Revenue models for the Hanze UAS to increase revenues from applied research with

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Revenue Models for

Applied Research

-

Revenue Models for the Hanze UAS to Increase

Revenues from Applied Research with

Author: Suzanna Bakker

Student number: 11130660

Date of submission: 30-01-2018 (final) Qualification: EPMS – Strategy Track

Institution: University of Amsterdam/Amsterdam Business School

Supervisor: Dr.Ir. Jeroen Kraaijenbrink

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Statement of Originality

This document is written by Student Suzanna Bakker who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Abstract

Universities in the Netherlands are facing a challenge: student numbers are expected to go down which has its consequences on the income of these universities. The Hanze UAS wants to keep its position and in order to create revenues from other resources than student numbers, a couple of scenarios are described. One of them is to increase revenues from applied research. This thesis gives answer to the question which revenue models can be used or developed to help the Hanze UAS increase its revenues from applied research.

Despite the growing importance of applied research and the urgency to think of ways to create revenues, there is little systematic analysis available on revenue models for applied research at a UAS. There are papers on revenue models related to (mostly basic) research at Academic Universities where research has a more prominent position to begin with, but no papers on revenue models related to applied research at UAS’s.

An inductive qualitative approach was used to identify the revenue models to increase revenues with. Based on 24 semi-structured interviews with experts and stakeholders in different fields related to research and revenues the conclusion is that the biggest potential lies in doing more research with the business. The revenue models to increase revenues from applied research are contract research and regional innovation, making better use of research funds, participating in start-ups, creating value with research results, integrating different disciplines and work together on research, working on the reputation of the Hanze UAS and other activities than research which can be identified as first flow of funds to create room for research funds. An unexpected outcome is about licencing. Although literature suggests licencing to be a suitable revenue model for a university, this research shows it is not very valuable to a UAS because of the type of research. It suits basic research better.

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Introduction

As of 2022 predictions are that the student numbers will go down in the Netherlands because there are simply less young people in the student age category from that moment on. For the Hanze University of Applied Sciences (UAS)1_{, and many other institutes, one of the consequences of this}

diminution is that the income goes down2_{. For the Hanze UAS the estimation is that it will miss out}

on ten million euros a year3_{. The members of the Executive Board have decided they want to remain}

at the same level, keeping the turnover in line with the current level, and the Hanze UAS wants to keep its position. Therefore, a couple of possible solutions have been selected which are expected to generate more income. One of these solutions is to increase revenues from applied research.

Research has become the second core task for Dutch Universities of Applied Sciences, next to teaching. This reform had the overarching goal to help achieve the strengthening of the innovative potential of the Netherlands by using the UAS-sector optimally in providing modern professionals who are highly-skilled and in providing services the industry and public sector needed (de Boer, 2016). Since 2000 the government introduced several instruments to stimulate the teaching staff of the UAS-sector in becoming more research oriented and strengthening the research function of the UAS’s: the introduction of new staff positions, grants for establishing Centers of Expertise and grants for applied (practice-oriented) research (de Boer, 2016).

Research has also developed as one of the core tasks at the Hanze UAS, which strategic goal is to be a professional knowledge institution in 2020 with one primary process: acquiring knowledge. This process will be effectuated, on different levels, through teaching (knowledge dissemination), research (knowledge creation) and innovations with (local) industry (dissemination and co-creation) (Miedema, 2017).

1_{The Hanze UAS is situated in Groningen. There are approximately 27000 students and 3000 staff members.} 2_{Universities in the Netherlands are financed by the government through a lump-sum and an amount per student.} 3_{Of the annual budget of approximately 250 million euros.}

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7 Because of the newness of research in UAS’s and because of the lack of urgency, there has not been a need for research on revenues and applied research within these UAS’s up till now. The literature provides in information on revenues at Academic Universities. For example research on diversifying the funding base of the Academic University by generating non-state income streams (Shattock, 2010), or on the creation of spin out companies (Locket and Write, 2005), or revenue generating from patenting and licensing (Bulut and Muschini, 2009). But that is not the same for a UAS because of the difference in the type of research and also the funding of the Academic University versus the UAS.

At this moment the funding of research comes from the UAS itself, from government funding and a very small part from the business. The desire to generate more income from applied research creates questions on how to achieve it, which leads to the research question:

Which revenue model(s) can be used or developed to help the Hanze UAS increase its revenues from applied research?

The sub questions I will address are:

1) What are the characteristics of applied research compared to other types of research? 2) Which relevant revenue models for applied research are currently known, coming from

literature?

3) Which revenue models for applied research are currently used by other institutes? 4) What are the advantages and disadvantages of these revenue models?

5) Which revenue models would fit the Hanze UAS?

6) What factors should be considered when innovating revenue models?

In the following chapters the different topics will be addressed that are important when trying to answer these questions. The literature review in chapter 1 will start by explaining what applied research is, how research is financed, what the influence of financing and quality is on the balance between research and education, looking at universities from a stakeholder perspective, what

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8 revenue models are, a description of different revenue models which could be relevant to applied research, and what factors could be important when innovating revenue models. After the literature review the research design will be discussed in chapter 2. The results of the research can be found in chapter 3, starting with the revenue models and then the strategies, context and intervening

conditions which are of influence on the revenue models. In chapter 4 the discussion is found, which starts with a summary of the findings which will then be compared to the literature. This is followed by implications, limitations and recommendations for future research. And chapter 4 finishes with a conclusion.

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Chapter 1 Literature review

In this chapter literature will be discussed on topics related to the research questions. This begins with explaining what applied research is, specifically in relation to higher education in the

Netherlands. Then there is a paragraph about the financing of research in the Netherlands, followed by a paragraph on the influence of financing and quality on the balance between research and education. Universities can be viewed from a stakeholder perspective, which is explained in the next paragraph. Then there is a paragraph on what revenue models are, a description of different revenue models which could be relevant to applied research, and what factors could be important when innovating revenue models.

1.1 Applied Research

The higher education system in the Netherlands has a binary structure where a distinction is made between scientific education at (14) universities (also referred to as Academic Universities) and higher professional education at (37) hogescholen (also referred to as Universities of Applied

Sciences; UAS’s). The UAS’s have a professional orientation in theoretical and practical training with a primary focus on local and regional needs, and in the last couple of years some have begun to

operate nationally and internationally. For about 17 years now a second important task of the UAS’s is developing and transferring knowledge (de Boer, 2017).

In applied science three stakeholder groups are involved, which are presented by three circles: professional practice, education and research (figure 1). The goal is balance in this triangle: applied research generates knowledge and knowledge products which can be used by education,

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Figure 1 Stakeholder groups in applied science Reprinted from ‘Educational vision 2020’, May 2014, retrieved from

https://www.hanze.nl/assets/corporate/Documents/Public/Onderwijsvisie/ENG/Educational%20Vision%202020.pdf

There are three approaches to research – research in the professional fields, education and development of knowledge – which are equal and complementary. The UAS has to be able to add value to all three. Research in the professional field results in knowledge and knowledge products, which education, professional practice, government and institution can use (Miedema, 2017). Miedema (2017) describes that the position of applied research can probably best be explained by the technological readiness levels (TRL) as a metaphor (figure 2). This scale goes from one (only an observed basic principle) to nine (products that are ready for the market, or systems proven in an operational environment). Traditional scientific institutions (Academic Universities) target TRL one to three, sometimes four, but for society or for creating economic value new knowledge will be of value from TRL eight or nine. The area where fundamental science ends, but the knowledge cannot be used directly, is the gap that applied science can fill (Miedema, 2017). The focus of applied science for the UAS is delivering products and services for professional practice and society which lead to accepted changes and if possible even established changes in practice (Miedema, 2017).

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Figure 2: TRL levels

Reprinted and readjusted from ‘INESC TEC’s management model evaluated in TRL – Technology Readiness Level – considered ‘exceptional’ by the FCT’, by INESC TEC, January 2015, retrieved from

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12 At the request of the Hanze UAS a model is developed by van Beest and Andriessen (2016), the PRO-model, which further develops TRL for applied science (figure 3).

Figure 3: PRO-model

Reprinted and readjusted from ‘De praktijkgereedheid van praktijkgericht onderzoek: voorstel voor een assessmentmodel in opdracht van Hanzehogeschool Groningen’, by van Beest, W., Andriessen, D., & Balje, J., 2016. P17

By 2010 it had become normal to cooperate with Academic Universities because they recognized that applied research could be complementary to academic research (Gageldonk, 2017). The strategy of UAS’s to avoid competition with academic research and find their niche in practice oriented, mostly regional research, has been a clever one (de Boer, 2017). The Dutch context has been supportive on the acceptance of the implementation of applied research. The research function of

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13 UAS’s has not been disturbed by disruptive events like a number of scandals in the sector or the financial crisis (de Boer, 2017).

1.2 Financing of universities and research

In the Netherlands all institutions in higher education are funded with a fixed amount from the government, the lump sum, and a variable amount. The variable amount depends on the number of students who register for an accredited Bachelor or Master within the nominal study length (four years + one) and on the number of completed Bachelors and Masters. This fixed and variable government funding is also referred to as the first flow of funds (Jongbloed & Salerno, 2003). Students pay a yearly tuition fee, which is generally used as part of the first flow of funds. There is also funding for (promoting) applied research that comes from the government. For the UAS’s in the Netherlands the ‘Nationaal Regieorgaan Praktijkgericht Onderzoek SIA’ is the

organization in charge of the allocation of research funding for applied research. For the Academic Universities in the Netherlands the ‘Nederlandse organisatie voor Wetenschappelijk Onderzoek’ (NWO) is in charge of the allocation of research funding for academic research. This funding for research is also referred to as the second flow of funds (Jongbloed & Salerno, 2003). The last funding resource, also referred to as the third flow of funds, comes from the business who pay for services like contract research (Jongbloed & Salerno, 2003). Especially for Academic Universities the second and third flow of funds are increasingly important. This is due to a decreasing first flow of funds from the government (Feiten en cijfers, n.d.).

There are some differences between Academic Universities and UAS’s which can help explain the difference in how Academic Universities and UAS’s organize teaching and research. Government funding for research in an Academic University is different from government funding for UAS’s. In 2016 government expenditure related to research amounted a little over 2.4 billion euros for

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14 enlisted at Academic Universities in 2016 (Feiten en cijfers, n.d.) as opposed to 446.638 students at UAS’s (Kennisbank, 2017). The number of FTE’s were 42.618 at Academic Universities in 2016 (Feiten en cijfers, n.d.) and 35.801 at UAS’s (Kennisbank, 2017).

A condition in the current regulation of the Hanze UAS is that 40% of research financing has to come from external parties (on average). This may lead to project-based financing without a sharp focus on the portfolio, instead of a strong research track where appropriate funding is sought (Miedema, 2017).

1.3 The balance between research and teaching

Research and teaching are the two core tasks of a university, but the balance is not always equal between these two. This paragraph explains the influence of financing and quality on this balance.

1.3.1 The influence of financing

By comparing two universities financed by the government through a lump-sum and an amount per student Del Rey (2001) found that government financing in the per student allocation form can influence the equilibrium (balance) between teaching and research of the university. Del Rey (2001) describes four types of equilibria characterized by full-time teaching, full time research, selective teaching plus research and mass teaching plus research.

A high quality university will attract students with high ability and because of that ability these students need less teaching. Therefore, more funds can go to research (Del Rey, 2001). When research will always pay less than teaching, a full-time teaching equilibrium is assumed. In this research Del Rey (2001) considers the choice of quality when the payoff from research is larger than the payoff from teaching.

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15 The different equilibria depend on the chosen quality the university offers the students, the ability of the students, the payoff from research and the payoff from teaching. The different equilibria are:

1) Selective teaching and research: the per student allocation increases teaching and the quality

of it while it decreases research levels. The lump-sum financing on the other hand favours research. in this research the two universities have a selective admission policy, which has an influence on the student numbers and the quality of the students.

2) Mass teaching and positive research: when a university is not very selective on quality, they

will want to enrol as many students as possible. All demand is satisfied, because all of the students will be admitted, which will result in mass teaching. When the government increases the per student allocation, research levels will be reduced and the quantity and quality of teaching will rise. Every enrolment means cash. When the per student allocation increases and it becomes more rewarding to enrol more students, research will become less rewarding.

3) Full-time research: when the per student allocation is low and the payoff of research is high,

the funds will be allocated to research. The government can influence this by letting

universities rely more on the per student allocation. The universities are induced to teach all students and the universities can obtain an amount of money for research.

The Hanze UAS is not very selective on quality. From the 54 bachelor programs, there are five who have numerus fixus. This means that there is a maximum number of students who can join these programs, and when more than the maximum number of student want to enrol a selection will take place. This selection can for example be based on the portfolio of the students, and/or their

motivation. The Hanze UAS receives a lump sum and is not very selective, which means research is not (yet) very rewarding for the Hanze UAS.

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1.3.2 The influence of quality

Gautier & Wauthy (2007) argue that for a university that is dependent for its finances on an amount per student, and where students choose the university because of the teaching quality and prestige which is related to research, it is important to strive for a combination of high quality research and high quality teaching. When the teaching quality is high and the university can enrol more students, the funds for research will increase because these will be part of the first flow of funds.

This is often seen as a challenge because of the individual incentives lecturers face (Gautier & Wauthy, 2007). Many lecturers treat research and teaching as substitutes and they have a large amount of freedom to shape and mould their own job which means lecturers can have very different tasks, depending on taste and incentives (Gautier & Wauthy, 2007).

Gautier & Wauthy (2007) compare universities to conglomerates: they are active in multiple fields and each field is organized in a department, with a certain level of authority. The internal financing system is very similar to the internal financing system of a conglomerate. And there is a central authority that has a final say in the allocation of funds and resources. One of the issues that derives from multi task agency problems central authority has to deal with, are contracting mechanisms which are needed to align the interests of the principal and the agent according to Gautier & Wauthy (2007). Teaching and research are two very different tasks which are complements for the principal, but substitutes for the agent (Gautier & Wauthy, 2007).

Gautier & Wauthy (2007) assume the lecturers prefer research over teaching because research efforts are more easily measured and appropriable. Lecturers will however put effort in the quality of teaching because the student numbers play a big part in the financing of the university and the more students, the more money which also means more money for research (Gautier & Wauthy, 2007). The reallocation of funds is centralized which creates an internal market for research funds. Teaching efforts can be viewed as private resources in a multi-department university that help create a

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17 who only want to contribute to research. And because of the allocation of research funds yardstick competition between lecturers can be triggered.

There is an assumption mentioned by Gautier & Wauthy (2007) which is bad for the teaching efforts. According to them he lecturer has a private benefit associated to the output of research, but there is no private benefit of teaching efforts. The value of the lecturer on the market is influenced by the performance of his or her research, teaching only has value inside the university.

The conclusion here is that the effort invested in research will help increase the benefit of teaching and the effort invested in teaching will help increase the benefit of research (Gautier & Wauthy, 2007).

1.4 Universities and their stakeholders

Jongbloed et al. (2008) look at universities from a stakeholder perspective. Higher education has local, regional, national and international relationships with their external stakeholders. When it comes to making strategic choices, the stakeholder interests should be a concern to organizations (Freeman, 1984). The most important stakeholders for a university are the students and the government, which is not a unitary stakeholder. Next to teaching and research the university also interacts with health, industry and culture for example. Not only the Education Ministry, but also other Ministries influence the strategic agenda of universities.

The social contract between higher education institutions and the state is changing. Not only the delivery of excellent research and education is expected by the state, but also output relevant to the productive process and shaping the knowledge society (Jongbloed et al., 2008). The direct role of the state is reducing and the university becomes more integrated in society. The downside might be that universities will have little attention for civic responsibility and become too fragmented. The

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18 individual universities and an increase of the role of the market in combination with a less direct role of the state. There is a growing need to provide in teaching and research that is relevant or

applicable for the region or national (Jongbloed et al., 2008). Governments and stakeholders judge universities on their engagement, which means the university demonstrates its relevance through a set of activities and can be held accountable. It is best to create this engagement through the core activities of teaching and research and to treat the relationship with the stakeholders as a

partnership.

Jongbloed et al. (2008) explain that the role of the supporting staff is getting more important in this stakeholder perspective. For example the HR department and the fundraising office. They can be seen as a gatekeeper with considerable influence between the external stakeholders and the university and as a link between management and operational staff.

In today’s network society lifelong learning experts and providers of higher education have to be in constant dialogue with their stakeholders. This will make teaching and research more relevant for society and accountable for the public.

Jongbloed et al. (2008) suggest there are three barriers to active interacting with external stakeholders:

1) Deciding what will be on the research agenda and what the university offers educationally: when there are more opportunities for applied research which may bring in revenues, chances are the university has to let go of its own research portfolio and look into the research agenda the business desires.

2) The reward system of the lecturers: the workload in teaching oriented institutions determine the reward and for Academic Universities the research production is the most common indicator to determine salary or promotion (which can be bad for teaching efforts, according to Gautier & Wauthy (2007)).

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19 3) The entrepreneurial culture of the university is lacking: this barrier is about the individual

level, while the previous two are about the organizational level. Researchers often do not feel comfortable with research commercialization and lecturers maybe more interested in teaching students about the contents of textbook knowledge instead of the wider and practical potential of knowledge.

1.5 Revenue models

There are many different explanations on what a revenue model is and the term is often confused with the term ‘business model’. A revenue model is actually part of the business model and explains why a product or service results in profit or revenue; it explains why the business model works in a commercial way (Gassmann, 2015). According to Gassmann (2015) a business model consists of four aspects: the client (who), the value proposition (what), the value chain (how) and the revenue model (why). This research will focus on the later. Gassmann (2015) has designed the business model navigator, a tool to develop new business models. It describes 55 models which can be used as input for a business model and for a revenue model. From these models, the models in which the revenue model is one of the aspects explained will be summarized, where a selection has been made based on the supposed relevance to applied research.

The model Explanation

Cross-selling On top of the basic product or service, additional products or services are offered. Firms can sell more and it creates the opportunity to sell existing products or services that have unused potential. This model is often used in the B2B-sector, where highly specialist products are bundled with other products or services. These bundles are specifically attractive to customers who like to buy from one supplier.

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20 Customer loyalty By offering more to the customer than the basic products or services and

stimulate their loyalty because of that. A good relation is important to win and retain the customer. Real customer focus in combination with a loyalty program creates the opportunity to engage in a dialogue with the customer.

Experience selling Creating more value to the product or service by offering an experience that comes with it. This creates loyalty and the willingness to pay more. This model brings the opportunity to create a relation with the customer. Fractional ownership Customers buy a fraction of a product or service which they possibly

cannot afford if they had to buy it on their own. A broader range of potential customers is targeted and the total revenues can be higher than with direct selling. This works well when customers are willing to share ownership.

Licensing Creating intellectual possession and selling it to a third party in the form of rights. The advantage is that they can be sold to more than one party. It is an instrument to spread the risks and income of the firm. It also spreads the products and services quicker, which helps in branding, and loyalty and revenues will rise. This model brings the freedom to focus solely on R&D, which means no competencies are needed on marketing or production. This model works best in knowledge and technology driven context.

Make more of it The knowhow and other instruments are not only used by the firm itself, but are also offered to other firms. In this way under-utilized resources can generate value. The specific knowledge and overcapacity can be used to make money and create new expertise which in return can be used to

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21 improve processes and the core activities of the firm itself. Others can view the firm as an innovative leader which helps the image. When using this model it is important to assess which technologies, processes and capabilities add to core competencies.

Open business Creating value together with external partners, which is very different from classical business models. Every firm has its own business model, but together the firms are in a system of open business. Aspects of creating value where other firms can contribute their resources or use them in an innovative way. With this open model strategic advantages can be achieved, efficiency can increase and new markets can be entered. It is important to stick to the original business model for the firm itself and to gear to the other firms. It is also important to make sure the extra value also contributes to the value of the firm, not only to the system. Such an ecosystem only works when all partners generate enough income and benefit from the cooperation.

Performance-based contracting

The price of a product is determined by what the firm does, not by the face value. The result is measured and the customer pays the

predetermined amount. The value creation of the customer often depends on the integration of the firm delivering the product or service. The firm has experience with the product or service and builds new expertise through the usage by the customer. With this model existing knowledge can be put to service. It works well if the products or services are complex in manufacturing or usage.

Revenue sharing Individuals, groups or firms work together and share the revenues in a symbiotic relation. This often works by affiliation arrangements on the

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22 internet. Other possibilities are that people can work on a common

purpose. It is a good way to reach more customers via strategic alliances. It is also a good way to lower distribution costs and share risks with others. The model only works when one party raises its revenues and shares with the other party, in return for its participation. Value chains have become more fragmented, open and dependent from one another. Because of that this model is getting more important.

Two-sided market This model facilitates, via an intermediary or a platform, contacts

between two groups which benefit from this. Crucial are indirect network effects: the more people from one group using the platform, the more attractive it becomes for the other group. The biggest challenge is to bring the two groups together in a way the indirect network effect becomes as large as possible. Revenues come from payments by a (or all) parties. There can also be more than two parties involved. The firm has to know who the relevant stakeholders are and how they are connected to the firm. With enhanced marketing campaigns you have to quickly create familiarity.

1.5.1 Innovating the revenue model

The revenue models currently used do not generate enough revenues for the Hanze UAS from applied science given the strategic choice to increase revenues from applied science. This research will result in new or improved revenue models for applied research with which this strategy can be achieved. When innovating the revenue model(s) there are some theories about the future of revenue models and innovation of business models to consider, which will be discussed in this

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23 section. They can be of influence on which revenue model is relevant for the Hanze UAS and what factors are of influence to turn these models into a success.

A good business model will create value for the customer and revenues for the developer or implementer (Teece, 2010). When designing a competitive sustainable business model, strategy analysis is an essential step (Teece, 2010). Most business models are easy to imitate and in order to create competitive advantage a differentiated business model design is important, where the elements work together in a system. For this process it is necessary to couple strategy analysis with business model analysis. A model can create a strong competitive advantage by itself when it is difficult to replicate and changes the economics of an industry (Margretta, 2002). The difficulty to replicate will result in higher revenues for the firm and increased value for the customer (Teece, 2010).

A good business model design is not a static model, it is highly situational and there are possibly iterative processes involved in the design process (Teece, 2010; DaSilva & Trkman, 2014). It is important to keep learning and have the capacity to improve the business model. And for

innovations to succeed commercially, it is essential to analyse and develop business models which can translate the success of the innovation into commercial success (Teece, 2010).

When research is seen as a public good, which is mostly the case with basic research at an Academic University, it is very unlikely to find funding from the business. While there are positive externalities (or spill-overs) there is no direct value for the customer and therefore government funding and/or philanthropy is needed. According to Teece (2010) one way to capture value from inventions is to put them into products. To help create and capture value, the bundled supply of complementary services and products is a common approach. Which corresponds with the cross-selling Gassmann (2015) describes, where additional products are offered to the basic product. It is hard to capture value from intangible assets like knowledge or knowhow. One can also capture value by naked licensing or

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24 even sale of intellectual property (or possession as Gassmann (2015) calls it), when there is a strong patent (Teece, 2010).

When an innovation is radical, the revenue architecture gets more challenging and traditional business models will transform into an innovative one which can help achieve or maintain differentiable competitive advantage (Teece, 2010).

Experimentation and learning is necessary when designing the best fit business model, so that it can be adjusted when needed. Designing the model requires a good insight in customer needs,

willingness to pay and desires, and in the capabilities and possible responses of competitors (Teece, 2010). In the case of the Hanze UAS research already exists as a core task. What is new is the idea of creating more revenues with research, which can come from the business or research funds. These customers can either be existing contacts, or new ones.

Firms have recognized the need to add value for its customers, which has led to service-dominant behaviour and competencies at these firms. What has also changed is the way payments are made. The traditional way is exchange oriented, something is given and something of value is payed for it. The new way is more sophisticated and moves from this traditionally exchange oriented model to models that incorporate temporal, behavioural and relational issues (Ng, 2010).

Ng (2010) describes four major movements she believes to have an impact on the future of pricing and revenue models. First of all we go from value to value co-creation. The organization that wants to be successful in the future has to use value co-creation, with customers and other stakeholders, that will create opportunities (Ng, 2010). Treating the relationship with the stakeholders as a partnership (Jongbloed, 2008) and creating value together, similar to the open business model described by Gassmann (2015). Firms provide value propositions and the customer determines value. The customer chooses the context and the moment that will be best to achieve the outcomes the customer wants to co-create with the firm. The customer puts in resources to realize that value in the form of end benefits and the ability of the customer to realize that value has an influence on the

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25 price the firm charges (Ng, 2010). Prahalad and Ramaswamy (2000) even state that the customer becomes a source of competence for the firm. Bonnemeier et al. (2010) talk about solution selling, where the solution meets the specific business needs of the customer. Either by reducing the costs of the production process of the customer, or by helping the customer create better offerings. The relational process becomes important because of that; it is needed to co-create (Bonnemeier et al., 2010). With this innovating revenue model come two pricing mechanisms which are also innovative. The first is about the solution provider promising a certain quality level, and the customer who pays for that quality level. This is called ‘performance based model’ (Bonnemeier et al., 2010). The second is about optimizing the internal processes of the customer, who pays for value created by the solution provider. This is called ‘value based model’ (Bonnemeier et al., 2010).

The second movement with an impact on future pricing and revenue models is system thinking, where system level outcomes are the result of interaction between components (Ng, 2010). A system consists of a web of stakeholders who contribute to the system and have something to gain from it. The interests of the stakeholders are taken in consideration (Jongbloed, 2008). Pricing will be more dynamic on a system level, which can be used as a level of analysis. More innovating pricing models will come from these system levels. The third is the buying of outcomes, system capacity and access

rights, which mainly comes from the need to be sustainable. Ownership and consumption of goods is

being traded for contracting and buying outcomes and having access to them (Ng, 2010). The last is about the context in which the customer will derive their value; how, where and when they use the activities, services or goods (Ng, 2010). Data is crucial here according to Ng (2010), to analyse contexts and use and determine the value the customers attribute to different contexts. Each context, or bundle of contexts, can be based on the analysis. New combinations of use contexts can develop and with that the need for new services and pricing bundles (Ng, 2010).

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26 A conclusion here is that an excellent relation between the different stakeholders is a key to success in determining the best revenue model and putting it to practice. This implies the firm should have very good relation management as a resource and key competence.

The importance of this relation is also stressed by Siegel et al. (2003) who wrote a paper on how the effectiveness of the collaboration between the business and the universities can be improved, which will help bring technological innovation to the market. The interests of the three key stakeholders are very different. The scientist wants recognition from the research community and publications, the valorisation department wants to protect and market the university’s innovation and the

business/entrepreneur wants a financial gain. In order to overcome barriers in the collaboration between the business and the universities, Siegel et al. (2003) explored these differences. The business and universities experienced a lack of understanding regarding their norms. Business managers stated scientists and valorisation experts did not appreciate and understand the goals, constraints and culture of the industry, while scientists and valorisation experts stated that business managers did not appreciate and understand the goals, constraints and culture of the university. Siegel et al. (2003) suggest a couple of improvements for the effectiveness of the collaboration. The most important one is about the understanding between universities and the business. The needs of the business have to be understood by universities, the understanding of those needs has to

improve. Another improvement is about flexibility; the negotiation, agreements, policies and procedures need to be more flexible. Inflexibility and rigidity have a negative effect on the

negotiation process. The risk aversion of universities does not fit the need to respond quickly in an ever changing and competitive environment, especially for start-ups. A task for HR would be hiring managers and valorisation experts with more business experience. The marketing skills need

improvement in order to bring the innovation to the market. Siegel et al. (2003) also mention agency theory in this context, as did Gautier & Wauthy (2007). Because of the conflicting interests of the scientist and the valorisation experts (the principal and the agent) and the assumption that each

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27 party acts in their own interest. Therefore an improvement could be that the valorisation experts receive incentive compensation for successfully marketing the innovation. The importance of leadership in making the marketing of innovations happen, is translated into managers with a strategic vision who make improving the collaboration with the business and the marketing of innovations a priority. What would also be an improvement according to Siegel et al. (2003) are additional resources for the part of the organization responsible for marketing the innovation. More staff is needed for the marketing and when the portfolio of the university is not well known,

proactive marketing is needed as well. The final improvement is about the importance of social networks (involving firms, scientists, alumni and graduate students) where the mutual

understandings can be improved. A suggestion made in this paper is organizing conferences where all of the stakeholders are brought together.

Conclusion

When revenue models are designed it is important to make it a dynamic process with the possibility to learn and improve. All the theories about innovating revenue models discussed in this paragraph are about co-creation and how to effectively realize that, with a link to universities and innovations. Good relation management is essential when co-creating, in order to bring the interests and needs of all stakeholders together.

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Chapter 2 Research design

2.1 Overall design

Thinking about creating more revenues through applied research is relatively new for a UAS, the availability of academic literature is limited and therefore this fits choosing qualitative research according to Boeije (2014) and an interpretative, exploratory approach. The qualitative design will provide a rich description of revenue models that can be used by the Hanze UAS, coming from multiple perspectives (Yin, 2009). An inductive model is used to collect data which in the end can be used as input for a revenue model (Saunders et al., 2012).

The choices that are made in this research design are based on the research question which revolves around the phenomenon of creating revenues with applied sciences. It is answered by interviewing experts and stakeholders (the unit of analysis) on their experience and knowledge about revenue models related to research, in a case study. In this holistic single case study (Yin, 2009), the case exists of organizations who have a relation to applied research and who already use applied research. This primary data coming from the interviews, together with secondary data from literature, will be analysed which will result in recommendations on a revenue model for the Hanze UAS.

2.1.1 Quality

The quality of this research can be judged by three tests, commonly used in social science; construct validity, external validity and reliability (Yin, 2009). In order to achieve construct validity, multiple sources of evidence are used: the primary data from several stakeholders coming from different contexts, and secondary data. There will be a chain of evidence to make sure the reader will be able to follow the process from research questions to the conclusions and recommendations of the research (Yin, 2009). And the draft version of the thesis will be reviewed by an informant; my supervisor and the head of staff office Research & Education from the Hanze UAS. The chain of

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29 evidence and the reviewing of the thesis are also measurements to achieve reliability, which means that a later investigator will get the same result following the same procedures described in this thesis (Yin, 2009). To assess the trustworthiness of the research and enhance the credibility of my findings I will use stakeholder checks, carried out by my supervisor, on the coding of my data and on the findings, interpretations and conclusions (Thomas, 2006).

External validity is about the generalizability of the research (Yin, 2009). The case study is aimed at finding a revenue model for the Hanze UAS and therefore considers the context of this specific UAS. Because of that the results of this case study, the analysis and the recommendations are not directly generalizable for other UAS’s. Because of the combination of using academic literature and

interviews the outcomes will contain usable information for other UAS’s, but the conclusions and recommendations will specifically fit the context of the Hanze UAS.

2.2 Data collection

The collection of the data is done by conducting semi-structured interviews (appendix 1) with stakeholders in relation to applied research, after which the data was analysed by codifying and categorizing it in order to find patterns and new insights on revenue models in relation to applied research.

Semi-structured interviews were used and the knowledge gathered from literature on different revenue models formed the input to interview people who are experts and stakeholders in different fields related to research and revenues. The questions are based on the knowledge and prepared in advance. There is a probable order of the questions, which can change when needed. The

respondent can answer in his or her own words. By using this semi-structured method, assurance is created that all respondents will be asked the same questions. This will help reliability of the data collection (Bleijenberg, 2013). As in the Delphi-method (Okoli & Powlowski, 2004) the choices for the

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30 experts are made on the requirements for deep understanding of the issues, they must be qualified experts. The Delphi-method suggest a sample size of 10-18.

The research sample of 24 existed of three groups of interviewees: experts active in research, decision makers and people supporting research.

 Experts active in research from the Hanze UAS itself and from outside of the organization. The later are divided in experts on applied research and experts on research in general, coming from the Hanze UAS, from CHEPS (Center for Higher Education Policy Studies); a research institute at the University of Twente, from the Amsterdam University of Applied Sciences, and from the Netherlands Organization for applied scientific research TNO.  Experts supporting research: revenues can come from the second flow of funds (funding

organizations) and from the third flow of funds (business) and because of that experts on funding and valorisation were interviewed from the Hanze UAS, from the university of Groningen, from Saxion University of Applied Sciences and from HAN University of Applied Sciences. Also, experts on revenues from the Hanze UAS were interviewed from the finance department.

 Important stakeholders are decision makers: people responsible for the execution of strategy and achieving related goals. One of the members of the Executive Board of the Hanze UAS was interviewed who has applied research in his portfolio, the director from the ‘Nationaal Regieorgaan Praktijkgericht Onderzoek SIA’ which’s responsibility lies in financing and stimulating applied research at Universities of Applied Sciences, the director of Research and Valorisation from the university of Groningen and a Dutch politician with higher

education (UAS’s and Academic Universities) in his portfolio.

The data collection began with interviewing internal experts and stakeholders. The main reason for this is that they could form a starting point in contacting external experts. Their networks were used for snowball sampling (Saunders et al., 2012).

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31 The interviews took place at the location the interviewee preferred, mostly near or at their work environment. The interviews took an hour to an hour and a half and they were recorded after permission was given by the respondent and their anonymity was guaranteed.

During the data collection phase, an applied research conference was organized by ‘Nationaal Regieorgaan Praktijkgericht Onderzoek SIA’. There were several workshops and opportunities to network and two of the workshops are part of this research. One workshops provided information about an impulse for SME’s and UAS’s participating in research together and another was about the question what the next step should be for applied research.

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2.3 Data analysis

The semi-structured interviews were audio recorded and these were transcribed, word processed and analysed as text data (Saunders et al., 2012) for which computer-aided qualitative data analysis software was used (ATLAS.ti). The data was analysed inductively and executed by organizing data while reflecting on the research question, because it is important to keep focus on what one wants to find out and why (Boeije, 2014). The analysis consisted of three elements: unravelling data and organizing it in themes, working out these themes and discovering what is important and in the end finding patterns and integrating themes. The final goal was to discover patterns, which were used to formulate new theory combined with information coming from literature.

The analysis of the text data started with open coding (Corbin & Strauss, 1990) to analytically break down the data from the interpretative research. The interviews were coded using line by line coding; coding phrases and sentences. Because of the inductive approach in this research, the theory has derived from the data and the themes have derived from the interpretation of the raw data coming from the semi structured interviews. A constant comparative approach was used in an attempt to saturate. In the end there were no more codes coming from the data, which was already experienced when interviewing. During the last interviews no new information came from the interviewees relating the research question. It did however bring the opportunity to dig deeper into the details mentioned by the interviewees about making the revenue models to a success. For example the marketing department, having a role in relation management. Interesting for the organization and the success of the revenue model when implementing, and therefore the interviews proceeded while being convinced the saturation had been achieved.

After the phase of open coding, axial coding was used to relate the categories to subcategories, test the relationships with the data and to further develop the categories (Corbin & Strauss, 1990). The subcategories were:

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33  the causal conditions: what causes the need for the revenue models;

 the strategies: what do the interviewees do using the revenue models, how do they influence them;

 the context: in which the revenue model is used and the strategies taken;

 intervening conditions: what has to be done first in order to get to the revenue models;  consequences: what finally happened.

On the causal conditions and consequences not much codes were derived, and therefore they were left out of the final model (figure 4). The causal conditions are discussed in the introduction and are about limited financing of UAS’s. The consequences of using the model are not known yet, they will when the revenue models will be put in to practice.

From the interviews and the literature a couple of revenue models were derived and some ideas on innovative revenue models which could be relevant for applied research. During the axial coding the information was used coming from the literature and compared to the revenue models coming from the interviews. Similar to this process the revenue models from the literature were used and

compared to the data collected from the first four interviews. By doing this the revenue models were filtered out that could be relevant for the research; revenue models which could be used to increase revenues from applied research. From that moment on this information was used in the interviews by asking interviewees about their experience with, knowledge about and usability of these revenue models, after they gave information on which models they used and/or recommended.

In the last coding phase selective coding was used (Corbin & Strauss, 1990) to generate core categories or central concepts. Selectively relating the core categories to other core categories. In this phase poorly developed categories were identified, for example when there were only a few explanatory concepts (Corbin & Strauss, 1990). In the end a story could be told with these categories which answers the research question and tells which revenue model(s) can be used or developed to help the Hanze UAS increase its revenues from applied research.

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Chapter 3 Results

This chapter provides in an explanation of the results of the research. The key-interrelated themes are displayed in figure 4 which are addressed in detail. The results are supported by several quotations from interviewees.

Causal

conditions:

Limited financing

Revenue models:

 Contract research and regional innovation

 Research funds

 Participate

 Creating value with research results

 Integrating different disciplines

 Reputation

 Other activities

Strategies:

 Business development

 Demand oriented research

 Strengthening research groups

 Better connecting research and education

Consequences

Context:

Entrepreneurial research platforms:

 Innovation Work Places

 Centers of Expertise

 Research centers

Intervening conditions:

 Improving support from staff offices

 Enhancing entrepreneurial culture

 First flow of funds

 Focus

 Enhancing research culture

 Long term strategies

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3.1 The phenomenon: revenue models

There are seven revenue models for applied research as figure 5 shows. It displays the three groups of interviewees versus the different revenue models. The biggest group of interviewees are the experts supporting research, the smallest the decision makers. This partly explains the difference in height of the bars in figure 5. The other factors explaining the differences are presented in this paragraph.

Figure 5: Revenue models versus sample characteristic

3.1.1 Contract research and regional innovation

The first revenue model in figure 4 is contract research and regional innovation. Figure 5 shows that the three groups of interviewees all mentioned and advised this revenue model the most. They also believe the business is willing to innovate more in cooperation with UAS’s. One of the interviewees supporting research said: “The business comes to us with an issue. It always includes research, which can be fundamental or applied. Ideas come out of that process and that is a circle you want to get started. You should use a business or institution as a starting point, they have a research question. We also try to do projects originated from our own line of research. They do not connect to the research question the business has. Then we are frustrated that the outcomes do not align with what

Participate Other activities Contract research and regional innovation Integrating different disciplines

Reputation Research funds Creating value with research

results

revenue models

Revenue models vs Sample characteristic

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36 the business needs and you will not get a product that is worth money. So if you do follow the circle, the business is more than willing to pay for it. It just works. They get the picture and understand we put much effort in it. But they want something they asked for and not an idea imposed to hem”. Contract research is about providing research services to businesses and institutions on a contract basis. Regional innovation is about research at regional businesses and institutions. The businesses and institutions make use of the research expertise of the Hanze UAS to innovate. It can be a co-creation, where the expertise from the business is linked to the expertise from the UAS. One of the interviewees active in research said: “Offering what the business needs, with the knowledge you have. That is a unique position which you have to be able to develop. And that is fun.” Another one active in research said: “So we leave the articulation of the research question with the regional cooperation’s. After which they will come to us and because we have a structural relationship because of internships etc., we can immediately arrange support from lectors. We really begin to see volume there. We are already at a couple of hundred of those three thousand

Innovation Work Places which we want to accomplish and with those we create an ecosystem where problems are addressed and where we create innovation.”

Disadvantages of contract research and regional innovation which were mentioned the most are that the business cannot demand high quality results from the students, there often is a difference in time span between what the business wants and what the student needs for the research (one of the interviewees active in research suggested a long term commitment with the business is preferable because of this), the first flow of funds and other resources like facilities are lacking and the fact that in the North of the Netherlands most businesses are small and medium enterprises (SME’s). They don’t have a lot of money to spend on research and with the money they do spend they might want control over the research process or matters related to the research; he who pays the piper, calls the tune. The advantages mentioned on the other hand are that the research is interesting for students; they get state of the art knowledge and the quality is high, the business can influence what the

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37 students learn and students can participate no matter what year they are in. An interviewee

supportive on research said: “The more money you get from het business, the more you have to relate to them. That is a disadvantage. I do find that the advantages overweigh the disadvantages by far”.

3.1.2 Research funds

Research funds as a revenue model have a strong relation to the first one, because one of the conditions of most organizations funding research is that a UAS works together with the business on the research. Another important condition for most funding organizations is a contribution from the first flow of funds, coming from the university itself. One of the intervening conditions coming from the interviews is the advice to increase this first flow of funds in order to create opportunities for more research funds. At the same time it is a solution to one of the disadvantages of the first business model, as mentioned in the previous section.

One of the interviewees supporting research said: “Research funds work very simple: when you do something that fits the policy and you invest yourself, a funding organization will want to provide means.”

Disadvantages of research funds as a revenue model mentioned by the interviewees are that the costs of the work a researcher and/or supporting staff puts into the grant application do not always mount up to the amount the UAS receives from the research fund. An interviewee active in research said: “You can be very proud to participate in a consortium for a national research fund, or a

European project with partners from who knows where. Look what I raised. But the time the lecturer or researcher has put in, is sometimes disappointing and then you suffer a loss. That is not very wise”. Another disadvantage which was mentioned is the idea is that the fund creates a starting point for the UAS to develop something that can be successful without extra funds, like a product or service, but that doesn’t always work. An interviewee supporting research said: “I watched a lot of

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38 funded researches fail… in the end no product or service of use for society has come out of it”. Advantages are similar to those from the first revenue model: external orientation, up to date knowledge, contacts with the business and research that fits the needs of the business.

3.1.3 Participation

The third revenue model is participation, mostly in a start-up which is the result of research. UAS’s can help students with the start of their own business in many different ways, from financing to a business plan, but there are no revenues in return. Some interviewees have even called this naive. One of them supporting research said: “We do a lot for almost nothing. Helping students starting up a business. Searching for financing. Thinking about a revenue model with the student. Coaching. We do all that without the student having to pay for anything. When an innovation evolves and makes it to the market resulting in profits, I believe the UAS has the right to be compensated for the guidance during that process. And I even support actual participation.” Most of the interviewees working in a UAS explained they are looking at the possibilities of participation. If they can, if they must and what it means.

According to the interviewees the advantage of this model is that the student gets support in starting their own business, and the UAS can generate revenues from the shares they own. From all four UAS’s interviewees shared examples of start-ups which originated from a UAS and are very successful businesses now. If they had participated, interviewees said, they would have earned a lot of money to invest in research and education. Making sure the money flows back into the UAS in the form of research or education is explained by a couple of interviewees as an important condition. The interviewees from the university of Groningen explained they use this model already and they make sure the money is invested in research. The disadvantage of this model, is that there is a risk of losing money and because of the public financing of the UAS’s the question is if this is a model that would fit a UAS. Most people interviewed are convinced this is a good model to use and the time for UAS’s

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39 to determine how. They did however also explain this is a model that needs time to create revenues with and that it is essential that top management supports it.

3.1.4 Creating value with research results

This revenue model has some overlap with the previous one, because a start-up can be the result of research. Creating value with research results is more about the step before thinking about

participating, namely turning the results of research into something valuable. There is a lot of valuable research that ends up in a drawer and there is a lot of potential there, interviewees explained. Not only for the UAS, but also for the student and the business. One of them supporting research said: “We almost never see a linkage to the value we can create for the business. Nobody makes a business model for what we invent. Worse still: when something was invented, it almost always disappeared into a drawer. Unthinkable from an economic perspective.” Another example of creating value with research results, is by offering educational programs based on these results. Some of the interviewees explained that especially demand oriented research can result in innovations professional practice wants to use and wants to learn how to use.

The advantage of being a UAS in comparison to an Academic University, interviewees explained, is that the innovations are quickly applicable and they are what the business wants because the input for the research comes from the business. One of the interviewees supporting research explained that there is an awful lot to gain from this revenue model, because there are a lot of useful research projects to tap into and the innovations can be used easily in practice. There were no disadvantages mentioned on this revenue model.

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3.1.5 Integrating different disciplines

This revenue model is about addressing social issues and innovation with the business in an integrative way, where knowledge from different disciplines is combined. An interviewee active in research said: “Research often targets one facet. We are all good at making one facet important. We are very good at proving that this facet is very important, but in fact there are all kinds of different building stones. However, if we bring these building stones together into bigger systems I think you create more value and I also think it is way easier to create more revenues.” And an interviewee supporting research explained that in the school she works for students from her school and other schools will work together. They all have different approaches, which they will combine. The students learn from each other and the business benefits from a more complete package. The advantages of this model explained by the interviewees are that it provides more market potential and the research has a bigger impact. There were no disadvantages mentioned on this revenue model.

3.1.6 Reputation

Familiarity with what the UAS has to offer the business is necessary in order for the business to approach the UAS with research questions. When the business does not know the UAS offers what they need, they will never approach them. This may seem very obvious, but practice has proven otherwise. One of the interviewees supporting research said: “The social impact of placing an up-ed piece or approaching the media, creates familiarity with what the UAS has to offer and this is also a revenue model. There is no other resistance than the costs that go along with it. The business is not familiar with all of the possibilities the Hanze UAS has in store for them.” One of the interviewees supporting research also explained she didn’t think the UAS should get rich as a result of research, the Hanze UAS should build an excellent reputation and become the number one UAS of the Netherlands which will result in more contract research and/or regional innovation. Another

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41 interviewee supporting research explained that businesses were interested to contribute to research at the UAS, as soon as they found out the UAS was conducting research relevant to their core

business. They wanted to contribute, because they could create a better market position for themselves by improving their product. They can advertise with what they are planning to do with the research results. The interviewee explained that when you create something that people can understand and see the value of, it can create revenues.

One of the disadvantages of this model is already mentioned in the quotation; the costs of placing a piece or advertising. Another one mentioned by the interviewees is that the effect is difficult to measure; how do you know revenues come from investing in the reputation of the UAS? The

advantage that is mentioned the most is that a good reputation and familiarity cause the business to approach UAS’s with more research questions and the willingness to support research of

organizations who fund the research increases.

3.1.7 Other activities

This revenue model is related to the research funds model, because other activities (other than research) are identified as first flow of funds to create more room for submitting an application for research funds as one of the interviewees, active in research, said: “What we did is we said, part of our strategy is the educational vision 2020. Important in this vision is that the business (professional practice), education and research are connected in the three circles. This comes together in what you try to do in an Innovation Work Place. So if you do research it is also education, if you educate it is also research. What you are actually doing is labelling education as research, knowledge

development, contributing to the business what is fundable and with which you actually… you cannot finance education twice, that is not allowed, but you can label it as first flow funds. That is what we do, but only if you direct it carefully and it contributes to the goals of the project.” One of the interviewees supporting research explained that he expects money for research and money for

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42 education will eventually come from one source where you look for ways to organize education in a smart way, so you include research at the same time. Only pumping more money in research, he said, would eventually be at the expense of education. His advice is to look for smart ways of combining the two.

The advantage according interviewees is of this model is obvious; it creates room for more second flow of funds. The disadvantages mentioned by the interviewees are general disadvantages when the UAS will do more research. First of all a shortage in facilities for doing research and second the presence of lecturers who don’t want to specialize in certain subjects concerning the research or who don’t have affinity with research at all.

Revenue models for the Hanze UAS to increase revenues from applied research with

Revenue Models for

Applied Research

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Revenue Models for the Hanze UAS to Increase

Revenues from Applied Research with

Statement of Originality

Table of contents

Abstract

Introduction

Chapter 1

Literature review

1.1

Applied Research

1.2

Financing of universities and research

1.3

The balance between research and teaching

1.3.1 The influence of financing

1.3.2 The influence of quality

1.4

Universities and their stakeholders

1.5

Revenue models

1.5.1 Innovating the revenue model

Chapter 2

Research design

2.1

Overall design

2.1.1 Quality

2.2

Data collection

2.3

Data analysis

Chapter 3 Results

Causal

conditions:

Revenue models:

Strategies:

Context:

Intervening conditions:

3.1

The phenomenon: revenue models

3.1.1 Contract research and regional innovation

Revenue models vs Sample characteristic

3.1.2 Research funds

3.1.3 Participation

3.1.4 Creating value with research results

3.1.5 Integrating different disciplines

3.1.6 Reputation

3.1.7 Other activities