The IP Audit: Driving by the Rear-View Mirror

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

Previous posts have discussed the dichotomy between the importance of intellectual property (i.e. IP is responsible for >80% of the value of companies) and the degree to which it is mis-managed (70% of execs believe it is managed as a legal task, as opposed to a business asset.) This post is about what I see as a major disconnect between day-to-day IP management and the IP audit.

According to the literature I’ve read, an IP audit can be initiated for any number of reasons. The common theme in all of these reasons is that the IP audit is initiated in response to an event that requires the company to REALLY know what is going on with its IP – as though IP didn’t matter all that much before.

Unfortunately, the IP audit will tell companies about mistakes they’ve already made, or opportunities they’ve already missed, but it won’t necessarily prevent them from making mistakes in the first place.

Perhaps I’m biased because I’m a software vendor, but I suggest that the level of detail required in an IP audit represents the level of detail companies should have in their day-to-day IP management system. That’s not to say that every minute data point in an audit would need to be revisited on a daily basis, but the IP management system should capture the information through the normal course of business that would be required in an audit.

MISPLACED PRIORITIES
Companies spend millions of dollars tracking and managing their tangible assets: inventory, real estate, machinery, computers, etc – millions of dollars to manage just 15% of their corporate value. In reality, intangible assets have to be identified, protected and maintained as well. In fact, I would argue that it is more important to take these measures with intangible assets as they account for ~85% of a company’s value.

INSUFFICIENT APPROACHES
Intellectual property has business implications at many points across the enterprise, and each of these having a role to play in its management – from targeted innovation in research and development to licensing opportunities in business development to cost accounting and royalty tracking by business units. Traditional docketing systems, departmental stop-gap spreadsheets & databases to not address these interdependencies and responsibilities sufficiently.

Docketing
Docketing systems are good at helping companies to ensure that they take appropriate actions by required dates. They do not determine whether these actions are optimal for the business. For example, a company with hundreds of patents could be wasting thousands of dollars annually by maintaining patents that it does not use in its core business – but the docketing system does not care.

Spreadsheets
Spreadsheets are often used to try to make up for shortcomings in the functionality of docketing systems. Companies use them to try to track additional information about intellectual property. However, spreadsheets are error prone, difficult to share and when used in conjunction with docketing systems they can create a need for duplicate data entry. Duplicate data entry increases the opportunity for errors. Speaking of errors, a study quoted in CIO Magazine found that on average, four out of five spreadsheets contained errors. The article went on to describe a number of material spreadsheet blunders that cost the respective companies tens of millions of dollars.

Shared Directories
Shared directories on network servers are sometimes used in an attempt to overcome the inability of spreadsheets to be shared easily. Unfortunately, information kept in a shared directory requires a lot of maintenance in order to ensure that the data is current, and version control becomes a new problem. Although shared directories may be a convenient place to dump bits of information, they are severely limited when it comes to handling key relationships between IP assets and the business.

Standalone Databases
Some companies have tried database programs in an attempt to improve on the limitations of spreadsheets and shared directories. However, these databases are not geared towards sharing data with a distributed workforce. They require extensive IT resources and custom programming, and are expensive to modify as the business changes and grows.

None of the approaches or any combination of the tools described here suffices for the meaningful implementation of strategic IP management. Still, companies try to make them work: many different spreadsheets, databases and directories are deployed in different areas of the company in an attempt to address needs at departmental level. This creates a nightmare scenario of disparate data silos, each with its own risks of data inaccuracies and none with the complete business-oriented picture of the company’s IP assets.

So how do companies address this nightmare scenario of disparate data silos, each with a small piece of the overall IP picture? If they don’t have an IP management system in place already, many companies turn to the IP audit.

AN IP AUDIT
Depending on circumstances, and IP audit can have a wide range of meanings. Generally speaking, an IP audit is an inspection of the IP owned, used or acquired by a business as well as a review of its management, maintenance, exploitation and enforcement.

Seems reasonable…

Unfortunately, the IP audit is like driving a car forward using only the rear view mirror. You’ll find out about opportunities after you’ve already missed them and problems after you’ve already hit them.

What if the IP audit was not a one-off project in a reactive mode to some external event, opportunity or market shift? What if the rigor and thoroughness of the IP audit was captured during the course of business as part of day to day IP management operations? Isn’t that the way most other critical business functions (such as finance, accounting, sales, production, logistics, etc) operate? Why do most companies relegate the management of their most strategic assets to docketing systems and spreadsheets?

FROM IP AUDIT TO IP MANAGEMENT
The management of IP should be an ongoing practice and should become part of the corporate fabric. The next time your company goes through an IP audit, recognize that you have just completed the necessary data gathering to begin the implementation of an IP management system. The question is: will your company leave the results of the audit in binder on a bookshelf, or will you use it to begin to strategically manage the most valuable asset your company owns?

(For more information about strategic IP management systems, visit our website at www.innovation-asset.com.)

Business Strategy IS Intellectual Property Strategy

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

IP assets are increasingly recognized as key business assets. The management of IP assets is no longer a discretionary function, nor solely the domain of the legal department. It has become a pillar of corporate strategy. If you are reading this, you probably already know that IP is important.

A lot has been written about both business strategy and IP strategy. In the case of business strategy there are a multitude of models, formulas and approaches that provide a framework to assist in development of the strategy. In contrast, it seems to me, most writings about IP strategy deal with why it is important, but there is little written about how to go about developing or implementing such a strategy. In fact, most writing seems to position IP strategy as a separate concept that must be aligned with a pre-existing business strategy. In my opinion business strategy and IP strategy are at the very least deeply intertwined, if not two sides of the same coin.

IP IS IMPORTANT...
According to a number of recent reports by PWC and others:
• Approximately 90% of worldwide corporate net worth can be attributed to intangibles and intellectual property.
• Over 80% of executives believe the importance of intellectual capital to the value of their companies will increase over the next 3-5 years.

...BUT APPARENTLY MISMANAGED.
• Almost 70% of executives believe IP management is too often treated as a legal, not a strategic issue.
• Over 60% of executives believe current accounting practices understate the value of IP.
• Over 80% of royalty agreements are under reported.
• Over 60% of executives believe their companies could extract significantly more value from existing IP and IP formation if it devoted more assets and attention to relevant processes.

WHY THE INTELLECTUAL PROPERTY DICHOTOMY?
• Over 70% of executives believe a focus on short-term results inhibits the development of sophisticated processes for managing IP.
• Intellectual property is inherently more complex than tangible assets.
• Most business executives would rather not have to read the claims of a patent, let alone the claims of an entire portfolio.
• It is easier to continue to have the legal department manage these assets. (In my opinion, this is why we are seeing the legal function around IP become elevated to a more strategic position in companies, just as we have seen with IT departments in the past 10-15 years. You can read a related post about Chief IP Counsels and Chief IP Officers here.)

IP Strategy can be approached in much the same way as business strategy. In some respects, they are the same.

IP STRATEGY IS BUSINESS STRATEGY
I think part of the challenge executives have is the concept of mapping their IP strategy with their business strategy. IP strategy is simply a component of a business strategy. In fact, I think you could take a model such as the Balanced Scorecard or the Five Forces and insert an additional component for Intellectual Property.

In developing a business strategy, there are some common things to consider that apply equally well to the realm of intellectual property. Generally speaking, you want to consider the needs of your customer, the nature of the competition and your own capabilities. (For the sake of simplicity, I’ll leave market sizing and some other topics out of this post.)

Customer
Eventually, the value of the IP a company hopes to control is derived from the needs of the market. Just as a business strategy must consider the needs of customers in various segments, so too must IP strategy consider the needs of customers. Understanding these needs will drive product requirements, R&D priorities and eventually help prioritize patents to be acquired, licensed, applications to be filed or even trade secrets to be protected.

Competition
In business strategy, a company cannot chart its course without understanding its competition in terms of strengths, weaknesses, distribution strategies, pricing strategies, etc. In the IP realm, companies can look at the profile of their competitors to understand the relative strengths and weaknesses of their IP portfolios, strategies and technological directions. With this information in hand, a company can patent or acquire rights to technologies to strengthen their own competitive position.

Product
In business strategy, a company looks at its relative areas of expertise. What does it do better than other companies, how does it differentiate itself? Similarly in IP strategy, a company must consider its portfolio -- what does it have, and what does it need to add? On the business side, a company has to make the build vs. buy decision. In IP, a company looks out across the IP landscape with an understanding of the market requirements, competitive implications, and determines if it should invent (make) or acquire (buy) the necessary components to round out the portfolio.

Understanding what the market needs, the competition and your own capabilities are key elements of both business and IP strategy. With this information in hand, you can intelligently plot your course forward with all appropriate milestones and metrics.

Stay tuned for next-in-series posts that will get deeper into the ‘how’ does one go about this – at each stage of the IP Value Chain and at varying levels of IP sophistication. And please…feel free to add your insights.

The New Era in the IP Assets Market

by
James E. Malackowski,
President & CEO, Ocean Tomo, LLC

This year may turn out to be a watershed moment for intellectual property in the U.S. Relative to recent years, there are better prospects for patent reform legislation and a noted appetite at the Supreme Court for patent cases. At the same time, the market is witnessing the prospect of increased IP regulation in the form of new accounting rules and expanded review of patent-related business transactions. In addition, there is widespread and growing appreciation that enhanced competitiveness is inextricably linked to IP. Against this backdrop, the time is ripe for the development and widespread use of private sector mechanisms to cure inefficiencies in the IP marketplace.

The Supreme Court’s current interest in patent cases coinciding with momentum building for a patent bill indicates an activist Court seeking to influence the scope of patent legislation. The Court’s timing is impeccable. The private sector now has an opportunity to widen the application of patent pools and IP securitizations, participate in the development and use of secondary markets for IP transactions, and explore new avenues for IP asset monetization and commercialization. With Congress and the Supreme Court taking up IP issues, a level of urgency surrounds private sector activity.

The IP debate has revolved around promoting innovation and American competitiveness in the global markets. While the public dialogue extends to new technologies, new legislation, and new business models leveraging IP assets, there has been less attention devoted to the marketplace mechanisms and infrastructure necessary to make IP assets liquid and transferable at low cost. Yet the maturation of the IP marketplace is critical and necessary. First, corporate IP management stands to benefit from marketplace innovations. Second, efficient market mechanisms create benchmarks for the courts to recognize in IP infringement damage awards. Third, private sector innovations can cure market inefficiencies, thereby influencing the shape and scope of legislative remedies. Examples of recent marketplace innovations include public auctions of IP and emerging patent valuation standards.

It is a momentous time for the IP markets as 80% or more of a public company’s market value resides in its intangible assets, and this dependence continues to increase. Business models are emerging to more efficiently acquire, enforce, and monetize IP assets. Small and large corporations with IP portfolios will benefit from widespread adoption of the newly available IP marketplace mechanisms. A new era is dawning with efficiencies ready to be exploited by IP-rich companies. For example, the ability to buy and sell patents and patent portfolios in a liquid market changes the IP management options at a company’s disposal. Greater transparency in IP-based transactions and the development of a secondary market for IP assets are welcomed by investors and policymakers. Use of the new IP marketplace mechanisms supplies IP assets to a market with pent-up demand. The time is ripe for the private sector.

Last week on April 19th, Ocean Tomo held its Spring Live IP Auction, where total floor sales reached $11,429,000, including sales of $3,025,000 and $2,860,000 setting the world’s record for highest selling prices for patents at a multi-lot live IP auction. The auction had a 51% transaction success rate; 55% of the sellers who participated in the auction successfully transacted their patents; and the average selling price per lot was $336,148.

About Ocean Tomo: The next Ocean Tomo Live IP Auction is set for June 1, 2007 at The Dorchester in London, England. The Catalogue, now accessible online at ww.OceanTomoAuctions.com, provides information regarding the 600+ IP assets to be offered. Sellers include top multinational companies such as PCTEL, Inc., Air Products and Chemicals, ABB Research Ltd., MeadWestvaco Corporation as well as small to mid-sized companies, professional inventors and investors.

Field-of-Use Licensing

by Sandra L. Shotwell, Ph.D.

Managing Partner, Alta Biomedical Group, LLC

Field-of-use licensing provides the licensor with greater control over the use of its intellectual property, while maximizing the use and value of the technology. In order to maximize the use of a given technology, managers will have some additional work to do as they identify, negotiate with, and manage more than one licensee. Special issues related to multiple licensees in distinct or overlapping fields will have to be handled with forethought and a balancing of interests.

When is field-of-use licensing worth the extra effort? When more than one company is needed to fully develop a technology’s potential, when different licensees are needed to address different markets, or when field-of-use licensing has the potential to significantly increase the financial return from a technology. In all of these situations, field-of-use licensing can produce better results for everyone involved.

Shotwell, S.L. 2007. Field-of-Use Licensing. In Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices (eds. A Krattiger, RT Mahoney, L Nelsen, et al.). MIHR: Oxford, U.K., and PIPRA: Davis, U.S.A. Available online at iphandbook.org.

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.

Russell Parr Presentation on Royalty Rates to the Licensing Executives Society

As we are just launching this new blog on the financial aspects of IP, I wanted to highlight a recent event of interest to all involved with intellectual property valuation and licensing.

At the inaugural meeting of the Portland/SW Washington chapter of the Licensing Executives Society (LES), Russell Parr recently presented an overview of his just published booklet titled "Determination of Royalty Rates". This was the largest inaugural meeting for any LES chapter and it was terrific to have attracted a speaker like Russell, a luminary in the area of valuation of intellectual assets.

The booklet describes various approaches along with examples of determining royalty rates using multiple analytical techniques. These include infringement damages analysis (profit differential), comparable transactions, investment rate of return, and discounted cash flow. A copy of the booklet is available at no cost via email request to booklet@innovation-asset.com.

For those of you who would like to see a video of Russell's presentation, I've included it below with a link to the entire video.




Shawn Pilkington, VP at Innovation Asset Group, is the new chairman of the Portland/SW Washington LES chapter and kicked off the meeting. It was a great night and terrific to see the spectrum of attendees from the technology, corporate, and legal communities in the Portland metro area.