Chapter 10
Knowledge Factories – Buying Knowledge from Universities

Universities as Knowledge Brokers

The teaching of students is the primary objective of universities and, even allowing that their students represent the bulk of the future intellectual capital of the nation, they are by definition only partly trained and inexperienced. A university may not at first sight appear to be the best place in which to undertake research or other knowledge-procurement activity. Yet universities are widely seen as being not just a creator of knowledge and trainer of young minds, but increasingly as a major agent of economic growth. The Economist newspaper, in a major survey on universities, adopted the phrase 'the knowledge factory' to describe the way in which governments and industry increasingly perceive these institutions as:

For the purposes of this chapter, we refer to universities and other institutes of higher education simply as 'universities'. From the point of view of the knowledge-buying client organization there are a number of different types of potential knowledge-contractor within the tertiary education system and they are not all universities. However, in practice the bulk of sponsored research/knowledge creation work performed in institutes of higher education is performed by universities. In most of the developed countries a large share of research and development activity, typically 15%, is performed in universities. The real significance of the universities' contribution is greater, however, since they conduct the bulk of basic research. The majority of university research is funded by the government and the public sector. The general belief is that without the State's involvement in basic research, industry would not make up the shortfall because companies cannot find a way of securing the benefits of such research exclusively for themselves. Governments also accept the 'received wisdom' that basic research contributes directly to economic growth.

There are however critics of the flow of research money into universities. Upholders of the academic tradition of universities argue that external research funding undermines the independence of universities, increases the dominance of research over teaching, promotes some disciplines unfairly at the expense of others and represents a policy by the State biased towards the creation of intellectual property. The consequences of this to scholarship, they argue, may be as damaging as State-driven industrial policies have so often been to economic development. Governments for their part predominantly see basic science as a 'public good' and have, over the past two decades, sought to spare university science from the cutbacks they have inflicted on their own laboratories. Countries such as Japan and France, where universities have traditionally held a smaller role in research, plan to increase their funding in this area - although at the time of writing both countries face severe budgetary constraints which may undermine this general intention. The intention to maintain and increase university research funding is partly because of the success of some universities in the added value of their R&D activities. A study by Bank Boston in the late 1990s concluded that if the 4000 companies funded by MIT graduates and faculty were turned into an independent nation, the income they would produce would make it the 24th richest in the world.

With the end of the Cold War, which was an important stimulus to government investment in R&D generally, global economic competition has become a fresh justification for continuing high government investment in basic science. In the US it is noted with some concern that companies such as General Electric and AT&T, which used to undertake all their own basic research (sometimes earning Nobel Prizes on the strength of it) are now concentrating most R&D effort in product development. Governments are interested as never before in the way their funds are invested by universities which have traditionally received funding via block grants to be divided between teaching and research at the discretion of the university. OECD analysts, however, have detected a growing share of mission-oriented funding in recent years, accounting in the UK for 30% and in the Netherlands, 15% of the total, which channels funding to the support of specific technologies. This may be good news for knowledge-hungry client organizations, where the favoured sciences happen to be in their field of interest.

Universities have proved an enduringly successful beneficiary of R&D investment. As stated 35 years ago in the Handbook of Industrial Research Management (Reinhold Book Corp, 1968, page 94): 'Wherever people are being trained to do research, they must be doing research; no substitute for this approach has ever been found. Therefore every such institution is a centre of research activity.' They are endowed often with world-class facilities, world-renowned academics and gifted and enthusiastic undergraduates. Small wonder, then, that, despite the tension between teaching and research, they prove to be a fruitful R&D vendor for research client organizations.

Problems in Buying Research From Universities

In planning to buy knowledge-based services from universities, the knowledge-buying client organization must undertake all the normal procurement-type due diligence suggested earlier in this book. There are, however, special problems in dealing with universities. The UK's Centre for Exploitation of Science and Technology (CEST) conducted a survey in the early 1990s of companies that had used universities for contract research. Of those surveyed 70% had used universities as a limited source of technology and, surprisingly, 40% had used foreign universities. Their experiences were varied, however, as these quotations reveal:

The CEST survey concluded:

Universities are very focused upon the opportunities for commercial exploitation of the work they are involved in, but often have unrealistic intellectual property (IP) objectives. Much valuable management time is wasted negotiating IP considerations on relatively low-value contracts where the likelihood of direct commercial exploitation is remote. Traditionally, investment in university research has been considered by business to be at least partly investment in the national fabric (or, as is popular in the UK, investment in 'Great Britain plc'). Universities have gratefully seized on such investment as a way of subsidising teaching.

The balance, as we have seen, is shifting. When asked whether their interests lay primarily in teaching or research, respondents to a 1996 survey carried out by the Carnegie Foundation for the Advancement of Teaching, across the universities of a number of countries, found that there is often a preference towards research (see Table 12).

Table 12 Universities: loyalties to teaching versus research

In the UK, before publication of the Cooper Report in 1989 – a report which has been influential in other countries with large tertiary education sectors – universities looked primarily for marginal recovery of overheads (usually, in the UK, at 40% of staff costs). Today a much higher rate is often sought. Knowledge-buying client organizations should note that overheads should generally be paid only on staff costs, as the costs of university contract research are primarily people costs. The exception to this is where the university invests in capital equipment with specific reference to a prospective contract from a commercial client. If the client is not directly funding that investment under the contract, then overhead recovery needs to take this investment into account. In these cases, as the university has borne investment risk, it is proper that some overhead recovery should be payable on this investment.

A price build on a university research contract which is expected to continue for several years may include the following headings:

• Staff costs
  • – Research assistant
  • – Research student
  • – Research supervisor
• Superannuation/NHI
• Overheads – at [x] per cent of staff cost
• Equipment – payable at cost
• Consumables – payable at cost
• Travel and subsistence – payable at cost at standard academic rates.

In the UK context, VAT may need to be itemized separately. In other countries, local purchase or value-added taxes may be payable. Advice should be sought from the university in the early stages of the negotiations.

In a research project lasting a number of years, fixed prices are unlikely to be appropriate because academic rates will almost certainly be inflated year on year: to meet these increases will probably be less expensive than meeting the university contingency if fixed prices are sought. A maximum estimated price must then be agreed. Prudently the knowledge-buying client organization will build in an undisclosed contingency figure but it should not be assumed that this must be spent – it is a contingency.

A cost control clause in the contract will be necessary. The following is typical:

• Salary costs are subject to increase arising from incremental and nationally agreed salary awards only, and to prior notification by the university to the purchaser in writing.
• None of the itemized sums in the price breakdown shall be exceeded without the prior written approval of the purchaser. An underspend on one of the itemized sums may not be used to fund an overspend on another itemized sum without the purchaser's prior written approval.
• If and when the cost of the service, including commitments, amounts to 80% of any of the annual/total/itemized sums the university shall at once inform the purchaser in writing stating his or her liability to date and the estimated cost of the work remaining to be done.
• The university shall advise the purchaser forthwith in writing if at any time it becomes apparent that any of the annual/total/itemized sums will be exceeded. The purchaser shall then decide whether or not the service shall continue.
• The purchaser shall not be liable to meet any costs incurred or committed in excess of the agreed sums or if the service has not been carried out in accordance with the contract.

Pitfalls to Be Avoided

There are a number of common pitfalls to be avoided when dealing with universities on research contracts:

• The research student may not complete his/her course and may therefore not complete the research project. The pre-contract interview and selection process may reduce this possibility, giving both the university and the client organization the opportunity to probe the student's commitment and staying power, but the risk cannot be ruled out altogether. A financial retention may be useful – certainly if the final report is not delivered then the final payment should not be made to the university and, depending on the terms of the contract, it may be appropriate to recover some or all sums already expended. If, however, a draft report has been received, failure to deliver the final report may not be deemed to be an insuperable problem to the client organization.
• Progress reports may not be supplied without prompting. Universities have traditionally been less professional than commercial CROs in project management. This shortcoming is improving year on year, particularly as universities become increasingly focused on external research work. The importance of good, proactive project management on the part of the client organization cannot be overemphasized, however (see Chapter 6). The client organization should not be satisfied with anything less than good project management from the university. This is after all, one reason why he or she often pays separately for supervision!
• The university will wish to publish results, particularly if the research project is part of the student's thesis (which often must be made public under the university's Articles of Incorporation). In many situations it will not be a problem for the client organization to agree to publication: but it obviously depends on the nature of the work and the need for confidentiality. The most difficult problem may occur in situations where unexpectedly valuable results emerge, or results that may prove to be a severe embarrassment to the research buyer and must be suppressed. The conditions of contract should include a provision that the client reserves the right to veto publication. Expect this to be a subject for negotiation. It is possible, subject to the agreement of the university authorities, to have theses published on a need-to-know basis. This, in effect, debars the university's information service (or library) from making the thesis generally available for a predetermined number of years.
• Staff may change over a long project. The client organization should stipulate that staff changes (or at least, approval of replacement staff) are subject to its prior written consent.
• The university may require a long period following notice of termination. Termination for convenience is not really in the spirit of research contracting with universities. If the work is proving to be unsuccessful, both parties normally attempt to renegotiate the contract to see if the project can be reconfigured to increase likelihood of success. A full academic term's notice of termination is not unreasonable, given that the university will have a responsibility to the student to redeploy them onto another project meeting their educational needs and aspirations. What 'a full academic term's notice' means in practice to the client organization is that there is a termination fee (except, of course, in cases of default or breach) which is equivalent to the student's cost for a full academic term.
• The university may have poor cost control methods and expect to bill the buyer months or even years after the event! As noted above, universities are getting steadily better in the UK at professionally project managing their external research contracts. However, a clause in the contract to limit the university's right to submit bills long after the event is a useful device for defeating this problem. A clause along the following lines may suffice:

Research Fellowships

Knowledge-buying client organizations may wish to link with universities in other ways. A Research Fellowship is a prestigious university appointment, normally at postdoctoral level. Appointments are usually for three years but may be extended. The terms of reference for the fellowship are negotiated individually but there is an increasing tendency to require the Research Fellow to be closely involved with some major topic of interest to the client organization. The Research Fellow is normally paid on the same scale as a university lecturer of similar age and experience. Academics may also be retained on consultancy contracts or short-term employment contracts specific terms of reference will be necessary.

Royalties

The payment, or not, of royalties has become a battleground between universities and their industrial/commercial partners in the UK in recent years. This was encouraged by the Cooper Report of 1989 which reinforced the pre-existing argument of universities that they were subsidizing industry research. The Cooper Report stated that

and went on to state that it had excluded from consideration 'fully funded research contracts at universities'. However, the report failed to define what was meant by 'fully funded'.

The Cooper Report suggested that in the UK the most common contractual arrangement in research contracts with universities was for 'the sponsor to own the IPR but to pay the HEI reasonable royalties in recognition of their contribution to the project' (p. 7). This rather sweeping statement may, in its reference to royalties, have been more akin to a wish than to reality. Certainly many industrial sponsors do not consider it appropriate to pay royalties on work they have had undertaken in universities in exactly the same way that they do not expect to pay royalties to independent contract research organizations.

Where the university has first approached industry with background IPRs and with a concept for industry to take forward, develop and commercialize, there are good grounds for ensuring that work is fully recompensed via a royalty arrangement. Where, however, industry is proactive in searching out sources within universities to undertake R&D work, is investing its own energies, resources, people and commitment to enable R&D projects to be taken forward, not to mention their contribution to the education of under- or postgraduates, the argument for royalties is much harder to sustain. It is likely that the Cooper Report in the UK was widely misunderstood and misapplied by the university sector. The arguments against paying royalties for university contract R&D work revolve around the idea that for multi-party, multi-year, multitechnology projects it is impossible to determine the value of the various contributors to the project.

Even in less complex technological developments which eventually reach the market, it can take the wisdom of Solomon to determine the value of an university's 'contribution' to a project's commercial success.

The university argument that they subsidize the R&D through the knowledge and experience of researchers and the associated costs of developing specialized groups, seems to be implausible. First, it is very unclear that the costs of such know-how are not already recovered in the overhead rate applied to staff and other costs. Second, and of more relevance, when placing a contract with an independent contract research organization (CRO), or a consultant, or indeed a manufacturing firm for services or goods, one does not expect to be charged an additional success fee on the basis that the CRO or manufacturer has 'knowledge and experience' which has contributed to the project. These costs should rightly be reimbursed in commercial overheads.

Where, for whatever reason, royalties are payable on the exploitation of the research results, they are defined on principles similar to those found in licensing agreements, that is:

• the royalty base – the precise definition of the products in respect of which royalties shall be payable
• where a percentage of sales calculation is adopted, as opposed to a fixed fee per item sold, the contract must define how the net sales value shall be calculated
• the rates at which royalties are payable
• any limitation on period over which royalties are payable
• where a minimum royalty is agreed this is to be set out clearly in the contract
• details of manner and timing of payment, currency and/or currency conversion
• permitted and non-permitted deductions, tax withholding and so on
• obligation on the part of the knowledge exploiter to keep proper records and make them available when requested
• obligation on the knowledge exploiter to put some degree of effort into commercial exploitation.

The amount of royalty will be based on the relative bargaining strengths of the parties and their perception of the value of any pre-existing rights to the value of the final commercialized product. Setting off of the costs of the research contract will usually be appropriate in these situations, as may be royalty reduction in the event that patent protection is not available in particular sales territories.