Aligning IP Strategy and Business Strategy

In previous posts we’ve discussed the importance of IP and that business strategy is closely intertwined with IP strategy -- whether most companies realize it or not. (We’ve also written a white paper on the subject.) In this post, I thought I’d discuss a couple of examples in which a good IP Management System can help companies deal with real world business-level issues.

IP is important because it accounts for somewhere between 70%-85% of the value of corporations (depending on which report you read). And the value of an intellectual property asset is determined by its relationship to other things, such as its relationship to products, other IP, people and agreements. For example, a patent may have more value if it enables a key aspect of a product of the assignee or of another company. Similarly, the patent’s value can in part be derived from the licensing agreements to which it is related.

So... the value of a company is derived from the value of its intellectual property. And the value of intellectual property derived from the relationships it has with other things. Therefore, the management of intellectual property should include the management those relationships as well.

This makes sense in theory, but let’s test it on a couple of scenarios:

Mergers & Acquisitions
The value and importance of intellectual property assets are playing a greater role than ever before in terms of assets received through mergers, acquisitions and takeovers. These valuable assets include patents, trademarks, copyrights, know-how, trade secrets and domain names.

In the course of M&A due diligence, the acquiring party must not only assess the inventory of intellectual property included in the transaction, but to properly value the portfolio, they must also consider the network of relationships surrounding the IP portfolio. For example, the acquiring company must also evaluate the contracts & agreements that could affect their ownership or rights to the core IP assets. (There is an article on the WIPO site (PDF) that explains this in greater detail.)

M&A deals can completely fall apart and shareholder value can be lost due to mis-management of an IP portfolio. A round-table transcript (PDF) in Mergers & Acquisitions Magazine actually mentions a situation in which the acquirer backed out of a transaction because the target’s IP portfolio did not have coverage where they thought it did -- the acquirer would have effectively been excluded from a number of international markets due to a lack of related international patents in the patent family. To put it another way, it was not just the inventory of assets that was important to the M&A transaction, but the relationships the assets had or did not have with other things. As you can imagine, this would have a significant negative impact on the relative value of the IP portfolio in question.

It is not the issues of docketing and cost management that define IP management, rather it is the alignment of IP strategy and business strategy. This alignment is achieved by understanding and managing the network of relationships that surround the IP portfolio.

Product Launches
We frequently hear that IP Departments are looking for ways to become more strategic to the business units of their respective companies. As such, they are looking for ways to add value to important business events such as new product launches.

Product launches are one of those events that require many different business functions to come together and operate cohesively, if only for a brief period of time. In the context of intellectual property, there are the obvious considerations such as patent protection and freedom to operate in the new markets. But there are also a number ancillary IP issues that may be less obvious.

For example, there are a number of contracts and agreements that need to be in place to execute a successful launch. These include agreements for distribution, sales & marketing, service & support and others. Each of these items need to be coordinated and require collaboration between legal, marketing, business and the local teams.

Again, it is not simply the management of intellectual property in the traditional sense that ensures a successful product launch. Rather, the coordination of a number of IP assets (patents, trademarks, products) and their related contractual obligations (distribution agreements, licensing agreements, etc) that determine how well IP is aligned with the business strategy.

If not properly in place, any one of these related pieces can lead to adverse business results. A poorly executed freedom to operate analysis can result in costly legal battles. Similarly, an missing or poorly written distribution agreement can lead to unnecessary expense or lost revenue to the company.

Other
As mentioned previously: It is not the issues of docketing and cost management that define IP management, rather it is the alignment of IP strategy and business strategy. This alignment is achieved by understanding and managing the network of relationships that surround the IP portfolio.

There are other scenarios that would make good illustrative examples of the importance of managing the network of relationships around the IP portfolio. They include competitive intelligence, trademark licensing, joint ventures and others. Perhaps we'll cover some of these in future posts.


About Us
At Innovation Asset Group, we often use the concept of an IP Value Chain to illustrate the nature and importance of the relationships described in this post. We believe an IP Management System should be flexible enough to accommodate the different use-case scenarios described here. More importantly, it should be flexible enough to deal with new challenges that may arise in the future. For example, ask us about automatically analyzing your entire patent portfolio to ensure compliance with the 5/25 rules. (If they ever take effect!)

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.