Denzil Doyle

A new approach to technology licensing assessment

By Denzil Doyle

The economic impact of technology licensing can be difficult to assess, leading to current methods which often undervalue the value that can be derived and benefits to the economy at large. Many publicly funded research laboratories whose mandates include the transfer of technology into the private sector use licensing fees to measure their success in such transfers. However, unless these fees are somehow related to the wealth that is eventually created by the technology, they fall short as measures of economic contribution to the country.

In order to make that linkage, it is necessary to identify the end use that the licensees will make of the technology. More specifically, it must be known if the technology commercialization results in the development of products, services, or processes, or a combination of all three.

The simplest quantification process is one in which the licensee agrees to pay the research laboratory (the licensor) a license fee that is tied to the sales of a product that is produced by the licensee — say 2.5% of sales. (A discussion of rates follows below.) This means that if the research laboratory receives a certain amount of money from the licensee during a certain period of time — say $100,000 in one year — then the licensee sold $4 million worth of product during that same period.

factoring in employment and taxes

It is possible to arrive at the economic benefits that are of most concern to policy makers — namely employment and taxes — by making certain assumptions about the sales per employee and taxes paid by the licensee as a result of this incremental $4 million of sales. For example, if the licensee is a company with sales of $200,000 per employee (which is typical in the high technology industry), the $4 million translates into 20 person-years of employment.

As for taxes, Doyletech has traditionally used a figure of 20% of sales for the taxes generated by such a technology-based firm as described here. This refers to direct taxes that the firm pays, and includes corporate taxes and payroll taxes, as well as HST on spending. However, in other sectors (without R&D credits, etc.), or for larger technology firms with stronger net incomes, taxes may well be much higher. A figure of 25% would still be conservative, based on recent increases in payroll and other taxes (e.g. HST). Moreover, if the indirect and induced economic effects are taken into account, the tax take rises further.

Doyletech's EconWin Economic Impact Model shows that the eventual total tax take would actually be closer to 30%. This reflects the higher HST and corporate taxes linked to spending in the surrounding general economy.

By using the figure of 25%, this $4 million of sales would generate $1 million in taxes — certainly much more than the $100,000 licensing fee mentioned above. While it can be argued that there are other inputs to the sales generation process than technology, there are many situations in which technology plays a vital role.

Before going on to a similar analysis for services and processes (the other two legs of the wealth creation stool) it is helpful to anticipate what a research laboratory can expect from a licensee in the way of a fee. On the high end, 10% may be used as a starting point, particularly if the licensee is a high technology company, because it typically spends 10% of sales on R&D. However, it should be understood that only about half of this goes toward actual product development and the other half goes toward more fundamental research. Of the 5% that goes toward product development, the licensee will assume that additional funding is required to tailor the external technology to meet the specific application and a fee in the 2.5% range is what should be anticipated. It is a figure that is widely encountered by Doyletech in its technology commercialization work. Anything below this figure will not be worth the administration work required of the licensor, and anything above this figure will cause the licensee to pursue internal technology alternatives.

If the technology being transferred is aimed at the delivery of a service as opposed to a product, the same factors are involved but a higher fee is usually arrived at because the licensee is usually not so well equipped to develop and apply in-house solutions. A figure of 5% is typical.

In the case of a process, the figure is usually higher still because the licensee is often in an even weaker position to come up with alternatives. Also, the application usually has more to do with increasing licensee efficiency (and therefore profitability) in its existing business than with expanding it. A figure of 10% is typical.

By including the complete range of impacts stemming from technology licensing, research organizations will gain a more accurate picture of the impact their work has outside the confines of their laboratories and demonstrate their value as publicly funded entities.

Denzil Doyle is chairman of Doyletech Corp, an Ottawa-based consulting firm providing services to entrepreneurs, investors, policy makers and economic development authorities. From 1963 to 1981, he directed the affairs of Digital Equipment Corp's Canadian operations. From 1995 to 2005, Doyle served as chairman of Capital Alliance Ventures Inc, an Ottawa-based venture capital firm specializing in technology investments.