Monday 7 April 2014

When a spin-off is the only answer

When a spin-off is the only answer

If your employees have come up with a promising innovation, a separate venture may be the best home for it

Carly Chynoweth Published: 23 March 2014
Monica Beltrametti of Xerox: ‘The tendency is to hang on to ideas’Monica Beltrametti of Xerox: ‘The tendency is to hang on to ideas’
Some companies invest a lot of time and money in innovation in the hope that their staff will come up with profitable ideas. It doesn’t necessarily follow, however, that they should develop those ideas themselves.
Instead of pursuing innovations in-house, it might sometimes be better to spin them off into new businesses, or even let them leave the company entirely, according to Ulrich Hege, a professor of finance at the HEC business school in Paris.
For a start, the established structures and processes of an existing business can limit the opportunities for turning an idea into a genuinely new product or service.
On top of this, a company may find that attempting to develop new ideas is damaging to the business it already has because it distracts employees or steers it from its core purpose.
“Ask yourself whether your company really is the best host for the new idea, or whether it would be better to create another organisation for that product,” said Hege. “If the second is the right answer, do not be afraid. You might make more money and have better value from doing that than if you kept it in the company.”
Spinning out the idea into a separate business offers a number of benefits, he said. It means the new operation will have the flexibility of a genuine start-up, with the room to grow in a way that suits the new product and its market, instead of having to conform with existing corporate formats. It can also minimise the potential for discontent in that the individual or team who came up with the idea will have a financial stake in its development, and at the same time the parent company won’t have to worry about complaints from other staff that the entrepreneurs are getting special treatment.
A third benefit is that “you are incentivising innovation within your company”, said Hege. “It means employees know you will not stand in their way if that is not in the idea’s best interests.” That motivates people and encourages them to share their ideas with the company, instead of leaving to set up on their own. Even if they do not take the idea with them when they go, it is less likely to succeed without their involvement. So giving them entrepreneurial freedom while maintaining a capital stake can be the best option, said Hege.
More big businesses are beginning to see things this way, according to Jason Goodman, chief executive of Albion, a marketing services firm that has supported a number of start-ups born in big companies. “Often, separate businesses are set up if the idea could compete with or disrupt the main business in some way,” he said. “It’s also a recognition of the fact that start-ups need momentum to succeed and that big companies just don’t move fast.”
Companies use a variety of structures in these situations, from wholly owned subsidiary to independent businesses in which they are just one of a number of investors, said Goodman. “Our view is that . . . you need to give [the new operation] responsibility for making its own business decisions with virtually no approval required from the corporate centre.” The parent should have roughly the same level of involvement as a venture capital fund would with the businesses in which it invests, he added.
Over-involvement in the start-up can almost defeat the purpose of setting it up in the first place.
“Parents naturally want to retain some interest in the spin-out, such as minority share ownership, royalties on the transferred intellectual property or opportunities to be a supplier to the new business,” said Rick Eagar, a partner at Arthur D Little, the management consultancy. “These are all reasonable and normal, and perfectly sensible if done carefully. But too much ownership and interference in the spin-out’s operations, heavy initial royalties — choking the spin-out’s cash flow — and tight restrictions on its freedom to choose other suppliers . . . are all good ways to ensure early failure.”
Even without these mistakes, the approach can come with costs. “If a spin-out is created, key expertise usually goes with it and is lost to the parent — hence the difficulty of running a technology consulting service for clients alongside new business creation,” said Eagar.
“[And] some new ideas have the potential to significantly disrupt or cannibalise a company’s core business, [so] companies may wish to keep them under control until the time is right.”
Simon Jones, a business coach and consultant, added: “There is a trade-off of keeping ideas in-house if they need lots of financial and other support. Spinning them off could starve them of the resources needed to accelerate, and then they will have to find their own channels to market . . . which might be readily available in-house.”

Copy the Xerox strategy

Attempting to keep innovation focused on specific business sectors or aligned with corporate strategy does not really work, according to Monica Beltrametti, chief services research officer at Xerox. “You can’t restrict research into specific verticals,” she said. “If research is successful it will be very broad. It is a matter then of looking for applications.”
It is at this point that companies need to decide whether to develop ideas themselves. Xerox patents all its inventions and then assesses whether they fit into one of its core business areas. Those that do not are licensed to other companies. “We licensed a number of patents to Apple and Google,” said Beltrametti.
Others are licensed to employees who leave to develop the technology through standalone companies. “We encourage it because it means they have a tight relationship with Xerox. They might license some [more] of Xerox’s technology, or we could license some of theirs.”
She advised companies to develop formal guidelines. “The natural tendency is to hang on to ideas . . . so there has to be a strategy.”

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