3.7 HOW DO WE CO-CREATE ONE-TO-MANY?
MULTILATERAL CO-CREATION
Co-author – Olivier Van Raemdonck
Corporates have become increasingly conscious that the sourcing of innovation through the set-up of (open) collaboration models is needed to face the unstoppable technological revolution we are experiencing today. Whereas innovation was traditionally driven through internal R&D or through M&A activities, corporates nowadays realize that these traditional methods are insufficient and do not satisfy the innovation needs of their customers.
Their shared ambition to accelerate (internal) innovation and expand their market position through the use of (disruptive) innovation models, is the key driver why both innovative disruptors and established corporates become dependent on each other.
In order to achieve this ambition, it is crucial to set-up a corporate partnering model between partners that creates a win-win level playing field, especially for the weaker and usually more innovative party.
In practice, we have observed that many startups/ scaleups and corporates have the best intentions when trying to structure a co-creation arrangement, but have difficulties in actually putting those plans into practice.
Such partnerships can take multiple forms: joint research and co-development of products and services, franchising, preferred supplier relations, licensing, co-promotion, joint production, equity-based partnerships and many other ad hoc collaboration methods.
There is a growing tendency within most industries and sectors to join forces through the establishment of multilateral collaborative partnerships between various stakeholders (e.g. startups and scaleups, corporates, authorities, research institutions, non-profit organizations, etc.) with a shared ambition to push innovation and roll-out new business models, access new markets, etc.
The proper structuring of a multilateral corporate partnering model is essential to enable the creation of synergies on the basis of the complementarity of the collaborating partners.
In order to build a sustainable multilateral co-creation arrangement, partners should first establish complementarity and on the basis thereof carefully define the pursued objectives of the contemplated collaboration. A focus on, and monitoring of, the various objectives of a multilateral corporate partnering arrangement is essential for its success.
Among the objectives of multilateral corporate partnering models, the matchmaking and the building of an ecosystem between different stakeholders within a specific sector is commonly found to be an important driver.
Startups will be driven by the following objectives:
• Develop, pilot and test the marketability of its innovative solution.
• Collaborate to share risk and generate new intellectual property rights.
• Accelerate access to markets.
• Increase intellectual property rights monetization.
• Collaborate with corporates while maintaining a high level of self-control.
• Avoid equity dilution.
Corporates will be driven by the following objectives:
• Accelerate internal innovation cycles and mitigate risks through exchanges between technical experts.
• Create first mover advantages within traditional business models.
• Renew the internal corporate culture to increase innovation awareness.
• Improve social responsibility.
• Develop potential acquisition targets.
• Creation of new intellectual property rights and licensing opportunities.
Research institutions will be driven by the following objectives:
• Improve research programs through co-creation.
• Increase focus on intellectual property origination and monetization through e.g. licensing of various intellectual property rights.
• Improve and support entrepreneurship.
• Increase funding of research programs through private sponsorships.
• Improve the exchange of know-how and talent with corporates.
Governmental authorities will be driven by the following objectives:
• Attract and incentivize foreign and local Investors in various sectors of the economy.
• Sustain job creation by promoting entrepreneurship.
• Support marketability of innovative solutions.
• Support the enhancement of quality of life of all citizens.
• Promote use for different purposes (e.g. promotion of a country, region, sector, etc.).
Multilateral Co-creation Best Practices
Collaborative multilateral development projects are initiated by partners who are willing to pool capital (financial, social, human, organizational and physical), and technical, managerial and intellectual property resources, with the objective to both achieve a commonly defined goal and expand their own business capabilities in a way that would not be possible when acting alone.
From this perspective it is crucial for each party to take into account the following:
• The individual goals resulting from the collaboration as well as the common goals partners pursue. In this respect, potential partners should – prior to entering into collaboration negotiations – tackle any discrepancies and/or conflicts between their respective individual goals and the commonly pursued goal of the collaboration (i.e. “elimination of the hidden agendas”).
• The contribution needs of each party, which can be expressed in cash, in kind or any other type of asset (e.g. intellectual property, infrastructure, people, etc.).
The strength of a properly functioning multilateral collaborative co-creation arrangement depends on the scope of such arrangement. The broader the scope, the more potential disputes may arise between collaborating partners due to conflicting interests. Furthermore, a too broadly defined scope results in a loss of focus and inevitably results in a decrease of qualitative outcome of the multilateral corporate partnering.
For example, a collaborative multilateral co-creation focusing on developing innovative solutions with an aim of implementing them in a variety of sectors which deviate from the core sector the collaborating partners belong to and in which the collaborating partners do not have any experience, nor market share, is likely to be difficult to be implemented. Focus on a common, initial sector is important to develop performant innovative solutions, which may later be used or transported to other sectors.
Furthermore, the detailed definition of the scope of the multilateral co-creation will enhance partners’ willingness to contribute specially dedicated resources (including but not limited to intellectual property rights) to the collaboration.
Partners should thus ab initio be clear on:
• Which resources will be contributed to the collaboration?
• What rights will be retained by the contributing partners?
• What rights will be granted to the collaborating partners?
• How the respective contributions of the partners (i.e. in equal proportions or different proportions) are valued?
Simultaneously with the definition of the scope of the multilateral co-creation effort each participating party will be required to conduct an internal due diligence to determine what kind of rights (including but not limited to intellectual property rights) can be contributed to the collaboration.
In addition to general business, financial and legal investigations which are required to be conducted prior to the entering into any collaboration, will be of the essence to determine the scope of a party’s background intellectual property rights (the “Background”) and its ability to grant potential licenses thereon to the benefit of the collaboration. Such assessment will help a party assessing its suitability to support the proposed objectives set forth by the collaboration.
Most of the multilateral co-creation models will require partners to make available their respective personal intellectual property rights (which can take various forms such as trademarks, patents, trade secrets or copyrights), either through a full assignment of such rights or by the grant of a license on their respective background intellectual property rights for the purpose of the collaboration.
Depending on the type of collaboration, the scope and the pursued objectives, partners are likely to be reluctant to proceed with a full assignment of their Background and will rather grant limited licenses to the other partners in order to prevent unauthorized use and profit from the (intellectual property) results of the collaboration.
As a result, the value of the contributed intellectual property rights to the collaboration will depend on the scope of the Background licenses which are granted by the respective partners in the collaboration. A few points to consider when granting such licenses are:
• Scope of the license: the broader the scope of the license on one’s Background, the more valuable the contribution of such party will be to the collaboration.
It is essential to provide that a party’s Background remains the exclusive property of such party, including improvements, and that only for the purpose of the collaboration a license is granted to the other partners on this Background including any improvements.
• Term of the license: in general, the term of the license will coincide with the term of the proposed collaboration. Partners could however make the license dependent on the successful completion of milestones. Finally, Partners should always reflect on the continued need of any license on the other partners’ Background upon exiting the collaboration.
• Territory of the license: the territory of the license should be consistent with the territory in which the multilateral corporate partnering aims to operate. The elected territory will also determine the validity of the grant of licenses (e.g. patents have a territorial (national) scope).
• Exclusivity of the license: in order for the multilateral co-creation to be successful, it might be required to grant exclusive licenses on Background IP for specific fields of use.
This might be required to increase the investment by the partners in the collaboration and creates a competitive advantage for the collaboration towards unlicensed third partners. Moreover, exclusivity ensures that partners may not use the licensed intellectual property rights to compete with or against the collaboration.
Nevertheless, Partners should carefully consider the grant of exclusivity rights in the framework of a multilateral corporate partnering and should specify arrangements in detail in this respect to ensure that a partner is not precluded from exploiting its intellectual property rights outside the multilateral corporate partnering.
As with respect to the term of the granted license, it is not uncommon for exclusivity rights relating to one’s intellectual property rights in a multilateral corporate partnering to be made dependent on the successful fulfillment of predefined development and/or revenue milestones.
The most common problems with defining the “Background” of the involved partners and which require particular attention are:
• A too narrow definition of intellectual property rights to be considered as “Background”.
• The lack of a comprehensive definition of intellectual property rights forming the “Background” which is likely to create uncertainty as to the scope of the licensed intellectual property rights to the collaboration.
This may lead to practical problems, especially in the framework of multilateral co-creation models where “Background” is necessary for the exploitation of developed intellectual property rights pursuant to the collaboration agreement. Absence of any licensing provisions for a partner’s Background may inhibit the commercialization of the “Foreground” (i.e. any and all intellectual property rights developed in the framework of the multilateral corporate partnering), if Partners’ Background is necessary to operate and commercialize the Foreground.
It is therefore recommended for each party to:
• identify its proper Background and establish an inventory of Background to be contributed (either through licensing or property assignment); and
• provide for definitions distinguishing between a party’s Background and the collaboration’s Foreground.
We all know the common quote “If you want to go fast, go alone; if you want to go far, go together”. Having focused the recent years on open innovation ecosystems, it has become clear that multilateral co-creation can deliver rapid and sustainable results for all parties.
Participants should strive for a common challenge with a common purpose to co-create new solutions. Successful open innovation ecosystems require trust, transparency and flexible governance mechanisms.
Adding a neutral ecosystem facilitator, acting as a conductor, to play the best “symphony” together, will foster successful exchanges between all participants.
Multilateral co-creation can stimulate cross industry curiosity and creativity in order to solve complex business and societal challenges!
Béatrice de Mahieu, CEO Co. Station Belgium
Responsibilities of the Partners
When setting up a multilateral co-creation effort, partners will need to define their respective roles in the collaboration, which generally includes (i) the type of contribution made, (ii) the level of contributions, (iii) the projected development plan (exploration, co-creation and commercialization) and corresponding timetable, and (iv) the commercialization strategy that will be applied in case innovative co-created solutions are ready for a commercial roll-out (e.g. continuance of the contractual collaboration or set-up of a special purpose vehicle).
Furthermore, it is essential for the partners to determine how decisions will be taken during each phase of the projected development and how information will be efficiently and periodically shared between partners. Partners mostly opt for the constitution of a steering committee (comparable to the board of directors of a company), composed of a representative of each partner and deciding with a simple majority of votes, except for key decisions for which unanimity may be required between the partners.
The principal goal of multilateral co-creation projects is the creation of protectable intellectual property rights (the “Foreground”). The challenge consists in allocating ownership rights in such Foreground to the collaborating partners.
The default position would be for Foreground to be jointly owned by all partners to the multilateral co-creation without any restrictions as to the use and disposal by each party. Except for industry initiatives where competitors co-create a solution to serve as a platform utility which each party may use without restriction, it is unlikely that unfettered and identical use by all partners to the co-creation agreement will ever be successful, requiring the partners to clearly scope the (mutually exclusive) fields of use allocated to each party.
In a contractual multilateral co-creation effort, partners expressly opt not to institutionalize their collaboration through the establishment of a specially dedicated legal entity both owning all Foreground and commercializing this Foreground. However, partners are recommended and required to agree to contractual governance principles.
In other words, partners will be required to agree on mechanisms to manage the multilateral co-creation project.
Failure to provide for a governance model exposes the partners to fraught and inefficient decision making in respect of the development project. The absence of a governance mechanism providing in majority decision making will require all partners to agree in respect of each decision, failing which, blocking situations are likely to arise rapidly.
The successful design and implementation of a governance model will depend on:
• the capacity and attitude of the partners involved (startup or scaleup vs corporate, non-profit organization acting as catalyst/ facilitator between startup or scaleup and corporation, etc.);
• the needs of the project;
• the pursued individual and collective objectives.
Different approaches exist, but when dealing with multilateral co-creation partners in general opt to appoint a steering committee that is empowered to make all decisions with respect to the development project. Depending on the importance of the decision to be taken and taking into account the number of partners to the arrangement, simple (50 % + 1) or qualified (2/3rd or 3/4th) decision making will be required.
However, it cannot be excluded that for certain important matters, partners will simply not accept for decisions to be taken against their desires, thus requiring unanimity. In such instances the manner in which decisions are prepared and escalation possibilities are provided, will be crucial not to arrive in a deadlock situation which would be detrimental for all partners involved.
Agreement on governance principles should, inter alia, cover agreement on:
• the internal organization and management of the project by the partners;
• the handling of the contributions made by the partners;
• IP management (patent filings, IP licensing, IP enforcement, IP infringements, etc.);
• the settlement of internal disputes.
The main purpose for entering into a multilateral co-creation agreement is the commercialization of the co-created Foreground and the realization of a return on investment for the partners to the collaboration.
Often the question arises whether and how commercialization agreements can be made at a later stage in the development project, if partners are unable to predict all potential commercialization possibilities for the contemplated solutions. Often partners strive to exhaustively determine the commercialization plan at the outset of partners’ co-creation efforts, but such plans need to be sufficiently flexible and adjustable to cater for unexpected development evolutions.
Absent any specific commercialization plan for the co-created Foreground, both collectively in respect of all partners and individually in respect of each party, this Foreground will be jointly owned by any party involved with unrestricted rights to use and to commercialize.
As a matter of prudence, partners should at least provide explicitly in the multilateral co-creation agreement that best efforts will be undertaken to implement a commercialization strategy and, in the absence, thereof each party involved in the collaboration should refrain from any commercialization of Foreground without the express consent of the other involved partners.
Getting partners to agree on indemnity and liability arrangements in respect of co-created Foreground is also likely to be a difficult exercise.
Appropriate indemnification and capped liability arrangements should also be made in respect of the Background that is made available, both for development and exploitation purposes.
A workable approach can consist of the following elements:
• Co-creation obligations: each partner is liable to the other partners for a (material) breach of the co-creation agreement up to a certain amount to be agreed upon.
• Background use and merchantability: no warranty or representation of any kind is made, given or implied as to the sufficiency or fitness for any purpose of the Background, with each partner being entirely and solely responsible for its use of such Background.
• Background third-party IP infringement: each partner remains liable to the other partners in case the exercise of the access rights on Background granted to such partner infringes on the proprietary rights of a third party.
• Foreground use and merchantability: no warranty or representation of any kind is made, given or implied as to the sufficiency or fitness for any purpose of the Foreground, with each partner being entirely and solely responsible for its use of such Foreground.
• Foreground third-party IP infringement: each partner is solely liable for any claims that the commercialization of the Foreground infringes on the proprietary rights of a third party, except to the extent that such third-party claim in respect of the Foreground would originate from the use of infringing Background of the other partner in the development of the Foreground.
• Indirect damages: no partner is liable to the other partners for any indirect or consequential loss or similar damage such as, but not limited to, loss of profit, loss of revenue or loss of contracts, except in the event such indirect damages are caused by fraud or a willful act.
The partners should also put great care in thinking through the consequences of the termination of the co-creation efforts, upon or prior to the expiration of the relevant agreement.
A workable approach, which takes into account the reason for termination of the co-creation, can consist of the following elements:
• Completion of the co-creation agreement: Background, own Foreground and jointly owned Foreground can continue to be used as described above.
• Voluntary termination by a partner prior to expiration without consent: in the event a partner terminates the agreement voluntarily without the other partners’ explicit consent, it would lose access rights to the Foreground co-created up to the date of expiration. Continued access to its Background would be required as if it remained a party for the whole duration of the project.
• Voluntary termination by a partner prior to expiration with consent: in the event a partner terminates the agreement voluntarily with the other partners’ explicit consent, it would retain access rights to the Foreground co-created up to the date of expiration. Continued access to its Background would be required as if it remained a party for the whole duration of the project.
• Termination for default prior to expiration: any access rights to the Background of the non-defaulting partner and jointly owned Foreground will be forfeited by the defaulting partner.
It should also be considered whether ongoing support, maintenance or service levels are required upon completion of the co-creation, or the termination prior to expiration.