Partner for profit using the gainshare IP fee model

07/01/2001

John K. Kibarian
PDF Solutions Inc.

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What's the smart way to pay for intellectual property (IP) at the top of the semiconductor food chain? One concept is a percentage of profit-impact for the customer — some portion of a measured outcome surpassing normal. This is what we have called "gainsharing."

Is your vendor's reward related to your gain as a customer? Is your vendor ready to be on the hook — financially accountable — for your results? Here is why I think it's time you ask these questions.

Fixed-fee payments can look nice to a customer in the short term because the cost is known and locked in in advance. One disadvantage is that you pay the vendor before seeing the return in revenue that your purchase creates. But most important, by not offering the vendor the chance to share in benefits over the long term, you are removing a natural feedback loop during the product life cycle. This is a lost opportunity for the customer, as I will illustrate below.

In classic royalty arrangements, the customer pays a recurring cost throughout the product life cycle, often from revenue as a percentage or per unit-sale fee. But the payments are usually for something that happened once up front, the value of which may be declining. More important, there is no immediate and direct financial incentive for the vendor to go back in and improve the value derived by the customer. The result again is lost profit opportunity on a current product.

Upside of the model
What about an IP fee model that would dynamically drive higher returns for both parties together? We found the answer in developing our version of the gainshare concept.

For example, IC companies usually have historical data on how fast they ramp new products to volume, what performance levels they bring them in at, and how fast they reduce costs/cm2 of silicon. So when an IC company engages our firm's technologies, methods, and implementation to accelerate a yield ramp, targeting a time-to-volume or cost reduction, they can measure our value by how much ramping with us exceeds their normal curves on such metrics. The upside to us is we get a small slice of that extra value.

The upside to the customer in gainsharing is:

• a vendor that continually looks at how to expand the value experienced throughout the product life cycle. In fact, if the value levels off, the payments go to zero.
• a partner that uses its yield-ramping experience to constantly critique its technology, methods, and implementation to figure out how to make itself more effective.
• a separate R&D organization that is investing its own funding up front on how to widen the increase above the user's baseline.

In sum, the partner is continuously learning, constantly looking at the metrics and gainshare being achieved, identifying the limiters, and deciding what investments to make in its technology to propel time-to-volume, shrinks, and cost reduction — and its gainshare — ahead. This is a partner that has a real incentive to look out for the user's best interest over the long term.

On the hook for results
When customers encounter our gainshare pricing the first time, we have to work through the numbers with them, showing them how to fund such an effort from extra revenue outside their original plan and just how much financial benefit they are likely to gain by paying us a slice of the spread by which they will surpass their normal performance. But once they complete a project based on gainshare, they usually come back for more.

Why aren't more vendors setting up gainshare transactions? When you talk about this around the industry, you find there are currently few vendors really willing to be on the hook for their customers' results. You will hear from many vendors: "There are so many things outside our control. You may not sell your product well. You may do this, or not do that."

But as more customers have a positive experience with gainshare pricing, there will be a demand for more vendors to make it available.

Vendor assessment
If your vendor seems willing to go forward, here is a quick checklist for whether or not it is ready for the gainshare rocket:

• Does the vendor have a comprehensive suite of distinctive technologies that will cause a fundamental increase in your success?
• Has the vendor built a service organization that implements solutions all the way to your outcomes as the customer? If it doesn't have a solution-implementation group that is continuously improving its technology on the cutting edge — as experienced in your results — it will not achieve the learning cycles necessary to make fundamental advances within your product life cycle.
• Does the vendor have the ability and agility to develop the extra components and larger system needed to carry through from its prized technology to your business results?
• Is the vendor truly offering and implementing a complete solution as part of its core competence, or is it dressing up a partial solution that may be nothing more than a tack-on sales tool? (A hammer-maker shouldn't masquerade as a carpenter or general contractor.) If the vendor says to you: "I'm going to help your business results," based on metrics like cost of shippable silicon, time-to-volume, circuit performance, etc., it'd better be on the hook for all the other issues embedded in your gaining actual benefit from its technology.

Traditional software vendors to the IC industry resist meeting the requirements for successful gainshare projects with customers. So much of their revenue depends on software sales that their incentive is to sell more software, whether or not that increases customer profitability. Traditional hardware vendors have similar wiring; their revenue depends on selling more Big Iron rather than on whether or not it improves their customers' profit. And typical consulting companies deposit their recommendations and leave.

Traditional vendors should reconsider their revenue model and make the investments to build the service units and supporting technologies that can create and implement whole solutions directly impacting customer business results. Both they and you would benefit.

John K. Kibarian is president of PDF Solutions Inc., 333 W. San Carlos St., Suite 700, San Jose, CA 95110; ph 408/280-7900, fax 408/280-7915, e-mail [email protected].