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International Licensing Agreements: Feast or Famine

Many firms are using licensing as a tool for market entry, and for good reason.

Take an example of database management software, which may be produced by a firm in the United States. This firm may wish to enter, say, the Japanese market but not have the resources to set up offices, hire local staff, market within Japan and provide the after-sales ongoing service needed by the Japanese clients.

By licensing their technology to a local player, and having the local player take care of local market needs, the U.S. firm can concentrate on supporting the Japanese licensee, and upgrading and augmenting product as needed.

In many cases, the licensee will take care of integration of the foreign technology within their organization. And if there are marketing opportunities beyond the original licensee (a best-case scenario), then the licensee will add staffing, marketing to local clients, sales support and service to their duties.

Foreign producers need to know it's common that the licensee (in this case, the Japanese firm) earns more revenue in Japan than the foreign provider. If the licenser wishes to earn more in foreign markets, it will need more control, which translates to more investment: people, time and money.

Licensing isn't free, however. Aside from the costs in finding the right licensee(s), licensers need to add the costs of teaching, supporting and monitoring to keep the relationship prosperous. The licenser may have to help stimulate local demand for their product. And there are often other costs.

In examining licensing deals, the first thing to decide is whether it's indeed better to license or trade (sell) the product. There are pros and cons of each. Trading gets the seller a single client, and thus the vendor has to keep getting new clients, which is expensive. However, trading can give the vendor more control. The vendor isn't necessarily turning over the entire market to the local client.

Licensing offers lower entry and sustenance costs. And if you manage the licensee correctly, you'll have a local partner who will assist in all the areas mentioned above. However, mismanagement of that relationship can kill a market for a foreign vendor. If the licensee doesn't perform, the vendor may never gain market share in the desired country.

In our Japanese example, U.S. firms typically will engage attorneys to write complicated licensing agreements, demanding "minimum performance guarantees" by the Japanese counterparts.

But what if the Japanese perform up to the contract?

Revoking a license can be difficult in Japan, often impossible. "If everyone knows you are working with Mitsubishi," then it will be assumed you are de facto partners. This means other firms won't be eager to work with you, as they see you're already engaged in a relationship. And if the relationship fails, you may be seen as the one who hasn't performed.

Another negotiator's point in licensing is the type of license. Are you offering exclusivity in the market (meaning no one else can have a license)? Is the license time-sensitive, perhaps valid for one or two years? Is this a license to sell your product, a license to manufacture your product or both?

Are there additional conditions to be placed on the license? For example, who will trademark and (if necessary) patent the product or process you're selling? Will there be any conditions on the type of promotion used? Promotion can include distribution channels, type of media used, pricing and service/guarantee offerings.

How many licenses will be offered in each country/region/market/industry? Does a license for China include other Chinese-speaking markets? Is your Japanese health care license for health care in Japan only? What industries constitute health care? What about Japanese clients residing outside of Japan?

The locals in their market will want to know what type of investment the suppliers are making. Will they commit funds, technical resources, press visibility, personnel, localization of product (if necessary), localization of marketing materials (if necessary), legal resources in their home market, approval and regulatory fees? Will certain manufacturing standards (such as ISO 9000, Six Sigma) be adhered to? Will the supplier accompany the licensee on sales and service calls, and for what time period?

How is revenue divided? Who holds the pen? Who gets paid first and when are the accounts paid fully? Is the licenser willing to plow back any funds into the local market?

Perhaps the biggest stumbling block is expectations management. Did the U.S. firm do an adequate job of educating the local firm as to its needs? Did the local firm explain issues such as timelines, sales pipelines, finances, negotiation styles and cultural barriers to its new licenser?

I'm always amazed that most licensing negotiations center on protection issues, such as PI, patents, trademarks and repatriation of funds when almost all of those issues are unenforceable.

A thorough discussion (which may take several weeks) of the expectations serves two purposes: It allows the parties to get to know each other better, and it forestalls the cries of "foul" or "nonperformance" because both parties truly understand what type of deal is being created.