Managing the Technology Evaluation Process 1
Managing the Technology Evaluation Process
Yiche Grace Chen, Department of Business Administration, Yuan-Ze University,
Taoyuan, Taiwan, R.O.C.
Yan-Ru Li, Graduate School of Management, Yuan-Ze University, Taoyuan, Taiwan,
R.O.C.
Abstract: Technology evaluation is a very important task that has provided the core
information of high-tech investments and R&D decision-makings, of which
technology valuation is one of these important procedures. Unfortunately, many
people today think of these technology valuation methods as an art for managers and
more so for their decision processes. This paper is designed to help bridge the gap by
exploring both the content and context of technology valuation. This paper makes
technology valuation easily understandable by developing a technology evaluation
framework, a hybrid valuation formula, and a strategic value space. These tools are
straightforwardly developed into software so as to help executives improve their
decision quality. Our results make clear managers’ roles and responsibilities in
designing such a process underlying the various valuation methods of different
contexts and different strategic options.
Managing the Technology Evaluation Process 2
Introduction - Toward technology valuation management
Technology valuation is viewed as an important mechanism for research and
development which helps many critical decisions making. The bestselling
“Rembrandts in the Attic” from Rivette & Kline (1999) provides profuse cases such
as Intel, Microsoft, Lucent, Xerox, IBM, VIA, etc. to reveal the ambitions of
intellectual property being an important value driver in M&A, strategic alliances, and
technology transfer. Nowadays, there is a greater emphasis on intangible assets. The
economy relies on intangible assets that can be divided into such areas as: 1.
technology-related (e.g., engineering drawings); 2. customer-related (e.g., customer
lists); 3. contract-related (e.g., favorable supplier contracts); 4. data processing-related
(e.g., computer software); 5. human capital-related (e.g., a trained and assembled
workforce); 6. marketing-related (e.g., trademarks and trade names); 7.
location-related (e.g., leasehold interests); 8. goodwill-related (e.g., going concern
value) (Reilly, 1996). However, current financial statements provide very little
information about these assets. Even worse, much of this information that is provided
is partial, inconsistent, and confusing, leading to significant costs to companies, to
investors, and to society as a whole (Lev, 2003) .
Among various kinds of valuation tools which are applied in figuring technological
values, a basic common question is how to present the technological values while
applying different strategies. The terms used in the literature describing technology
valuation are rather confusing and raise some ambiguities such as valuation,
evaluation, assessment, pricing, and price. Therefore, we clarify these terms and
further set up a new technology evaluation framework which contains technology
assessment, technology valuation, technology pricing, and technology prices. We
understand the process of selecting a valuation tool which is not only an art, but also
needs more reason at the beginning so that we are able to organize several valuation
ideas into a hybrid valuation formula. We suggest that managers should clearly
comprehend the strategic value space, which enhances further the entire consideration.
There is no perfect golden guide rule in technology valuation, but as long as current
research helps solve some problems in explaining and creating value, then it is
contributable.
Valuation, Pricing, and Price
Conventional financial assessors usually confuse us with valuation and price such as
option pricing being a value number or a pricing number. The duty of technology
valuation is to determine the maximum economic gains through using information
effectively and with a series of more reasonable methods. In other words, it enables a
buyer or seller to benefit by fully utilizing information. In monopoly and oligopoly
Managing the Technology Evaluation Process 3
markets, a technological price is set up by bargaining power; that is, the advantageous
position helps a buyer or seller to get more rent. The other condition is that buyers or
sellers will raise an different acceptable price area after the initial screening process; if
this is not the case, then buyers or sellers will choose to leave (Razgaitis, 2003). The
valuation process provides the reasonable value space and pricing process provides
the numeral range of final negotiation. Therefore, we can get a clear responsibility of
valuation as providing a faithful value interval while fully utilizing information for
decision makers.
Developing a Technology Evaluation Framework
Technology valuation is a confusing vocabulary in different parts of the literature. We
develop a new schema for clarifying the content and scope, and we propose the
operational definitions as follows:
1.
2.
3.
4.
Technology assessment: Jural investigation of technical data, the screening and
audited process of technical content.
Technology valuation: The technical valuation is appraised by buyers or sellers
for its true worth.
Technology pricing: The technical buyers or sellers make an acceptable price
range before negotiation, and the price which buyers receive will not exceed the
economic benefit; the cost which sellers make will not lower the licensing cost.
Technology price: The amount the technical buyers or sellers accept after
negotiation is usually a license fee and royalties, etc.
Accountants and lawyers are the pioneers in the investment of practice. They focus on
some topics of technical rights, and financial and tax plans, and then provide a report
to the insiders of a corporation. The R&D department must play the role of screening
in advance and then join with the sales and marketing department which may propose
a proper technology commercializing schedule and market report. The financial
department then provides the debit and credit plan.
In the technology-pricing phase, these situations that the enterprise faces can
determine a technology price’s range after the technology–valuation stage. The
technology pricing can provide a more informative basement for negotiated
preparedness in the technology-price stage.
Managing the Technology Evaluation Process 4
Technology
Assessment
Technology
Valuation
Technology
Pricing
Technology
Price
Technology Evaluation Framework
Participants
Consulting Firm
-Consultants
-Attorneys
-Accountants
Enterprise
-Management Div.
-R&D Div.
-Marketing Div.
-Sales Div.
-Financial Div.
Figure 1. Technology evaluation framework
Hybrid valuation formula
Risk and uncertainty in the technology valuation
Technology valuation exists under conditions of risk and uncertainty. The two terms
are not the same at least in our regards. Uncertainty refers to the variability of
decision, and risk refers to the variability of outcomes. Therefore, uncertainty, which
can be partially reduced in a detailed plan, is our unclear strategy, and risk, which can
be partially limited by history or experience, is the unknown return. We can solve
both the uncertainty and risk by different techniques such as a simulation, a decision
tree, and/or an option. It seems that an option is not the best solution, but is still useful
under the situation for both risk and uncertainty. From the viewpoint of strategy, our
primary interest is not the technicalities of a valuation, but how can we use the
financial tool to show the value. If the situation of an outcome has no risk and the
decision is uncertain, then using an option to express the value is not appropriate
under that situation. Even if this is not so, a person using an option alone must
understand the basic assumption that is "more risk, more valuable".
Managing the Technology Evaluation Process 5
Risk
Lower
Uncertainty
Lower
DCF
Higher
Simulation
Decision
Tree
Option
Higher
Figure 2. Determining your valuation techniques
Reasonable structure of a valuation formula
Before beginning negotiations, an owner should develop a moderately sophisticated
financial model of his/her pricing objectives and financial assumptions for the product
or technology (Abbott, 2003). Technology evaluation does not have a specific method
to fit the various demand, and so there is a considerably amount of crucial work that
obviously explains the reason for selecting financial tools and using many types for
comparisons. Value is an easily confusing word sometimes, and thus we assume that
the value is from a cost perspective: income perspective plus the option perspective.
This definition avoids vagueness as much as possible and is more reasonable in
reality.
Total Value = Cost perspective + Income perspective + Option perspective.
Technology sometimes can reduce the production cost and sometimes can reduce the
time to market. Thus, the consideration of cost is very different, depending upon the
case. The determinant of income of technology is also on a case by case. The three
perspectives are the basic considerations to value a technology.
Table 1. Comparison of three perspectives
Perspective
Cost perspective
Data input
Historical cost
Replacement cost
Income
(profit)
perspective
Historical income
Similar information of
Option perspective
Acquiring cost
Forecasted income
Managing the Technology Evaluation Process 6
(include the cost of the
learning curve)
Cost reduction
Analytical approach
Example
Risk
uncertainty
Bottleneck
and
Low
Underestimate
income
Forecasted income
Risk (the most important
variable)
25% royalty rule
Multiple method
Investment
method
Medium
B-S option pricing
Not easy to get
data
return
High
reliable
Overestimate
As for selecting valuation techniques, it is also important to know the decision logic
of a business. For example, smaller businesses tend to get quicker financial returns after all, they do not have enough funds to take on higher risk usually. Therefore, a
new venture tends to use the viewpoint of an option to bear higher risk. A different
perspective and potential value are shown as in Figure 3.
Higher
Option
perspective
Value
Income
perspective
Cost
perspective
Lower
Lower
Risk
Higher
Figure 3. Different perspectives between risk and value
Expanding the drive of value
The basic ideas of a hybrid valuation model
What we are evaluating is not only the technology itself, but also the scenario choice.
Basically, the value of technology is the summation of self-development, licensing,
outright sell, and a future strategic option. We introduce the brief idea as follows:
V   PV   LV   SV   FV
.
Considering that the rights of manufacturing and sale will vanish after selling out the
Managing the Technology Evaluation Process 7
technology, there only exist herein two basic formulae as follows:
V  SV
V   PV   LV   FV
.
Variable illustration
V: The value of technology
PV: Technology will be utilized and transferred by oneself into products,
manufacturing procedures, or services, and bring about economic value.
LV: Licensing and transferring to others are done so as to bring about cash flow or to
exchange for other valuable assets.
SV: The value is derived from an outright sell.
FV: Tactic value: Although not exploited now, it still has a tactic value or can bring
some utility value in the future.
Most outright sell and licensing of technology belong to a mutually exclusive
situation. One can consider that the value under the situation of an outright sell will
not contain licensing anymore. Regarding the patent, it is a kind of a right for selling
and production, and the sale of a patent means the disappearance of a licensing fee.
SV  Max( S i ) - SC i
.
Variable illustration
SC: The cost of technology outright sell.
If we just consider the technological exploitation by oneself, then the consideration is
the value of the technological portfolio. For instance, silicon-IP can be applied in
many kinds of diverse fields and its technological value also equals the sum of m
kinds of applied value within n types of different fields.
n
PV  
i 1
m
 (P
j 1
ij
 PCij )
Variable illustration
PC: The cost of exploitation by oneself.
Under the situation of technology licensing, the technological value depends upon the
combination of different licensing portfolios. The basic concept is that:
n
LV   ( Li  LCi )
i 1
Variable illustration
LC: The cost of technology licensing
Managing the Technology Evaluation Process 8
Technology still cannot be exploited now, but nonetheless has the tactic value or can
bring some utility value in the future. The basic concept is:
n
V   ( Fi  FCi ) i
i 1
.
Variable illustration
FC: The cost of technology application in the future.
Showing strategic value space
Technology is not judged by its existence alone, nor is its mere existence a sufficient
condition for its successful usage. Technology, by itself, is useless, until and unless it
is used and assessed by its user (Geisler, 1999). The following example is the
silicon-IP that one company owns. If it wants to clearly realize the value of the
silicon-IP, then it can be displayed through the space of a strategic value. Under each
path of strategy, one should clearly assume the frame of reference.
Figure 4. Strategic value space
Cooperation in the evaluation process
From the preceding concepts, the framework of a technology evaluation is divided
into processes of technology-assessment, technology-valuation, technology-pricing,
and technology-price. The sources of value include risk and uncertainty. The main
Managing the Technology Evaluation Process 9
drive of technology worth is derived from the technology strategy. The professional
staffs that join in on the plans must have a great interaction and communication within
the system. Particularly, these staffs must keep watch for some sensitive numbers,
clearly apply and be reminded of the hypothesis and assumption, and usually look out
for situations of the selection and decision of tools.
The development of a multi-user interface
The price is the outcome of negotiation in technology-evaluation, unless the mark of
trade has the rules established by usage, or buyers or sellers reveal information.
Otherwise, it is hard to say that the price is unnecessary for owning adequate
information for a conjecture on the final number. The practical decisions are very hard
to be reasonable, especially within a complex technological environment. Therefore,
the main function of the framework of technology evaluation is to build up a
standardization of operation procedures. Second, one must proceed with a
systematization of deliberation and decision. Third, realizing a dynamic competition
game should possibly happen.
It is important to understand the needs of both sides (buyer and seller) in the
transaction process. Buyers or sellers insidiously reveal more useful information,
especially in an incomplete market transaction. In general, technology can be licensed,
sold, engaged in counters of joint ventures and strategic alliances, and also developed
by oneself. If an enterprise does not have a clear technology strategy and IPR strategy,
then technology will be submerged by inertia and turn into a cost. On the other hand,
if one can flexibly use technology, then IPR will be an asset with creative benefit.
Thus, different business strategies affect the value of technology. In a dynamic game,
sellers can better control the surplus of a consumer.
Managing the Technology Evaluation Process 10
Figure 5. Developing a multi-interface software
Conclusion
Technology evaluation is clearly valuable in the initiating and running of a technology
business. For the evaluation of risk, uncertain technology is a highly-complicated
endeavor, not only compounded by very little information, but also by a lack of
proper decision tools. To achieve this end, we cannot expect one single tool is able to
solve all problems.
The key for reducing risk and uncertainty is not only the method of valuation, but also
the payment in the technology-price stage. All we can do is that, in the process of
valuation, we can really reveal the value and be engaged in the calculation by even a
reasonable structure. It is not only realistic, but also numerical problems can be dealt
with in the technology-valuation stage. The assessment of an early-stage, intangible-
Managing the Technology Evaluation Process 11
based technology is a high-risk endeavor, complicated by the fact that typically there
is very little information on which to base an analysis. The complexity of this
evaluation problem is further compounded by a lack of decision tools specifically
intended for this calculation stage. In this paper we propose the technology evaluation
framework to illustrate and clarify the basic evaluation concepts by four stages
(assessment, valuation, pricing, and price) and show a hybrid valuation formula that
we use. We also improve our uncertainty and risk further by a strategic value space
and valuation technique.
Acknowledgement
This paper presents the result of work conducted on a project sponsored by the
National Science Council, Taiwan. We also thank the support of LearningTech, which
is one of Taiwan's leading software companies that provide a full range of patent
analysis products and suggestions.
Managing the Technology Evaluation Process 12
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