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To License or Not to License?
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Grant Whittle
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Mar 29, 2004 17:16 PST
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To License or Not to License? Many are saying that the days of licensing
pipe rehab is over. With a completely commoditized technology, I probably
agree. However, even with technologies, like CIPP, that can be purchased
from a seemingly infinite number of sources, certain firms offer value
added services that make Licensing attractive and prevent full
commoditization: superior QA/QC support, expert design support, the
economies from nationwide promotional programs,etc. Access to such
services that would require too much overhead to develop in-house enables
contractors to distinguish themselves from the rest of the truly
commoditized masses who are bidding at ever lower margins as more and more
firms enter the business. Frankly, much of the commodity work doesn't make
enough profit to be worth going after anyway...
So, with so many pipe rehab technologies available on a commodity basis
(sliplining, pipebursting, CIPP...), why pay a License fee and have a
restricted territory? This is a valid question. If you want to bid merely
on commoditized work at low margins, then you probably shouldn't partner
with anyone; treat pipe rehab like your backhoe and promote it (or simply
follow the Dodge Reports and don't promote) and bid it the same way.
However, if you want to provide a value-added product/service, then
entering into a License Agreement with a Technology Supplier has its
advantages. If you are provided access to a value-added
product/technology, one way or the other, you will pay for that advantage.
If you receive training, if you receive promotional materials, if you
receive design support (or if you have to develop those resources
in-house), you will pay for it. However, you have a choice on how you pay
for it: 1.) you can either pay a License fee that covers those costs and
thereafter carry the asset of that License on your books as an accounting
advantage, or 2.) you can not pay a License fee and have those costs billed
as expenses or else be built into an inflated product price. Forgetting
about the book value, at the end of the day, the only true measure of the
value of a technology license is the sustained margins achieved utilizing
the technology. Why wear out your equipment and personnel making commodity
construction margins of 5% or less, when you can pay a little more up front
to clear value added margins (20%)? Additionally, why allow yourself to be
lumped into the "me too" commodity market, when you can distinguish
yourself by offering something different with superior technology and
support.
Furthermore, vendors that License their products/technologies generally
take measures to ensure that they remain value-added, so that they don't
commoditize and thereby errode margins. This protects the Licensee's
investment of resources in entering the pipe rehabilitation market.
Frequently, this is done by ensuring that only a limited number of
contractors have access to the product/technology in a given market.
Furthermore, since territories are protected, Licensed Installers are more
willing to share experiences and expertise within the network, knowing that
such information won't decrease their own competitive advantage. With
everyone sharing their "best practices," everyone advances their
productivity and profitability faster than they could ever do on their own.
These are my thoughts... With such widespread and loud voices saying
licensing is over, what am I missing???
regards,
Grant Whittle
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