IP Management & Budget Cuts: Have Your Cake and Eat it Too!

by Ron Carson
Vice President of Marketing
Innovation Asset Group

Unless you've been shipwrecked on a remote island in the South-Pacific, you are probably aware that we've got somewhat of a global economic downturn on our hands. While no one really knows how long it will last, I think we can all attest to the fact that it is having an effect on what had become a fairly comfortable state of "business as usual." Already we are seeing the all too predictable rounds of budget cuts and layoffs at many companies in a multitude of industries.

IP departments and the portfolios they manage are often perceived as matters of legal expense and are often the target of corporate cost cutting measures. In the economic downturn they are being asked to contribute even greater expense reductions to the corporate good. While it is easy for a corporate finance department to arbitrarily allocate a 20% budget cut, it is not always easy for the IP department to implement those cuts. Should the cuts come from allowing certain patents to expire? What if they are core to a revenue stream of the company? Should the cuts come from applying for fewer patents? What impact will that have on the future competitiveness of the company? I suggest that cost savings can be realized AND that companies can strategically manage their IP portfolios at the same time – i.e. be more efficient in the short term, without sacrificing competitive advantage in the long term.

In these tough economic times, IP departments are caught between a rock and a hard place: asked to spend less (cut your budget by 20% please), but ensure future revenue streams are protected (you better not let anything slip through the cracks). The more I think about it, the “rock-and-a-hard-place” analogy is probably not harsh enough. A more applicable analogy is one of being caught in a vice: on one side the need to lower expenses is pushing in. On the other side, the need to protect the company's business strategy and future revenue streams is squeezing in the opposite direction. There is constant pressure. The effect of the economic downturn is to apply a few additional twists to the vice, squeezing IP departments even harder.

But I suggest it is possible to do both: reduce expenses (and be more efficient), and be strategic with your IP portfolio at the same time. In fact, some of our own research points to the possibility of being able to reduce IP expenses, while freeing up resources to focus on more strategic IP issues. (We'd be happy to share aspects of this research with readers who are interested – just contact us through our website.)

Lesson from the Past

When companies sought efficiency from CRM solutions, they didn't focus solely on cost reduction at the expense of losing valuable customers. They took a strategic approach that included being more efficient and saving money. For example, they used the exercise as an opportunity to focus appropriate resources on the most valuable customers, and consciously decided it would be okay for other non-core or non-profitable customers to leave the fold.

IP management should be handled in a similar manner. IP departments should become more efficient and reduce costs, but not at the expense of the competitive advantage their business derives from its IP portfolio.

Reduce IP-related expenses: streamline communication with outside counsel firms, say good-bye to the multitude of partial-hour billing line items related to administrative overhead & communication, prioritize invention disclosures so only the most important inventions evolve to a patent application, allow unused patents to lapse.

Be more efficient: automate the more repetitive tasks & workflows, keep more files electronically in the database of your IP management solutions so they are easily accessed by those who need them. Free up your employees to focus on more value-add activities such as mapping patents to products, business units, technology segments, etc. (There are a few good pointers on Duncan Bucknell's blog on this topic.)

Be more strategic: analyze the results of your portfolio mapping, assess relative areas of strength and weakness, rate & rank patents by relevant business grouping, set & measure progress against patent production goals that align with the growth plans of the company, profile competitive IP portfolios, patent for strategic advantage in your market.

I don't know who originally penned the thought, but I've heard it said recently that no company has ever saved its way to success. Successful companies invest their way to growth. They invest in innovation, they invest in business process and infrastructure and they invest in their people. The companies who invest in IP and their ability to strategically manage their IP portfolios will benefit from cost savings in the short term and competitive advantage in the long term.

Are Chief IP Counsels really Chief IP Officers?

by Ron Carson
Regional Sales Director
Innovation Asset Group, Inc.

Joff Wild over at IAM Magazine has an interesting perspective on the need for a senior executive responsible for the entire lifecycle of IP in the enterprise. He describes the role of a Chief Intellectual Property Officer (CIPO) and why it is a necessary function.

This runs along a similar train of thought to our CFO’s post about the role of the CFO in enterprise IP portfolio management.

We are seeing an evolution – perhaps revolution. Not just in terms of the recognition of IP as the fundamentally core asset for businesses today; but also in terms of the way in which that IP is managed (I think “where” remains the same).

Initially, IP is managed out of the legal department. In a non-strategic mindset, IP management equates to docketing in some of these companies.

As companies embrace the strategic importance of IP and understand the need to move beyond simply docketing, there is an evolution of the role of the legal department. Much the way IT departments in corporate America evolved from a cost center and service provider to a strategic enabler of the business in the past couple of decades, legal departments are making a similar evolution today.

If you picture a pyramid similar to Maslow’s hierarchy of needs, and similar to the one described in “Edison in the Boardroom,” the bottom of the pyramid represents the least sophisticated IP companies, and the top of the pyramid the most sophisticated.

I have talked to many different companies in the past year: some companies are parked at the bottom of the IP management hierarchy, others companies occupy the pinnacle of the hierarchy and many other companies are spread out across all points in between.

Although I completely agree with idea of the CIPO, in practical terms, I think the Chief IP Counsel role is evolving with companies as they evolve up the IP management hierarchy. For example, companies at the bottom of the pyramid still view IP as a legal issue only. Their idea of IP management is to consolidate their portfolio with a single IP counsel firm to help manage costs. The person in charge of IP is either the General Counsel or Chief Patent Counsel.

At the pinnacle of the hierarchy, I have spoken with companies who have sophisticated tools and strategies to manage everything from innovation targets, portfolio mapping, portfolio optimization, and licensing. The IP strategy is tightly aligned to the business strategy, the costs of the portfolio are allocated along with the revenues. In these sophisticated environments, it is still the Chief IP Counsel in charge of IP. Instead of a patent attorney focused on docketing, the Chief IP Counsel in these companies has a much more strategic role in the corporation – effectively filling the role of the CIPO.

It would be great to get a discussion going on this topic. Where is your company on the IP management hierarchy? What role/position within your company maintains control over the IP portfolio and IP strategy?

Who is Controlling Your Most Valuable Assets?

by Kathleen A. Sego
Chief Financial Officer
Innovation Asset Group, Inc.


Why do the management and protection of intellectual assets reside in the legal departments of most companies – rather than in the finance department? CFOs are charged with managing and accurately reporting the value of a company’s assets. Today, intangible assets are the largest and most valuable portion of the asset base for a majority of companies.

• PriceWaterhouseCoopers has estimated that as much as 90 percent of the value of the world’s top 2,000 enterprises consist of IP.


• In the United States alone, it is estimated that over $1 trillion of value is wasted in underutilized patent assets, to say nothing of untapped and under-managed trademarks, copyrights, and trade secrets.


• According to the Harvard Business Review, two-thirds of U.S. Companies own unused or significantly under utilized technology.

As a CFO in an intellectual property management company, I find it puzzling that many CFOs do not take a leadership role in the management of this asset category – they either delegate this to the legal department, or the legal department independently initiates a process to track intellectual property, trademarks, copyrights, and trade secrets. As Gary Bender at Ernst & Young observed last year in his article “Managing IP Risk in Accordance with Sarbanes-Oxley:”

“Responsibility for a company’s intellectual assets generally falls under the umbrella of the legal department. Unfortunately, many companies have assigned this task to one person or a very small department, not adequately recognizing the potential consequences. By understaffing or improperly controlling a company’s intellectual asset portfolio, organizations can both cut into their profit margin and put the company in jeopardy of a shareholder dispute or regulatory inquiry.”

I have observed that legal departments do a relatively good job at docketing, tracking patents, and managing the infringement of their assets – however, few, if any of the legal departments take the process of intellectual property management through the entire life cycle chain – to the financial optimization of the asset.

In this regard, the legal departments in many companies, or the executives in many companies who make decisions about legal departments do not understand the implications of IP as the set of core assets to their business.

This pattern of CFO’s not managing the value of their assets has not been lost on the IP opportunity industry. Businesses are emerging whose approach is to acquire patents (generally at a low price) and assert them against alleged infringers for royalty settlements or infringement damages.

If an active market existed today, much like the Stock Exchange, much of this value could be captured by the companies who developed the IP, offsetting the impact of disintermediating parties. The problem then develops – how does one value intellectual property on a consistent platform? What indexes would you use? How would you establish settlement?

Ocean Tomo is one example of an effort to standardize an approach to public company intangible asset market valuations. They have developed a suite of patent-based indexes and securities which provide IP benchmarks – called the Ocean Tomo 300 Patent Value Index. Additionally, they have started the first IP Auction which has created a limited marketplace for facilitating the exchange of intellectual property.

Still the problem exists as to how to capture and track all the relevant information on an asset so that its value is maximized. The combination of a total view of an IP estate with royalty rates and valuation methodologies will provide CFO’s with a tool to continuously monitor and value their IP portfolio – as well as to mange it on a day to day basis.

CFOs who do not take an active role in the management of their IP assets are not only putting their companies at risk for a shareholder lawsuit for the mismanagement of their assets, but also are not even meeting the basic requirements of their positions – to accurately report the value of the company (and its assets) and to maximize the value of the company’s assets. The market will, and has, found ways to value IP assets. CFOs now need to take control of this process.

We Are All Financial Institutions Today

by Nir Kossovsky, MD
CEO and President, TOPCAP


For years, financial institutions led their peers in corporate risk management. Always facing credit, market, and operational risk, any one of which could produce a catastrophic outcome that could precipitate the demise of the corporate enterprise (e.g., EF Hutton, Anderson, Enron, Drexel, Barings), financial institutions have always been under the gun to improve their control, mitigation, and management practices.

With intangible assets comprising upwards of 80 percent of the market capitalization of traded companies, the value of intellectual properties and other intangibles in the 21st century economy is indisputable. Companies and investors are rapidly coming to understand how the convergence of human capital and intellectual assets are their greatest source of both strategic risk and financial reward.

If we focus on the risk side, it appears that we are all financial institutions today. We are all exposed to precipitous losses in enterprise value of the basis of impaired intangibles. Consider Jet Blue’s recent reputational hit due to poor IT investments; BP’s decline due to poor safety practices, or Vonage’s collapse in the face of patent litigation – all body blows to enterprise value arising from a catastrophic loss of (intangible) asset value.

Because TOPCAP is an intangible asset management consultancy, and we help clients at the C and board level identify and take practical steps to mitigate risk, we are seeing this awareness evolving. One of the key aspects of the new risk agenda we are seeing is the increased emphasis on functional alignment – where the risk team, the finance team, and the capital management teams work together. We're also seeing the incorporation of lines of business and IT that need to be linked into the finance, risk, and capital teams.

But when is all said and done, a company is still exposed to fortuitous risk because
%$#!& happens. And in practical terms, this is why equity holders get higher returns because they currently hold that corporate risk. This past fall, the Intangible Asset Finance Society (http://www.iafinance.org/) surveyed the intellectual property community with the question: In IP-rich companies, who bears (or should bear) the ultimate risk in IP litigation, IP M&A or technology transfer - shareholders, outside counsel’s E&O insurance, the company’s law department, the company’s D&O insurance or professional IP risk bearers?

At the operational level, executives and legal advisers acknowledged that certain events could put a company at mortal risk. The emerging question: is whether shareholders will wish to continue bearing catastrophic risk or will demand that companies find a more efficient vehicle for risk transfer?

Welcome by Peter Ackerman, CEO and President of Innovation Asset Group

Not enough conversation in the world….so welcome to this blog.

At a minimum it’s interesting to think about the fact that intellectual property is such a powerful value-driver. An analysis last year estimated the total value of intellectual property in the U.S. at around $5.5 trillion (more than the total GDP of any other nation in the world). That’s one approach and was pegged to the total value of U.S. equities. There are plenty of other ways to view the economic significance of IP: by licensing revenues, M&A, magnitude and effects of product and brand piracy, litigation results, shifts in jurisprudence, other national econometrics and nation state activities, corporate asset shifting and globalization, investment activity (including direct foreign investments), etc.

And obviously there is no shortage of activity in other countries, nor on the part of organizations with international membership lists, on the subject of IP and its economic significance. I’m a member of the Licensing Executives Society (LES) and marvel at the people I meet from other countries through that organization. I also clip news and receive alerts on this subject. In addition to watching core trends in Europe & Asia, I keep the stories that stick out such as the Scout Merit Badge in Hong Kong for Respecting IP Rights, the Rajiv Gandhi School of Intellectual Property Law in India, IP conferences in such locations as Jordan, Russia, Malta, Nigeria and North Korea (some of the topics at the North Korean forum held at the People's Palace of Culture in September of this year: "Intellectual property and Social Understanding;" "Role of Invention in Combining Science and Technology with Production;" "Role of Intellectual Property as a Weapon for National Development;" "Intellectual Property as a Weapon for Development, Practical Experience Gained by Selected Developing Countries”).

To me, the power to spin an idea from thin air and make something financial happen with it is fascinating. And now we’re moving from the traditional “invent, put it in a product, put it on a shelf and hang a price tag from it” to IP as a lucrative asset class of its own. A couple of years ago, Kenneth Cukier (The Economist, London) mentioned that “just as the banking system created a market for capital, and the insurance industry created a market for risk, the growth of the patent system may be creating a market for innovation.” Indeed…not to mention the creation of new liquidity for other classes of IP (copyrights, trademarks, trade secrets).

So the subject is a big deal. It deserves some stream of consciousness and discussion of detail. Issues such as:

• How do you put a value on IP?
• For what purpose(s)?
• What methodologies are best to use?
• Where should the battle be when negotiating IP: In the methods or the
  assumptions used?
• Is it all about “technology?”
• What are the best information sources for IP valuation and royalty data?
• How much juice can you really squeeze out of an intellectual property asset?
• Are there best practices for managing innovation to a value result?
• Are standards possible for intangible asset valuation and management?
• Are there lessons for IP from fixed asset accounting regimes?
• What is the best way for rules and regulations to catch up with the economic reality of IP?
• Should companies manage to numbers or value? How is that defined?
• What are the correlations among early-stage capital availability,
  entrepreneurialism, IP asset formation, value creation and social advancement?
  

We’ll be talking about that and whatever else emerges.

I’m as enamored with the pure spirit of entrepreneurialism as I am with the financial potential its resultant intellectual energy produces. The former drives the latter. So I hope to stimulate some discussion about that – about some of the ways in which it all begins. “Financial aspects of IP” relates as much to diligence and investment on the front end as it does to output. We know about our “traditional” (though still emerging) innovation labs and clusters, IP transfers from universities to the private sector, corporate skunk works and idea centers, angel and vc-backed startups, etc. Plenty to talk about there. There’s also plenty to discuss around the real potential of every thinking human to convert ideas into currency, and the greater social possibilities of that.

I was impacted, for example, by this Frontline presentation about microlending. They profiled KIVA. a microfinance organization that’s snowballing. So we know from this, other microlenders, and the notoriety around Muhammad Yunus that a few bucks can begin to support “non-traditional” entrepreneurs (in the sense of how Westerners tend to view them anyway). Yunus, of course, won the Nobel Peace Prize this year for his microlending model. In 1976 he loaned an uncollateralized $27.00 to a group of women in Bangladesh so they could purchase bamboo in order to make and sell furniture in their village. They earned enough to pay him back and buy more bamboo. As I read it, the bank he formed around this model has now loaned over $5 billion to millions of other entrepreneurs in increments of less than $300.00, lifting most of them out of poverty.

Suppose any number of those entrepreneurs were producing goods that legal regimes could protect? What if the woman who makes peanut butter, profiled in the Frontline piece, had a unique formula? What if an artist, musician or furniture maker had protectible creations? What if they were able to tap into Thomas Friedman’s Flat World and extend their reach with some of the kind of expert assistance already being provided by several organizations?

Can’t happen? Every time I hear that, I recall: "I think there is a world market for maybe five computers" - Thomas Watson, Chairman of IBM, 1943; and "There is no reason anyone would want a computer in their home." - Ken Olsen, founder and President of Digital Equipment Corp., 1977. More on it later. For now, shout back any reactions to the main point and we’ll get the conversation started.