The intellectual property plan that ran out of ideas

What, he wanted to know, did she have to say about the Intermediary Technology Institutes (ITIs), those intellectual property (IP) factories that have swallowed £231 million of public money and whose returns have been questioned.

They had been a "bold" initiative that had been held back by the economic collapse, she replied. They could still produce great results. She would be only too happy to supply the committee with all of the agency's evaluations of the project.

It was probably the first time in years that the subject had been up for discussion in a public forum, much less any kind of public inquiry, but the politicians swiftly moved on without asking any follow-up questions. Contrast this with 10 years ago, when nobody could say enough on the subject of the ITIs.

They were introduced by then SE chief executive Robert Crawford, who promised that the initiative would spend £450m in 10 years commissioning research to produce IP that would be used under licence to create a new generation of world-beating Scottish companies. This looks a small fortune next to more recent public ventures such as the £28m being put into five research and development centres.

Modelled on the likes of the Fraunhofer institutes in Germany, the length and ambition of the ITI commitment was held up as a welcome change from quick fixes and hyperactive new initiatives that come and go with each new leader.

To loud approval from then first minister Jack McConnell, Crawford said: "If we get this right, it will be one of the most important things not only that Scottish Enterprise has ever done, but also that Scotland has ever done.''

The programme broke down into three so-called institutes that were focused on the areas that were seen as having the greatest growth potential for Scotland – techmedia, life sciences and energy. Set up respectively in Glasgow, Dundee and Aberdeen, and answering to a head office in Glasgow, they were deliberately made completely separate from SE so they would think like private companies.

Each institute was to hire a team of about 15 specialists who would decide on the greatest commercial opportunities in the field. With budgets of £15m a year each, they would seek to realise these by commissioning research programmes with universities, Scottish and foreign companies – so long as they established a unit here. The point was to choose development areas that would produce IP platforms that would not only have a specific use in one field but could be licensed for different applications in a number of fields.

The belief was that this would produce 75 start-ups and spin-outs within 10 years, and 170 within 20. SE was to make sufficient royalties from licensing the IP that the programme would be 40% self-funding within 10 years. Soon, certain politicians were demanding that double the money be spent. Business association the CBI went further, demanding a fivefold increase.

The programme started confidently, hiring an array of eye-catching names on six-figure salaries who had come from senior positions in companies such as Shell and Sony. They were led by Roger Dickinson, a top patents lawyer, and chaired by Gordon Campbell, who had the same role at industrial conglomerate Babcock International.

By 2005, there were 57 staff with an average salary of more than £71,000 (£87,000 in today's money). Research programmes were getting under way into everything from rechargeable batteries to text-mining of databases to biomedical diagnostics.

Then personnel started to become a problem. Campbell left the same year, along with life sciences boss John Chiplin and his energy counterpart, Tony Amor.

Campbell was replaced by Shonaig Macpherson, a former McGrigors senior partner and patents specialist who was morphing into one of the darlings of the Scottish non-executive circuit, with other roles including the National Trust for Scotland, the Scottish Executive, BT Scotland and the Scottish Council for Development and Industry.

By the following year, Roger Dickinson had gone and techmedia head David Creed's duties were extended to running the organisation. At the time, Macpherson's public comments about the fact that the two jobs could be done by one person both indicated that she could be coming under pressure from SE to rein in costs.

Numerous anonymous claims began appearing in the press about Macpherson doing SE's bidding. There was perpetual instability at the energy institute as three successors to Tony Amor came and went in the space of three years. There were also grumbles that either it was unattractive for private companies to rent IP from a state agency or the rates were too high to make commercial sense. By the time David Creed arrived in 2008, SE was in restructuring mode and everyone assumed the ITIs were for the chop. Sure enough, they were brought in-house in 2009, and Macpherson and her board departed.

In 2010, the decision was taken to effectively run down the programme even though barely half the budget had been spent. By this time, 31 programmes had been commissioned and 24 licensing deals had been signed. Staff numbers had peaked the year before at 77 on an average of £78,500 a year.

The focus has since been on finishing off research spending on existing programmes and trying to do licensing deals with the IP that came out of the programmes. Spending only exceeded the planned £45m a year once, in financial year 2006, when it was £47m, before dwindling back to £9m in 2011 and £5m last year. SE says the number of deals now stands at 23, with some having expired and four new ones signed.

However, a survey of the companies on the list indicates that some have gone bust, sometimes the IP had become obsolete and sometimes the companies have not been involved with SE for years.

More accurately, there are about 10 companies that are currently operating with ITI IP, two of whose boards include people who were previously on the ITI payroll. Five came out of techmedia, five came out of life sciences and there are none from energy. It has not been possible to ascertain exactly how many people are employed in them because some companies would not divulge information, but it is likely to run to a couple of hundred. Scores of other people, maybe hundreds, would have earned ITI money during the research stages of projects.

To date, SE's royalties have been about £600,000 and hardly any of the companies has reached break-even – albeit you might not expect that at this stage, particularly in life sciences.

Paul Lewis, a senior SE director who assumed responsibility for the unit, says the decision to reverse previous SE policy over the ITIs was informed by an internal piece of research known as the commercialisation longitudinal study. This essentially found that the organisation had been good at spotting gaps for research but, like SE in general, had been poorer at commercialising them.

He says: "We found that technology was important, but was probably less important than understanding the market and whether it's big enough for companies to be able to grow to scale. We needed to put more emphasis on building the route to market. We needed to start building stronger commercial milestones and building the right management teams from the outset."

This looks to be an acknowledgement that the companies behind the deals were not performing up to scratch.

Lewis insists that the decision to row back was not about cutting the budget but because the study had suggested a "better way forward". It is still not clear why SE cut the commissioning programme, however.

Lena Wilson, who last year faced criticism after she took on a £55,000 non-executive directorship on top of her circa £200,000-a-year role at SE, told last month's committee that she had not been "happy about the ITIs because they were becoming expensive institutions to run. We therefore took the decision to bring the initiative in-house".

She told the committee: "We did not anticipate that the economy would turn out the way that it has."

Lewis says that SE's commercialisation programme is now focused on building companies that fall into what the agency calls its "five by five metric" – meaning they can produce a turnover of £5m within five years and then double every two to three years thereafter.

Four of the ITI companies are seen as being in this category – Design LED, Embedded Technology Solutions, Integrated Magnetics and Millipore.

Design LED is based in Livingston and makes illuminated "tiles" that can bend around objects. Embedded, based in Glasgow, makes smart collars for cows that enable farmers to monitor their health.

Integrated Magnetics, based in Dundee, makes magnetic proteins that could be used in diagnostics and treatment, using IP that was an unexpectedly useful by-product of a wider research programme. Millipore might hold the greatest promise of all. Owned by US pharma giant Merck, it specialises in helping to overcome proteins called ubiquitins, which are seen as a major barrier to efficient drug discovery. According to the company's most recent accounts, they are all still some way from profitability.

Beyond these, SE points to four more companies as having potential for scale – Mölnlycke Healthcare Scotland (chronic wounds), Metaforic (online games development), Contemplate (software integrity) and CXR Biosciences (transgenic screening) – plus a further four pieces of IP are the subject of licensing discussions and relate to resonance enhanced drilling, composite pipelines, genome segment assembly and explosives detection.

Lewis says that the time to judge whether the new clearer approach on creating businesses is successful will be 2017, when the period foreseen by the longitudinal study has run out. Despite the old aim of being 40% self-funding within 10 years, he stresses that it's not about SE royalties but about creating a wider economic impact. By the end of the period, SE believes its overall commercialisation programme will be producing £8 for every £1 invested over a 10-year period.

He says: "I suppose I am more sanguine about the ability to leverage some economic impact from these, but I am also realistic that a lot of money was invested in the ITIs through their life time, though much less since it's been my responsibility. But it will be for others to judge whether they have been successful in due course."

The time for asking more questions is not now. All we can say is that Robert Crawford's original predictions, in terms of investment and achievement, have not been met.

The debate over whether this was because he was too optimistic, blown off course by the economy or thwarted by his successors and their political masters will undoubtedly continue.