What It Takes: The License/Licensee Dynamic

License agreements have long been regarded as an integral part of the aerospace world. The use of licensed suppliers has literally exploded over the past decade across many segments of aerospace manufacturers’ value streams. The trend among many aerospace companies is the shift away from diversification to increased emphasis and concentration on core business where margin delivery is the greatest. The outcome of this paradigm shift is a greater reliance being placed on qualified licensed suppliers that manufacture ancillary products and services not deemed key to the business. 

License agreements make excellent sense on many different levels for an aerospace business, most notably by offering companies the ability to be laser focused on key products and markets that are central to their success. OEMs have long understood the underlying notion that license agreements allow for the opportunity to reduce their labor and manufacturing footprint. They drive revenue gains with equally appealing profit margins. Many times they realize improved and enhanced customer support as an added benefit. Companies such as Boeing and Airbus have departments exclusively dedicated to licensing of intellectual property (IP) and other product assets. License agreements are increasingly seen as being vital to future business success. In essence, becoming another revenue stream or strategic business unit without all the tentacles associated with overhead.   

Few segments have seen as much shift to embracing a license agreement model as the support and test equipment side of the aerospace business has experienced recently. OEM aerospace companies are increasingly determining through extensive strategic mapping that their complete focus needs to be on the products they manufacture, including spares. Where these OEMs previously had dedicated strategic business units (SBU) in place for providing support and test equipment products and services,  qualified licensed suppliers are now fulfilling those roles. More and more they’re divesting these noncore assets. The market opportunity for licensed suppliers has never been better. HABCO, a leading supplier of support and test equipment, is experiencing tremendous growth in new license agreements based solely upon being a supplier of support and test equipment products. Over the past year, HABCO was named the exclusive supplier of tooling for Pratt & Whitney legacy engines and support and test equipment for Honeywell Aerospace. Each agreement falls under the HABCO Innogration value stream. Innogration was developed as an innovative solution to respond to and deliver against the needs of aerospace companies searching for a supplier with deep and extensive experience with support and test equipment products

Key Considerations: Evaluating License Supplier Business Decision 

Choosing a license supplier is complex and time consuming. It’s not a slam dunk decision.  It requires careful evaluation with thorough vetting of potential companies.  From experience, HABCO identifies five “best practices” strategic mandatories that must be addressed when a company embarks on considering the potential viability of entering into a license agreement. 

1. Assess the strategic risk
2. Evaluate market considerations and conditions
3. Weigh internal vs. external capabilities
4. Conduct a thorough economic evaluation
5. Understand the requirement for managing the supplier and the supplier’s processes

Assess the Strategic Risk

There is always a strategic risk associated with utilizing a licensed supplier. What signal does it send to the customer? Your business and brand reputation is at stake. You are placing your trust that your licensed supplier has the capabilities and credentials to deliver on everything that your customer has come to know and expect in a relationship with your company. In many ways they become a strategic extension of your business. Bottom line, is it strategically worth it?

Evaluate Market Considerations and Conditions

What is the market reaction? Is the market timing right? Are they willing to buy from a supplier what they’ve purchased from an OEM for years? Will they feel abandoned or underappreciated?  Although buyers increasingly are becoming more comfortable with license arrangements as they become more commonplace, the market needs to totally buy in.   

Weigh Internal vs. External Capabilities

With a shift to “core” business emphasis becoming pervasive, aerospace businesses need to honestly ask if some segments of their business can be better done through outside license suppliers? Is there upside potential by realizing appreciable customer support improvements that are gained from the license companies that help enhance the relationships? Maybe your cost structure can be reduced through the license agreement. Not everything has to be manufactured in house.

Conduct a Thorough Economic Evaluation

The return to the business must make sense financially across many fronts. Royalty percentages often look great upfront but don’t manifest in business reality when a license relationship is in place. Using a licensed supplier arrangement equates to a reduction in headcount supporting that segment. The financial evaluation needs to be mutually beneficial for both entities. 

Understand the Requirement for Managing the License Supplier and Their Processes

Another key perspective is truly understanding and allowing for the significant amount of effort and time that goes into managing the supplier relationship. Best-in-class license arrangements are those that are seamlessly efficient, with a level of trust based upon performance. Having to continually manage and oversee the product and work of a licensed supplier leads to diminished financial returns. It takes time and resources and diminishes the attractive financial return.

Key Considerations: Attributes of a Great Licensee Company

Many core attributes are common across all successful licensee companies in the aerospace category. You’ll find that the best relentlessly deliver against these key criteria. HABCO has learned, working through license agreements within the Innogration value stream, that the following must be readily apparent and delivered on in each relationship.

Aerospace Pedigree

The ability to produce or manufacture superior product is one thing; truly knowing the aerospace industry is another. The best aerospace licensed suppliers have people throughout their organization who have worked in the business or even for the OEM companies authorizing the license agreement. They understand what it takes to be successful in aerospace and aren’t intimidated by the pace and relentless demands. The common thread is people that love being in the aerospace industry. The passion needs to be evident and delivered against at all hours every day. 

Executive Management Team Involvement

It is critically important to have the attention and focus of the licensee management team. The relationship has to be in the forefront, not an afterthought. The license agreement must represent a significant percentage share of their business. Their involvement needs to be close and genuine through a demonstration that they have skin in the game. 

Process Integrity – Quality and Lean Thinking

Quality and lean thinking must be evident across the entire company and throughout the operation. It needs to be manifested each and every day and rendered in all products and services ─ a way of thinking and acting that informs every customer engagement and where the goal is always process improvement. The pursuit of lean must be relentless.

Resource Allocation – The Right People

People make or break a relationship and nowhere is this truer than in the aerospace industry. Putting the right people in place to manage the license relationship is critical to success. They are the face to the customer and often control the reputation of both the license and licensee companies. The people assigned to the relationship need to be flexible enough to meet the demands of both the license company and the customer. Total commitment to the customer is paramount.

Measurement and Results – Passionate About Analytics

Not only must the right people be in place, but also the measurement analytic. There must be a relentless pursuit of many facets of business analytics to ensure that the customer interaction is continually improved and enhanced.  Analytics must be more than a box checker. They must be measureable and actionable, and delivered in real time with dashboards that monitor results.

Being a license supplier is demanding on so many different levels. Many times you’re working for and answering to two customers with conflicting needs. It requires a unique and diverse set of attributes and skill sets to be successful.  

About the author. 

Jeff Kretzmer is vice president of sales and marketing for HABCO Industries, a manufacturer of support and test equipment and tooling for aerospace and defense segments headquartered in Glastonbury, CT. He has over 25 years of experience working in aerospace for the likes of Esterline Technologies, Connecticut Advanced Products, and Projects Incorporated. A lover of all things aviation, Kretzmer is certified as a commercial pilot and as a FAA certified airframe and power plant mechanic.  He can be reached at [email protected] or (860) 430-5124.