Ford Mines Internal Processes for Profit

By mining the potential of its intellectual capital (IC), Ford Motor Co. has turned intangible knowledge assets into tangible and impressive bottom-line results. In only two years the Dearborn, Mich.-based auto manufacturer has increased licensing royalties by 2,000 percent. One very successful effort involved licensing its rapid tooling technology both within and outside the automotive industry.

Recognizing Unused Assets

In the mid-1990s Ford executives began to look at new ways to make money as part of a restructuring process called Ford 2000. For years, Ford had used patents mainly to deter others from infringing on areas where it had a competitive advantage. The interest in garnering value from patents came from the executive suite. "Former CEO Roger May had a vision to fully extract the value from our IP," says Henry Fradkin, director of patent and technology licensing for Ford Global Technologies Inc., a subsidiary that owns many Ford patents and manages nearly 4,000 of them plus copyrights and other IC. In 1995, May asked Fradkin, a materials scientist who spent most of his career in planning and marketing at Ford, to draft a business plan for the subsidiary. Global Technologies was launched in March 1997.

Since then, Ford has done more than 100 deals. About 40 percent are with companies outside the auto industry and 60 percent are with competitors, either directly or indirectly through an industry-wide supplier. Last summer Fradkin completed the first license for rapid tooling, which reduces the time and cost of making tools for assembly lines. He has had more than 70 queries from automotive and other companies, including those in electronics, toys and even barbecue hardware. "This is exactly the kind of technology I had hoped to find: a mother technology that cuts across industries," he says. Like many other deals, the idea to license rapid tooling came from rank-and-file innovators.

Winning Managers Over

It wasn't always this easy; Fradkin spent the first year just convincing people to accept licensing. "The first reaction was if you had great patents why would you want to license them, especially to competitors," he recalls.

In response, he offers several reasons. A competitor that licenses your technology pays more for the same part than you do because he also pays the royalty. A license ties the competitor to your technology, giving him less incentive to supersede you in that area. And some products and processes become industry standards, which is good for the owner. One early deal helped to prove Fradkin's point. Ford licensed to other automakers an invention that lets drivers turn off the passenger-side airbag and saw it become the de facto standard. The resulting economies of scale let suppliers build the part cheaper, which benefited all companies but Ford most of all because it paid no royalties.

At Ford, the chief financial officer wanted all Global Technologies earnings to go straight to the corporate bottom line. Fradkin knew that such a policy would give business unit leaders little reason to cooperate, so he convinced the CFO that royalties must be shared by Global Technologies and the business unit that owns the IC. Recently he won an improved formula that gives the business unit most of these royalties. The business unit can choose to show the royalties as profits or plough them back into operations.

Motivating the Innovators

Ford Global Technologies offers financial incentives to employees who assist in generating revenue from intellectual capital. Such support is crucial, given that Fradkin's staff is made up of only six people. Engineers always got bonuses when their patents were used internally; now they get money if their patents are licensed out, even if the patent isn't used internally. This promise motivates engineers and others to bring to Fradkin's attention patents and know-how that hold potential value. Some engineers even supply leads on possible licensees. "We've progressed from trying to convince them that they should support us to getting a lot of referrals," he says.

This support spawned the rapid tooling effort and has led to other forms of IC value extraction. Fradkin licensed software written by Ford programmers to an occupational health clinic and secured a for-profit publishing contract for a manual by Ford training experts. In both cases, the innovators came to him with the idea.

There are many ways to go about extracting value from IC. Ford's Fradkin just plunged in, began to network internally and looked for obvious, relatively straightforward deals such as the airbag cutoff switch. He only recently hired an asset manager to begin a more systematic inventory of patents and other know-how.

Ultimately, IC mining must be tied to strategic business goals, which helps the company determine the necessary financial investment, cultural changes and timeframe for seeing results.