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Using IP to Turn a Profit

Using IP to Turn a Profit

Queensland is leading the charge among Australia’s government organisations to commercialize its own intellectual property — to the tune of $65 million in revenue over the next three years

Since Queensland established its Smart State policy in 1998, it has invested heavily in the knowledge industries and science education as a way to generate jobs and future opportunities for all Queenslanders.

Some of that investment has been focused on giving its small and micro IT companies — seriously disadvantaged by their relative isolation from Australia’s multinationals and large corporations — a leg up to get new products out to market, and to shifting their aspirations to international markets. But now, says manager, partnerships and alliances with the Information Industries Bureau (IIB) Peter Beven, the Queensland government is on a steep learning curve as it makes a fair fist of leading the charge in Australia on efforts to commercialize the government’s own intellectual property (IP).

Although some of the experiences to date have been — to say the least — traumatic, after 18 months and nine specific projects, the gains are already significant. Of those projects that are at agreement point, Beven told CIO Government’s Converge 2004 conference in Canberra in March, Queensland can expect to garner some $65 million in revenue over the next three years.

Beven says as Queensland pauses to evaluate its intended future direction on commercializing IT, the successes have already proved substantial enough to be of keen interest to CIOs in other government jurisdictions. And while the impact on affected agencies varies greatly, in no case were they to be scoffed at, he suggests.

“Queensland government agencies spend hundreds of millions on IT projects annually, which generate IP owned by government. When government does enter into deals it can result in significant revenue opportunities both for industry partners and also for government itself, with royalty arrangements being as high as 40 per cent in some cases,” Beven says.

However, there have been some harsh lessons to learn along the way, and Beven is more than willing to share them with his peers.

Knowledge Economy

The government pitches its Smart State policy as being all about using knowledge, creativity and innovation to maintain prosperity and quality of life for all Queenslanders, and positioning Queensland at the forefront of the “knowledge economy” to become a regional leader in “smart” industries. Another aim is to help Queensland build a skilled and diversified knowledge economy.

What is now known as the Information Industries Bureau, which is housed in the Department of State Development and Innovation, was established in 1992 to facilitate the development of an internationally competitive ICT sector in Queensland and foster the growth and development of the Queensland ICT industry through a diverse range of programs.

With a high preponderance of small and micro businesses clustered in a fairly small geographic region in the state, with limited ability to interact with larger companies, the government had to take an innovative approach to getting new product out to the market — one relying heavily on partnerships and alliances, Beven says.

“The work that we have been doing with those firms is primarily in a commercialization sense: taking new products, getting them out to the marketplace, and having in the marketplace very much an international focus. It’s not just on our doorstep; it can’t be or we won’t be successful at it.”

Having built up an extensive gallery of commercialization skills and knowledge, what could be more natural than for the government to eventually decide to direct the key competencies of its advisory team towards its own agencies and intellectual property by launching a pilot project to extend the IIB’s core business activity to itself?

In one of the exercises undertaken as part of a pilot, the IIB worked with the Department of Housing in Queensland to commercialize an algorithmic index developed to help it with strategic management of its portfolio of some 60,000 public housing dwellings.

Developed as a research project between CSIRO, the Queensland University of Technology and the Department of Housing, the decision support model — part of a new generation of interactive computer applications — had significantly improved the department’s management of its $4 billion building portfolio.

“Essentially, this one system is managing an annual facilities management budget equivalent to the whole Queensland government IT spend,” Beven says. “. . . It has major cost savings benefits to the agency in its own way. But it’s just been sitting there . . . When the solution has been presented at housing conferences worldwide, housing agencies would say: this is terrific, how do we get hold of it?”

In response to such interest a developer — local Brisbane firm Microgenx — not unnaturally saw an opportunity and requested access to the IP, expressing its willingness to incur the cost of ongoing product development and to provide support. Queensland Housing was eager to exploit the opportunity, but working with the developer in an area where it had no expertise meant an extremely steep learning curve.

“It was a challenge,” Beven says. “For Queensland Housing it was the first time they had attempted something like this. They didn’t understand the half of the commercialization issues and it was compounded by the fact that the IIB was primarily acting for Microgenx as the client rather than Housing — limiting the nature of support we could provide them.”

Despite the initial difficulties, which Beven attributes to big gaps in the department’s commercialization experience and awareness, Housing was eventually — with CSIRO’s assistance — able to get to a point where a deal was brokered. The result has been extremely promising.

In March, while visiting the UK, Queensland Premier Peter Beattie launched the resulting Microgenx product suite in conjunction with a multinational UK-headquartered partner. These products will now be rolled out to 250 large corporate clients and government clients around the world. That makes it a very significant outcome and a significant export earner. The Premier is, not surprisingly, very pleased.

With the deal due to be ramped up significantly in an international context, there will not only be a significant impact on local jobs and exports, but the commercialization effort has elevated the Queensland Department of Housing to the status of a world leader.

“The professional recognition that came out of this will really be very, very significant. The revenue stream itself is not be sneezed at, and it is perfectly acceptable to roll this back into future development projects,” Beven says.

“It also actually creates an environment that will allow us to do multiple commercialization deals for other market applications. This particular licence is for the public housing sector, but it applies equally to industrial properties, to commercial properties and so on. So we’re looking at a whole number of additional flow-on initiatives here, very much as cooperative arrangements with industry. So you can see how there’s actually a compounding affect that happens when you get to that point.”

Another much simpler project has been completed after the Queensland Police Minister at the time requested his agency to explore the opportunities to commercialize its Video deMultiplexer. “DeMux” is an analytical software solution developed internally by the Queensland Police Service (QPS) to analyze security video camera footage.

This application was initially showcased to senior executives of law enforcement agencies throughout Southeast Asia at the “FBI Re-training conference”, held in May 2003 on the Gold Coast. Subsequently, an agreement in principal has been reached with Canberra-based The Distillery Pty Ltd, a specialist software developer providing applications to law enforcement and the security industry worldwide.

Naturally, given IIB’s mission to assist local industry, the ideal would have been to give the commercialization work to a local Queensland firm, in keeping with IIB’s specifically stated policy of preferencing local industry. In this case however, no local firm proved to have the necessary capability so the QPS project has been commercialized instead in conjunction with the Canberra-based firm.

“If they didn’t have the capability, then a Queensland firm wouldn’t get the deal,” Beven says.

However, this agreement will see substantial benefits flow on to the Queensland ICT industry. This firm will now establish an office in Queensland; its relationship with government agencies has increased dramatically. So there is an indirect channel here as well in terms of what it means to the industry through the proposed establishment of an office by The Distillery in Brisbane and through a number of subsequent partnerships with Queensland ICT firms.

Even so, Beven says, the worldwide recognition that has been garnered for the product has created “enormous benefits, which have flowed on to other firms in the Queensland industry.

“A number of additional partnerships have been created for additional, complementary technologies that had been sitting on shelves in their own right, outside of government. So there’s at least four or five firms that are now starting to get commercial benefits.

“What does that actually mean? Again, the indirect benefits to the local industry, even though it was not a Queensland firm, are significant: exports, jobs, new offices, enhancement of their professional reputation.”

In fact the product has now seen the Queensland Police Service being recognized as one of the top two leaders in the world in this specific technical area. And while the initial cost of product development was perhaps as low as $30,000, the returns on commercialization are expected to be significant.

Findings

Commercialization does not come naturally to government, Beven says. Government agencies may have great technical and project management skills without having any commercialization skills at all. That applies across the board, not just to the business development side. Agencies lack the legal knowledge, and need competent advice on how to capture IP.

“The need for IP specialist legal advice is a particular point of agreement. Most agencies don’t have that on board,” Beven says. “I would encourage agencies very, very strongly to get those people involved. There is a big gap between capability from a legal perspective in commercial law and just IP law. There are a lot of overlaps, but there are also significant gaps.”

Beven says agencies need to fully identify and specify their IP in the product. That means firstly identifying and specifying the background IP, in terms of the business process side, the code and the infrastructure issues and architecture issues.

“The specification is vitally important. More often than not, what is needed for a good specification from a legal point of view is not what you will find in a purchase contract. There is a gap between the two, and having that understanding so that you can actually specify it, or try to specify it, at least in part by the developer, is important. What you’re trying to avoid is the possibility of disputes down the track,” he says.

If there is no whole-of-government IP policy, the agency at least needs an agency-specific IP policy for IT developments. Agencies need to understand the IP issues that technical staff will encounter on a day-to-day basis if they decide to head in this direction. This is not just an issue for CIOs, Beven says. Importantly, it is equally an issue for project managers.

“A lot of the activity, we’ve discovered, is actually at a much lower level, particularly for smaller projects, so providing those people with the proper policies, frameworks and management practices around their IP is essential.”

At its most basic, IP covers the proprietary rights over original ideas or inventions, including the know-how about business process. Some Queensland government agencies are getting quite sophisticated in their ability to identify their business process know-how as a key component of their intellectual property.

Agencies also tend to have little appreciation of the real commercial issues faced by the industry partners. Unless those gaps are bridged, the ability to achieve outcomes is limited. “In our case that learning curve has been very rapid, but . . . the lack of exposure to that environment has been the problem,” he says.

Beven strongly recommends the industry partner be allowed to model the commercialization. Even if that partner does not have a full spectrum of commercialization skills it is likely to be much better at it than any government agency. Private sector organizations are also likely to be much better at mixing and matching skills from partners on a day-to-day basis.

And you should always start with the low-hanging fruit that are generally easier to commercialize. The risks both from a commercial and a technical point of view are inherently lower, so the procedural requirements around contracts from the departmental commercial advisory area are less likely to cause headaches for the partner, and for you.

However, unless agencies can move to commercialize their product fast, they may as well forget about it. Beven says the biggest “bug bear” of all is that agencies move far too slowly. Speed to market is critical for any potential industry partner. If commercialization is likely to take 12, 18 or even 24 months, it is a dead duck. Agencies must be able to develop the processes or draw on the expertise to underpin commercialization in the fastest possible time frame.

“Speed to market cannot be underestimated. In terms of any product development cycle, not just IT, the process of conceptualizing, getting it out to the market and growing the market is a very, very narrow window of opportunity. It is highlighted and heightened in the IT space, particularly software, so you’ve got a very, very narrow time frame.”

The downside for government is the length of process, he says. Some commercialization exercises can take 18 months or more. IIB’s framework for agencies includes guidance that unless they can complete the exercise in 120 days or less, they should not embark on it. “It’s just a waste of their time, and it will be a waste of the industry partner’s time. They will get disillusioned. And the first thing they do when they get disillusioned is write a letter to your minister,” Beven says.

The ability to support the agreement to whatever extent necessary is also fundamental. And Beven says particularly before agencies have developed any expertise in commercialization, a top-down approach is essential.

“A number of organizations that we dealt with in our pilot project, and in the case study, they had never done anything like this before, so [it was] the first attempt at a commercialization exercise, so the hurdles were much, much higher.

“This has to be really a top-down approach. The people who are actually going to sign off on this have to be briefed; there have to be consultations right along the line. If you’re actually trying to push them from a project point up to try and create the mechanism, you will delay things very, very significantly. The realities around time to market are of primary concern to any industry players that you’ll be dealing with.”

Beven says the requirements of agencies to be able to tap into the investment of their industry partners when they further develop government IP has also always been a priority, so this too has been incorporated into the commercialization agreements, with specific terms and conditions outlining the benefits to the agencies.

“It may not be that they’re going to get it for free: the trade off there will be the price they’re paying in terms of the cost of the IP or the royalty being paid — those sorts of commercial considerations — but fundamentally to be able to access the new products, the product enhancements, the variance of that, are fairly crucial.”

Another lesson learnt is never to undertake such an exercise where it is likely to distract key personnel from the agency’s core business activities. If there is any chance that it will, agencies should either reject commercialization out of hand or develop a scenario for providing resources to the exercise.

“The process that you go through to take it through commercialization can be lengthy; it can require the devotion of significant staff resources to answer the questions you need to ask, and the ability to push that through can be a major distraction for your agency. The work that’s involved for the project management team needs to be considered.” But whatever the caveats, the Queensland government seems likely to push on with commercialization.

The demand since the Queensland government started its commercialization project 18 months ago from agencies has been phenomenal, Beven says. “We have been inundated and we actually can’t handle it properly. As a result we will be very selective in what we do — it’s not about government commercializing but vesting the IP in industry partners and supporting them to do so.

Asked whether IIB had any plans to commercialize its knowledge about how to commercialize IP, Beven said its is something they are definitely exploring but only if there are spin-off benefits to the Queensland industry.

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