technology available, not how people can continue protecting it,” he says. “There are going to be some situations very soon where our technology will show up in other people’s products before it shows up in ours.” Then those fees will go right back into trying to improve that technology even faster.
What’s the Deal So Far?
So how do you keep score with an innovation initiative like this? What are the metrics that define success? One way is simply to count the number of deals cut. So far, Weedman’s group, which is now called the external business development & corporate licensing group due to its added option to make equity investments in startups, has done several dozen deals. “The correct answer is, we’ve not done enough deals, and there will be more!” he says sternly, with a sly smile. “A good deal today is infinitely better than a great deal tomorrow. You know how close only counts in horseshoes and hand grenades? We have a horseshoe award we give out around here to people who are close to a deal but haven’t cut it yet. It’s not an award you want to get.” Weedman won’t disclose the revenues his group earned for other business units last year, but Dow Chemical runs a similar, though more mature licensing operation and pulls in about $100 million each year from it.
But perhaps the quantitative metrics are the wrong ones to use to evaluate Weedman’s efforts. Even if the group brings in $1 billion in licensing revenues, which only IBM has accomplished so far, it would still amount to just 2% of P&G’s revenues. Much more important is the way that the mere existence of the group is beginning to infect the thinking of researchers and strategists at P&G. Just a few years ago, Weedman had trouble getting people to sit down with him for an hour. Now they’re loaning him staff and paying that staff’s salaries to assist him in his licensing efforts. And at a time when P&G is asking more than 10% of its employees to take severance packages, Weedman’s group is adding staff.
Recently, the company announced that it intends to be the recipient of underdeveloped patents too, not just the provider of them. In his report to shareholders this year, chief executive A.G. Lafley noted that up until recently, about 90% of the company’s innovations came from inside the organization. Within the next few years, he wants half of the new ideas coming from outside of the company.
Ron Lieber (firstname.lastname@example.org) is a Fast Company senior writer based in New York.