Effective R&D is strategic but also expensive, costing money both to develop products and to protect and defend them. Given that only a small percentage of patents are employed to support strategic growth objectives, R&D is also not very productive. The rest serve, in the best case, as asset valorisation instruments or as weapons to defend against competitive action. In this context, it is normal for intellectual property to be considered as “property”, something that can be traded, and not necessarily as potential capital. With the 21st-century emphasis on knowledge sharing, partnering and “win-win” approaches, this mind-set needs to change.
IP licensing is an emerging, albeit embryonic, trend which is in tune with the new principles set by globalisation and the increas¬ingly complex interdependence of business. In a knowledge-based economy supported by sophisticated information technology, marketing existing products often contributes more value than R&D.
Thoughtful intellectual asset management
For many companies, the past 30 years have seen a change in the currency of competition from machines and factories to employee brainpower and patents. The industrial economy has given ground to the knowledge economy. In 1975, more than 80 per cent of the market value of companies in the S&P 500 comprised tangible as¬sets such as factories, machines and inventory. In 2007 the figure is less than 20 per cent — tangible assets have been replaced by intangible assets, primarily intellectual property.
Rather unsurprisingly this has coincided with the transition of intellectual assets from a rather dreary legal necessity to a frequent discussion point at corporate board meetings. Intellectual property (IP) — such as patents and trademarks — has emerged as one of the key bargaining chips of the global economy. Depending on ownership, IP can facilitate or impede companies’ ability to compete in particular countries and market sectors. By providing control over technologies that correspond to product features, or even products themselves, they can in turn have a fundamental impact on profit, as many companies have seen to their benefit — and cost.
Historically IP, and patents in particular, were deemed important because they represented a tangible and protectable outcome from the research function, as well as providing a way to measure the success of research. By protecting key innovations, IP was also able to help provide market differentiation and help create additional income. By cross-licensing with other companies, IP could also be used to settle patent disputes or to gain access to new innovations.
A number of issues have combined to bring the area of intellectual property to the fore. First, globalisation has increased the need for market access, and along with it the importance and value of
patent protection to both the patent owner and would-be exporter. Second, the sheer number of patents being granted has escalated dramatically over the past 10 years, meaning that IP has become difficult to ignore, even in a defensive sense. Third, the fanfare that has accompanied those companies, such as IBM, which have successful intellectual property licensing strategies, has created a greater awareness of the opportunities and threats which IP, and particularly patents, represent.
This fanfare over successful IP licensing strategies has frequently been with a good reason. The Ocean Tomo 300® Patent Index represents a diversified portfolio of 300 companies that own valuable patents. The Index, which would have outperformed the S&P® 500 by 313 basis points annualised for the ten years ended April 2007, provides a clue as to the importance of IP in achieving not only income growth but also sustainable shareholder value.
There is also a growing focus on IP as a tradable asset, with an increasingly liquid market generated by more buyers and trading mechanisms such as the first European patent auction held by IPB AG in Frankfurt in May 2007.
As a result of this increasing interest in IP and the realisation of its potential impact on company performance, the technical, commercial and management skills required to get the most out of this asset have been brought into sharp focus. The IP function itself can be viewed in a host of different ways, ranging from the purely defensive use of IP through to putting it at the centre of the organisation and using IP to ensure that the organisation is correctly positioned to meet emerging challenges. These different levels also reflect whether the licensing function is seen just as a cost centre, or as a P&L in its own right. Of course, the way IP is viewed within an organisation will profoundly affect the nature and implementation of the function itself. What is true in the majority of organisations, however, is that IP flows across most business functions. This usually means that effective IP management is thought of in many organisations as requiring two skills sets — one legal and one managerial/commercial.
Mirroring the relationship between a company CEO and its general counsel, it is usual for the legal and managerial/commercial aspects of IP management to be handled by different people. The legal role is usually staffed by IP attorneys responsible for working with inventors to file patents, and then managing the patents throughout their lifetime. This can include managing patent disputes with third parties and playing an active role in detecting and correcting patent infringement. The focus of this role is risk and cost containment and achieving legal best practice, both in patent filings and dispute resolution.
The managerial/commercial role deals with converting the legal instruments, which are in many ways the output of the legal proc¬ess, into tangible, measurable business assets and advantages. This function relies less on specialised legal knowledge (that is provided by the general counsel and IP attorney) and more on commercial, business and management savvy. Typically this role will involve a blend of strategic and tactical decisions taken in conjunction with owners of the P&L’s business lines. Questions needing decisions include:
- Is it more profitable to license rather than sell a product line and close down the associated line?
- Should we refuse to freely provide servicing documentation and charge a license fee?
- Should we license our brand in a market in which we may want >>to compete ourselves in five years time?
Ensuring that these questions attract the right answers needs a careful blend of business acumen and commitment from the whole organisation to actively manage and profit from its IP portfolio. This may include the licensing in of new IP as well as active management of the existing portfolio. Active management usually occurs in three ways: ensuring that a company’s competitive advantage is optimised through good use of existing IP and new filings; generating additional revenue-creating opportunities through licensing activities; and finally, generating additional busi¬ness advantages by licensing in relevant IP. As a result it should be no surprise that tactical IP management and product management are often closely associated, and indeed IP can be an effective tool in executing these functions. It is common for licensing personnel to be embedded into product management/marketing groups which have both the technical and market insight to identify potential licensing opportunities.
The overall licensing team — comprising both legal and business licensing professionals — will often be managed by a central licensing function to ensure alignment of objectives and the neces¬sary coordination. In certain situations it can also be advantageous to form a separate legal entity into which patents and other IP may be transferred.
Reflecting the increasing importance of licensing in organisations, reporting lines are changing. Companies with well evolved approaches to IP management have direct contact with the CEO or board member with commercial responsibility. It is not uncommon for the CEO to be involved in key licensing decisions, particularly where these form part of the implicit and everyday business of the organisation. The visibility and support this provides assists in gaining crucial wider support in the organisation. This can be essential in achieving the cultural change, which is frequently an integral part of creating a more licensing-centric organisation.
A case study
Our client was a diversified technology and manufacturing con¬glomerate with multi-billion-dollar revenues and operations in one hundred countries worldwide. The company had recently formed a business unit dedicated to intellectual property with the aim of engaging in business development activities in order to generate attractive royalty or revenues streams.
The company was looking for an intellectual property licensing director in Europe to assess the commercial potential of its IP technology portfolio who would be able to seek out and negotiate deals. Responsibilities included developing a strategy based on both an in-depth knowledge of the company’s portfolio and on market intelligence.
To fulfil his mission the IP licensing director was expected to:
- work and communicate closely with chief technology officers and explore their technology assets;
- develop policies procedures and guidelines which would assist external parties in identifying attractive technologies in the portfolio of the company;
- identify opportunities for the company, screening and championing them cross the organisation.
The successful candidate had broad technical experience together with some legal training. He was able to work easily in a matrixed environment. He had been widely exposed to technology transfers, divestitures, assertion-based and carrot licensing, trademark/brand licensing, and IP marketing.
After a year in the role he managed to generate a business portfolio in Europe worth US$30 million. Deal types included product line and non-strategic business divestitures as well as more conventional technology, patent and trademark licensing.
Changing mentalities
IP licensing is a relatively new profession. Its contribution is recognized within the most innovative corporations and less advanced companies are making steps to understand its benefits.
Without doubt, for IP licensing to be effective it needs to be a good blend of commercial and technical ingredients.
Since approaches to intellectual property have for so long been predominantly defensive, it will take a while to shift attitudes to the point where it is considered a revenue-generating engine.
Proper IP licensing implementation puts the client at the centre of the IP business. IP is then part of an open architecture business programme where knowledge becomes capital.
Intellectual property has a pervasive effect on the entire organisa¬tion since it not only touches R&D but also the chief technology officer, the legal director and ultimately the CEO. IP is in fact one of the most effective tools to trigger innovative growth.
Intellectual property is not just about patents. It is about virtually everything that the human brain can create, from brands to software. The collective value of worldwide intellectual property is increasing at an accelerating pace.
For some companies, active management means giving third parties access to their IP store through the execution of strategic and operational licensing plans.
When handled strategically and effectively, IP licensing can generate high-margin revenue. With its wide array of applications, an effective IP licensing program can be a lucrative opportunity to all industrial sectors from fast moving consumer goods to financial services, from pharmaceuticals to media. It can be applied to prod¬ucts, services, processes and more. To date, this unprecedented revenue opportunity hasn’t been exploited to its full potential.
With the continuous pressure to reinvent businesses at minimum cost, it should not be a surprise if most companies soon put in place a proper IP licensing business or, bettter still, a profitable intellectual capital management programme.
Conclusion
Intellectual property is not just about patents. It is about virtually everything that the human brain can create, from brands to software. The collective value of worldwide intellectual property is increasing at an accelerating pace.
For some companies, active management means giving third par¬ties access to their IP store through the execution of strategic and operational licensing plans.
When handled strategically and effectively, IP licensing can gener¬ate high-margin revenue. With its wide array of applications, an effective IP licensing program can be a lucrative opportunity to all industrial sectors from fast moving consumer goods to financial services, from pharmaceuticals to media. It can be applied to prod¬ucts, services, processes and more. To date, this unprecedented revenue opportunity hasn’t been exploited to its full potential.
With the continuous pressure to reinvent businesses at minimum cost, it should not be a surprise if most companies soon put in place a proper IP licensing business or, bettter still, a profitable intellectual capital management programme.
Note
This article forms part of Swiss Pojnt of View Winter 2007/2008