By Dale D. Buss
IP Law & Business/September 2007

Reprints & Permissions

To get an idea of what its "open innovation" model has meant to The Procter & Gamble Company, pretend you are doing your weekly shopping at the local supermarket-but you can't buy the products that have emerged from a new P&G business process called Connect + Develop.

Cross off your list Swiffer dusters and Mr. Clean Magic Eraser and mops. Same for Bounce, Downy Wrinkle Releaser, and Dryel in the laundry section. Over in health and beauty aids, you'll have to do without a Crest SpinBrush and Olay Regenerist lotion. These and dozens of other products occupy vast swaths of retailers' real estate today solely because seven years ago P&G switched to new paradigm for finding, licensing and developing innovations from far outside its own famed R&D labs.

Connect + Develop has made P&G an acknowledged global leader in external development. "With this process, they're finding ways to succeed where their competitors aren't," says Matthew McCormick, a portfolio manager for Bahl & Gaynor Investment Counsel, Inc. in Cincinnati, a large P&G stockholder. "They can outthink their competitors."

Innovation at P&G now actually travels on a two-way street. Under the Connect + Develop umbrella, technology invented inside P&G is also going outside the company for more fruitful development elsewhere. But it's the inward movement of technology and product ideas that has helped the 170-year-old Cincinnati-based corporate giant, with annual sales last year of $70 billion, to generate several billion dollars a year in organic sales growth.

It's difficult to overstate the impact that P&G's new openness has had on the company since chief executive A.G. Lafley mandated the revolutionary approach in 2000. More than 40 percent of P&G's new products launched last year have key elements that originated from outside P&G, up from about 15 percent in 2000. Connect + Develop has developed into a voracious internal client for P&G's legal department, which has created a dedicated team of transactional IP lawyers to handle the work involved with creating and maintaining relationships with the company's new partners. And big companies in other industries are rushing to copy the Connect + Develop philosophy. Delphi Corporation, for instance, is drawing heavily on lessons from P&G as it veers away from its historical role as a captive supplier to General Motors Corporation.

Before Connect + Develop, P&G's tightly closed business model led jokesters to insist that P&G invented the classic rejection "not invented here" as a way to resist change. Yet at the turn of this century, the old way just wasn't working anymore. Products at the world's largest consumer brands company took advantage of only 10 percent of its patents, and its R&D expenses as a percent of sales topped those of its rivals.

Its innovation success rate-the rate at which new products flourished after they were introduced to the market- had stagnated at about 35 percent. These problems contributed to P&G's other major woes, which included higher costs, stagnating volumes, and the loss of the company's proud number one market-share positions by Crest toothpaste (to Colgate) and by Pampers disposable diapers (to Kimberly-Clark Corp.'s Huggies).

Lafley took over the top job in the summer of 2000, after P&G's share price plummeted to $52 from $118 earlier that spring. The wake-up call from the stock market gave the new CEO just the rationale he needed to intiate a major cultural shift. Lafley soon set the goal that 50 percent of P&G's new products would come from outside the company's walls, borrowing from an approach that already had been paying dividends for IBM and Eli Lilly.

Thinking afresh, P&G executives quickly estimated that, for every P&G researcher, there were about 200 scientists or engineers elsewhere in the world who were just as good, a total of perhaps 1.5 million people. They recognized that important innovation increasingly springs from small and midsize companies and universities. They concluded that, by identifying promising ideas from outside and applying P&G's vaunted R&D, manufacturing, marketing, and purchasing capabilities, they could churn out better and cheaper products, faster.

Requiring some way to narrow its outreach, P&G decided that it would consider only ideas that already were in the form of working products, prototypes, or technologies. It set up a network of 75 "technology entrepreneurs" around the world, all P&G employees and local to their markets. These scouts started scouring government and private labs, suppliers, retailers, competitors, and venture capital firms for ideas-not just Googling for leads but actually visiting store shelves and technology fairs around the globe.

P&G also created a secure IT platform that would allow it to share technology briefs with the 50,000 R&D people at its top 15 suppliers. And it began to ramp up technology transfer within the company. P&G's Iams and Eukanuba pet food brands, for example, are using technology for controlling tartar that originally was developed by Crest.

Lafley's pioneers created another helpful screen: P&G would focus its surveillance on products addressing needs that its consumer research had identified as most pressing, on products "adjacent" to its existing products, and on specific technologies it wanted to strengthen.

Connect + Develop just keeps filling P&G's voracious maw with new ideas. For example, wanting to build on the company's prowess in cleaning supplies, P&G scouts found the idea for the Swiffer duster in Japanese stores. The duster's fluffy fibers trap and lock dust better than a rag, and come on a plastic handle. Because the fluffy duster is disposable when dirty and must be repurchased, it creates a profitable razor blade business model. P&G expanded the idea to mops and sweepers. Paul O'Connor, Swiffer brand manager in North America, exults that Connect + Develop let P&G "create an entire new category." Swiffer sales have reached $700 million globally, and the brand has become something of an icon for housekeeping virtue. (P&G VP of external business development Jeff Weedman is not the first to grace a magazine cover holding a Swiffer. Jessica Simpson already posed with one on the cover of Rolling Stone.)

Today one of P&G's top ten consumer needs is to "reduce wrinkles, improve skin texture and tone." This need also is "adjacent" because skin care products have been a high-growth area for P&G since its acquisition of Olay a decade ago. So when Syneron Medical Ltd., a company based in Yokneam Illit, Israel, approached P&G two years ago with an idea for a small appliance that would rejuvenate skin, the company was very receptive.

Several years ago, Michael Kreindel, the Russian-born physicist who is Syneron's chief scientist, invented a way to improve laser skin treatments. Publicly held Syneron has done well for years selling to plastic surgeons and other doctors $100,000 machines that harness radio and light waves. But now the company had developed a prototype for a similar device designed for home use that would be priced for the mass market, akin to a blow dryer or food processor. The company started out talking with several consumer products companies about its proposed Elos brand of devices, including companies that produced beauty products, such as Johnson & Johnson and L'OrŽal, and makers of small durable goods such as electric shavers.

"It became clear to us after a while that [P&G] was our preferred partner," said Fabian Tenenbaum, Syneron's CFO. "Their expertise in marketing and understanding the consumer for an aesthetic product was absolutely remarkable, and we were impressed by their technical and clinical capabilities." Tenenbaum was also impressed by P&G's legal team, at first by their absence. "Lawyers weren't introduced-except for the nondisclosure agreements-for a great majority of this process. They were only brought in close to a week before the deal was signed." In general, says P&G's Weedman, "we don't talk deal structure until fairly late in the game. The key is to create a vision of what could be possible if both companies figured out how to work together."

But once P&G lawyers arrived on the scene, recalls Tenenbaum, "they were extremely fast and accurate, because they were all P&G in-house people and were familiar with the process." In fact, legal performance is a competitive advantage for P&G. Until the deal was sealed, Syneron was running parallel negotiations with another large, multinational company for the same technology. "We'd discuss something, and a week later we'd only have [in their lawyers' draft] 30 percent of what we'd discussed a week ago. It created a lot of negative sentiment in our negotiating group," recalls Tenenbaum. The legal department tries to eliminate habitual barriers to trust that are unnecessary. The Elos appliance is now locked into final development work at P&G.

It may seem paradoxical that P&G's new partners perceive a relative lack of lawyerly intrusion, given that Connect + Develop is probably the P&G legal department's biggest client, according to Weedman. But those two realities stem quite logically from another pair of facts: Connect + Develop uses only P&G's own lawyers, and P&G's legal staff thoroughly understands the importance of the external-development mission.

"Rather than straight [patent] preparation, prosecution, and application, we've shifted a lot of our work around to take care of, and do more of, these transactional types of work with Connect + Develop," says Steven Miller, P&G's vice president and general counsel for IP. Miller recently created a group of five IP lawyers who are completely dedicated to transactional work with new partners. At any given time, dozens of members of Miller's staff of 300 IP lawyers are also doing Connect + Develop work.

In making novel licensing arrangements work, Miller explains, P&G lawyers must overcome traditional propensities. "In old deals, we'd structure it so that if we invented something, we owned it," he says, and the same was true on the other side of the table. Today P&G or another company may have invented something, but it may not own it going forward because there is more of a give-and-take about how a collaboration will be structured.

An example of this flexibility is how Mr. Clean Magic Eraser, now widely advertised on cable TV, got to market. LEC, Inc., a Tokyo-based consumer products company, was selling a cleaning sponge in Japan called Cleenpro, made from foam created by BASF in Germany, when P&G saw the product in 2001. Market research confirmed the potential for P&G in the United States, and P&G negotiated the licence for the technology from BASF. By 2003, the foam was packaged and launched in America as Mr. Clean Magic Eraser.

But the cooperation didn't stop there. BASF and P&G researchers collaborated in shared labs to improve the foam's cleaning properties, durability, and versatility. In 2004 the partnership launched their first cocreated product, the Magic Eraser Duo, in the United States. In that product the original foam, which disappears as it is used, is partnered with a more durable side to wipe up spills.

Flexibility is especially important when it comes to dealing with individual inventors. "These people are hard to find, the quality [of their inventions] is highly variable, and they can be extremely difficult to manage," says Vandy Van Wagener, a former P&G vice president and brand manager who helped found Evergreen Innovation Partners in Evergreen, Colorado, two years ago specifically to help make the connection between individual inventors and big consumer goods companies. Evergreen primes inventions for a look-see by big companies and, in the event of a sale, collects 65 percent of the licensing revenue. (That whopping slice illustrates the feeble leverage of individual inventors.)

Evergreen has made 2,000 submissions to P&G and others and now has 13 "under active investment, with the first four at the stage of corporate discussion right now," Van Wagener says-one of them, so far, with P&G. With P&G, he says, "we can have a discussion without drowning ourselves in process."

Connect + Develop also brings this ready-to-do-business attitude to marketing P&G's own innovations. Perhaps the biggest stretch for P&G in "licensing out" has been the joint venture that it created so that The Clorox Company-a direct competitor in many product categories-can use P&G technology in its new Glad Press'n Seal storage bags and Glad ForceFlex trash bags. (P&G discovered technology for helping plastic wrap stick to itself and stretch without tearing in its diaper business.) The Connect + Develop philosophy took P&G to that threshold, but the details presented some challenges. "We had to make sure that if P&G put in some IP to collaborate with Clorox in one space, it didn't flow to the balance of Clorox, where we compete in products such as hard-surface cleaners and mops," Weedman explains.

The legal structure "traditionally would have been just a straight royalty deal," says IP chief Miller. "But we were able to structure it so that P&G actually gets some ownership in a joint venture, rather than just an income stream from royalties." A joint venture-P&G started with 10 percent ownership in 2002 and exercised its option to buy an additional 10 percent in 2005-is more likely to stimulate new innovations, P&G figured.

The externalization of P&G-developed products, procedures, and technologies intensified much more quickly than the inbound side of Connect + Develop. For the first several years, Weedman said, about 95 percent of his department's activity was optimizing outside use of P&G's R&D work. But gradually the balance has shifted so that more than 60 percent of the deals are "inbound."

The ways that Connect + Develop has changed-and changed P&G-leave Weedman concluding that the company's new external-development philosophy will bring many benefits that aren't even glimpsed now. "Based on the number of phone calls I get from people wanting to benchmark us," Weedman says, "we aren't unique anymore. But we haven't even scratched the potential."