Understanding IP as a strategic business asset
For centuries, companies have linked their ideas to cash flow by embedding their ideas into products or services to be sold.
In the 1990s a new concept started to take hold that revolutionised the way companies extract value from their ideas – the ideas themselves in their raw state can be licensed, sold or bartered for great value.
An early pioneer of this concept, IBM, earned $1.5 billion per annum from licensing its IP by the year 2000.
New Zealand businesses seeking growth through export can learn something here, by seeking to export their IP through a licensing program, rather than the traditional activities of exporting products or establishing a foreign subsidiary.
Companies around the world are extracting value from their ideas through the discipline of intellectual property management. Like any business asset, intellectual property has to be actively managed in order for it to contribute value.
Unfortunately, New Zealand is lagging behind other parts of the world when it comes to understanding and implementing intellectual property management.
Until fairly recently it would be hard to find any mention of intellectual property in the New Zealand education system. The first real mention of intellectual property in my commerce degree was in a final year entrepreneurship class, and even in the school of law there was only one IP paper. It should not be difficult to find New Zealand business faculties offering a paper on managing intellectual property.
It is no surprise then, that most New Zealanders start out in business with little or no understanding of intellectual property.
I know this because only a few years back at a business functions it was common for me to get blank stares when I told someone I was an intellectual property attorney.
I would invariably have to go on and explain “you know, patents, trade marks, copyright - that kind of stuff”.
Thankfully these days, most people at least understand what I mean when I say “intellectual property”. However, most business people in New Zealand still have only a rudimentary understanding of how intellectual property is relevant to their business – and very few treat it as a strategic asset.
Those people who show a deeper understanding of IP have usually got a war story, which explains why they have come to learn about IP. Either they have been ripped off by someone copying their product, they themselves have been sued, or they have actually developed a really cool invention, sold a couple of units only to be told by a patent attorney that those sales destroyed their ability to get a patent for their invention in some countries.
Where is your company in its awareness of IP as a business asset? My website has an Intangible asset healthcheck that you any business can use for self-assessment.
A model called the Value Hierarchy was developed in the book Edison in the Boardroom, for companies to map their IP awareness and to understand how they might progress to higher levels of understanding.
People first understand intellectual property as something used defensively, to stop others from copying or eroding a competitive advantage. Offering lowest prices is an unsustainable competitive advantage unless you have some reason your competitors cannot match that price (for example patented production processes). Product differentiation is likewise unsustainable, unless you can prevent someone from copying.
If your competitive advantage relates to the functionality of your product, you can protect that by either keeping it as a trade secret or obtaining a patent.
If your advantage is knowledge based, again patents and trade secrets are relevant; but also consider measures such as confidentiality clauses and restraints of trade for key employees.
If your advantage is the way your product or its packaging looks, then this is protected by copyright, registered designs, and potentially trade marks.
If your advantage is your brand, so that customers continually repurchase your product, or are willing to pay a premium for your brand, then registered trade marks are important.
In this defensive stage of understanding, IP is viewed as a legal asset – a shield and a sword to protect your patch. Businesses in this stage may stake their claims to IP rights in a somewhat ad hoc manner, as and when they believe the need arises. They are concerned with protecting themselves and ensuring their own design freedom.
As businesses grow in size and the number of markets addressed, their IP portfolio grows much bigger. They notice their IP spend growing rapidly. These businesses start to view IP as an investment in which the cost-benefit relationship must be managed.
They develop criteria for deciding whether money should be spent on IP protection for new innovations or brands, and they review their existing portfolio carefully to see if money can be saved on renewal fees by abandoning unused patents or trade mark registrations.
Companies at this level have a better grip on their entire IP portfolio, understanding what they have and where new developments might fit in. IP is viewed as a legal asset, whose cost must be managed carefully.
Most New Zealand businesses are operating in these first two stages of understanding.
The next stage requires you to understand that because IP lets you “keep someone out” it can also be used to make money from “letting someone in”. A move into this value capture stage of understanding might be prompted by an approach from a foreign business interested in licensing a patent you own in its country. The passive income you receive from this licence, which goes straight to your bottom line, suddenly causes you to realise that there might be other parts of your portfolio that could be put to work.
In this stage of understanding, IP is considered a business asset, rather than a legal asset, and the focus becomes extracting value from the existing portfolio. Any IP right that is not actively used in the business or is otherwise non-core is reviewed to determine whether it can be sold, licensed, stored for future use or should be culled. The company will start a proactive licensing program.
IP is valued and linked to the company’s business and marketing strategies, and the company will develop some external focus on competitors’ use of IP.
in the next level, companies come to view IP as an integrated business asset have a deep understanding of the strategic implications of intellectual property at a business unit and business model level. IP is used to strategically position the company in the market, and so decisions as to what to include in the portfolio require a more complex understanding of competitors’ IP strategies and portfolios.
The company aligns its IP strategy with its corporate strategy, and functional units across the business understand the role IP will play in enabling their own goals.
For example, the HR department will be aware of the technology gaps that are to be filled in the IP portfolio, so they can be on the lookout for top scientists or engineers in the relevant fields. The finance department will understand the IP portfolio and use it to create tax advantages, or identify new acquisition targets.
The marketing department will start using IP searching to predict new product development by key competitors, and such like.
Companies at the final level understand that IP can be used to shape the future direction of the organisation and the industry in which it operates. They are interested in how the industry is evolving and in trying to not only anticipate, but to create, future trends in products, customer preferences and technologies.
Steve Fox of Hewlett-Packard put it this way, comparing two businesses on two seemingly different strategic paths:
They may not be on the same path at this point in time, but downstream there is a good chance that those two paths are going to converge and there is going to be an intersection point. When they get to that intersection point they become direct competitors. So what is it that they can patent now that will cover what their competitor does five years from now?”
With this framework in mind, what are some steps you can take to start improving your company’s understanding of IP as a strategic tool?
Create a central accessible catalogue of all IP owned or under control of the company. You can’t manage it unless you know it exists.
Carefully analyse the portfolio, so you understand it in terms of application and value. What is the business use for this particular asset – is it employed within a particular product, held to prevent a competitor entering a certain space, or held because it may be of interest to someone in a trade sale? Assign a relative value to each asset – is it a must have, nice to have or junk? Then consider what value the asset could have to an actual or potential competitor – it could be held as a bargaining chip or licensed to them, or traded for a technology they have that is of interest to you.
What can you do to mine more value out of your portfolio? Instead of just abandoning unused IP, could you perhaps sell it or license it to someone? Are there any applications for your core or non-core technology that you are not interested in and could to licence-out to another party? Could you licence your technology or brand into other geographic markets? Assign someone to chase these opportunities.
Develop protocols for deciding whether to add new innovations to the portfolio. You must require IP searching to ensure that you will not infringe the rights of a third party – an infringement can threaten your very existence. Develop a formal process for deciding whether new innovation should be made in-house, or acquired from outside – either by way of licensing or a contracted developer. Where outsiders are used be careful to ensure the company engages in formal written agreements concerning ownership of IP.
Create an IP culture, by educating staff at all levels on the value and importance of IP. Create incentives for staff to disclose new innovations to management early, and teach them that public disclosure, including selling or commercial use, will destroy the company’s ability to get patent protection.
Start a competitive intelligence program that includes IP searching, to understand your competitors’ future activities, identify key scientists or engineers worth employing, and potentially impede your competitors’ strategies. For example, one of my clients regularly searched trade marks filed by its Australian competitors in Australia, and learnt about likely new product lines before they hit New Zealand. It is also possible to draw a visual map of the patent landscape in a particular technology field, which will tell you where the technology gaps are, where the greatest innovative activity is, and who are the leaders in the field. Because patents require that you name individual inventors, you can also see who is worth poaching.
Finally, you must create a feedback loop by designing some metrics that measure key activities that are important for your IP and business strategy. If the strategy is to have a more innovative workforce than competitors, you might measure the number of patents per employee; if a key objective is to increase the efficiency of your IP spend, then perhaps measure IP costs as a percentage of revenues; if you want a strong licensing program, then measure percentage of revenues generated by licensing, and so forth.
In conclusion, CEOs are ultimately responsible for maximising company value. IP is an asset that can add enormous value if managed appropriately. Your leadership is required to transform your company’s treatment of IP from that of a defensive legal asset, to that of a strategically important business asset.
You can take the simple actions I have described today to start the process.