Four ways to stop knowledge leaking in R&D partnerships
02 August 2018
By Jeff Reuer
In industries where it is a race to the next innovation, partnerships in one form or another are highly attractive.
But in these industries, such as biotechnology, pharmaceutical or technology, forming collaborations is a risky business. Knowledge can easily leak and not just to the partner firm.
That’s why many firms choose not to enter into partnerships or instead seek companies who are not direct rivals, who sit outside their industry, but have expertise and knowledge that can transfer, such as Microsoft and Toyota working together on cutting energy consumption.
But even when this is done, knowledge can still leak to your rivals, especially when you look at the location of your partner and the cluster of firms around it.
Most companies sit in clusters, surrounded by firms in the same industry, direct rivals even, such as banking with clusters in London and New York, or technology with its huge and famous cluster in Silicon Valley or around Cambridge University.
And policymakers, indeed economists, often see clusters as a good thing, helping the flow of knowledge in the industry. Clusters are sought after as, according to ‘economies of agglomeration’, more knowledge spills over the more firms are located together.
Indeed, the theory and supporting research suggests partnering with a firm in one of these clusters can help you benefit from that pool of knowledge. But that also brings competitive implications for your business, something firms should understand before entering a partnership.
Partnering with a firm in one of these clusters brings the risk of your secrets spreading to another rival, perhaps your biggest - just several doors away.
After all people talk, especially at conferences, network gatherings, and social functions. These interactions are impossible to control for, and even worse, in the future your partner could join up with a rival because they are nearby or be acquired by one, with studies showing that geographic location increases the likelihood of both.
Also the risk of knowledge spilling over to nearby rivals increases as the partner is surrounded by more and stronger rivals of your firm.
So when partnering with a firm in a geographic location with a high density of firms from the same industry – ie a cluster – then that is an inherent risk. Information about your company’s strategy and future direction, benchmarking data, and other vital statistics might become known and even key employees might be lured away once contractual details emerge.
Such ‘indirect’ knowledge leakages can also occur through venture capitalists, research has found. VC’s want all their start-ups to succeed so sharing knowledge with them is an obvious ploy, but that may include a direct rival.
Studies have also shown this can occur through board members as well, a partner’s board member may have involvement with a rival directly or through their network.
The chain of connections to rivals should be something that is considered before entering a collaboration. These risks may persuade your firm that a collaboration is not the right route, maybe an acquisition is the best option to not only bring that knowledge in-house, but move it from the cluster to your headquarters in a different location.
But if collaboration or a joint venture is the route you are taking, how do you stop valuable knowledge leaking? We looked at 639 R&D alliances between 2007 and 2013 and formed by 114 US pharmaceutical firms and 481 US biotechnology ventures.
The US biotech industry is renowned for the concentration of similar firms in one location. Typically it involves a large pharma company joining up with a smaller biotech firm, who are not focused on downstream activities like manufacturing, marketing or selling the final product in the market.
But choosing that smaller biotech firm has real risks attached to it when competing against another producer of a drug for the same disease in the same large US market, because they often sit in clusters.
We found there were four methods used to stop knowledge leaking:
1 An equity alliance
This is where the firm will invest a stake in the partnership. It can be done in several ways, through a minority investment in the partner or the formation of a joint venture.
Out of the 639 partnerships we studied, 44 were equity alliances. The investment gives the firm a seat on the board to monitor and control the collaboration.
Being on the board might also give the firm voting rights and allows better monitoring of the partnership, so any unintended leakage of knowledge can be prevented.
The equity position could also give the firm preferred status if its partner was put up for sale, or the ability to block any acquisition by rivals or future alliances with rivals. More broadly, the shared financial stakes also help the firm to align incentives between each company.
2 Limiting the scope
You can tighten the number of activities and interactions between the two firms through a rigorous contractual agreement.
Some alliances not only work together on R&D, but then manufacturing and marketing of the project. There were 96 of these in our study and research suggests integrating these departments into the innovation process increases the quality of the new product and reduces the time it takes to get it to market.
But extending the scope to other departments also broadens the risk of knowledge leaking out, more information is shared between the two companies with more people involved and with operational routines also laid bare. Thus 595 alliances kept the scope to just R&D.
The more departments and people involved also makes writing a contract covering all eventualities even more difficult, with some rights and obligations bound to be missed in the complexity. This also means trying to monitor and keep tabs on what can and can’t be shared becomes more costly.
So, if you are not going to use an equity alliance it is best that the project’s scope is kept narrow, with less departments and people involved to reduce the risk of vital company secrets seeping out.
3 Reduce task interdependence
In an R&D alliance the more the project depends on knowledge being exchanged between the two firms the more risk there is of some parts of that knowledge ending up in the wrong hands, as increased interdependence requires closer working relationships.
But this risk can be reduced by working sequentially, so each firm works on the next stage of development independently.
We found 295 firm alliances did this, while 344 worked reciprocally, where the project is handed back and forth between the partners to work on – this increases the risk of knowledge leaking.
The work can also be pooled into different units, so instead of working on each task of the project together, each firm works separately on different aspects, so knowledge doesn’t have to be shared back and forth.
4 Steering Committees
If you are not using an equity alliance then you will need to draw up a contract setting out governance mechanisms, establishing accountability for different parts of the project, decision-making processes and outlining how to resolve disputes.
But another method is to set up a steering committee, with equal numbers of representatives from each partnering company on it. The committee is then given the authority to oversee the partnered activities.
Committees will also take up any disputes, which avoids the need for costly litigation or arbitration when disagreements occur in contractual arrangements. A steering committee can defuse these issues before resorting to expensive lawyers, which often ruptures the alliance indefinitely.
If there is a split over an issue, each partner can have the casting vote on different aspects of the partnership.
Committees are very effective at reducing information barriers, but they are also used to regulate the flow of knowledge.
We have found when the two firms are working in the same technological area steering committees are often used as the formal channel through which documents, blueprints, test data and any other commercially sensitive information flows through.
Instead of informal meetings being the channel where there is little oversight, a committee sets the ground rules of how information and knowledge is exchanged, giving both sides more control.
Partnerships are a great way to accelerate innovation and develop new ideas, but without adopting one of these methods they can also jeopardise its competitive advantage through unintended transfers of knowledge, particularly to competitors.
Jeff Reuer is Professor of Strategy at Warwick Business School and the Guggenheim Endowed Chair and Professor of Strategy and Entrepreneurship at the University of Colorado.
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