In the past 20 years, the role of IP in a corporate environment has reached new levels of importance. When the core of a company is its IP, it's important for executive management to understand the extent of these rights and what IP can do for them. In an extract from CPA Global's recent white paper, CPA Global's Jeff Maddox outlines key background information to take to the company board

In our information age, the old industrial ‘bricks and mortar’ era has been replaced by a powerful knowledge-based economy, with ideas and innovation as the new currency. In this environment, IP is no longer just a means of protecting innovation – it’s also a potent business asset and a means of capturing value. Executive management is now recognizing that IP Rights represent the most important form of competitive power that any company can own; they are the foundation for a product’s market dominance and continuing profitability, the basis for an almost unrivalled method of revenue-generation, through licensing or merchandising, and are often the key objective in mergers and acquisitions (M&A).

However, the management of a company’s IP Rights is a challenging, fast-moving and, often, unpredictable task. So long as intangible assets continue to play a pivotal role in bolstering a company’s bottom line, the methods in which IP Rights are created and enforced will also continue to fluctuate and expand. Already, the growth in importance of IP Rights has created new, previously unthought of methods of exploiting and using it. This in turn has generated an unheralded surge in filings and registrations, created new challenges in terms of accounting, taxation and valuation (many of which are still to be resolved) and placed added pressure on the systems in place to record and monitor IP Rights, causing them to be assessed and often overhauled.

But, in order to direct a company’s IP portfolio, executive management first needs to understand it.

Why does IP matter to me?
Of course, it hasn’t traditionally been part of a CEO’s role to track the management of the company’s IP; this has previously been considered a legal issue, the domain of corporate lawyers. IP is just one of many concerns to be factored into overall corporate policy, along with more obvious short-term topics, such as cash flow, customer retention, supplier sourcing, tax reporting and recruitment. Yet, as IP has become a business driver, it’s becoming imperative for CEOs to build a basic knowledge of the rights the company owns in order to properly direct its future and account for its worth. After all, IP, well-nurtured, can provide the bedrock of a company’s security, as well as enhance its identity and brand value.

The formal IP Rights system that protects a company’s intellectual output renders the IP a valuable commodity. Patents, trademarks, copyright and domain names are powerful competitive advantages because individuals and corporations own them and can enforce them in the courts. IP Rights protect the results of creativity once they hit the marketplace. For example, the cost of mass-producing a finished medicine is derisory in comparison to the billions it takes to create and test a typical pharmaceutical product. If it weren’t for patent protection, many organisations would think twice about embarking on the expensive R&D needed to produce new product research in the first place. IP allows them to justify the initial expenditure because it provides them with a guarantee that they will at least have the opportunity to regain their investment once the product has hit the marketplace.

Knowing what you own is key to building a successful IP strategy; one that will allow you to exploit maximum value from your company’s creativity, while ensuring you can chart your future in the marketplace without fear of infringing or being infringed.

With a properly maintained IP portfolio in place, a company can develop, acquire and use its IP Rights as competitive weapons to capture and defend markets, outflank rivals, and increase market value and revenue. Companies that ignore the growing value and power of IP do so at their peril. But first you need to know what you own.

How do I measure IP?
An IP audit will show CEOs what intellectual assets are at their disposal and how useful they are likely to remain. This is vital. For example, a company may rely on a patent to keep competitors from copying its product, but the maximum life of a patent is quite short. If that company does not have a strategy for maintaining the product once its patent has expired, how does it expect to retain its market share once other non-brand products enter the marketplace?

As well as tracking the patents close to expiry, an IP audit shows the CEO how much he depends on IP that is owned by others. The company’s software, its mailing lists – even the music played in its public spaces – may all be licensed in from other IP owners. Few businesses are entirely independent of ‘third party IP’, so the CEO should know which bits of his operation are subject to the continued co-operation of outsiders.

Similarly, companies will often work together to co-produce IP. A study of patenting trends in hybrid technology produced by CPA in 2006 revealed a considerable amount of co-assignment activity among the world’s leading automobile manufacturers: ‘We found several examples of crosscompany collaborations, in order to get hybrid products to market,’ said Christian Bunke, Product Manager, CPA. Both share the IP and should profit from the associated rights equally, but this can only be ensured if a succinct IP strategy is put in place to monitor its use.

Realising value
Just like any other property, the value of IP is flexible: it all depends on whether the company is buying or selling it; what it is being securitised for; whether the valuation is subject to accounting standards or financial reporting conventions; whether the right’s validity has been tested following a contested court action or is only presumptively valid; and whether it is free from encumbrances or subject to licenses, charges or other equities.

As IP becomes an integral part of business strategy, its value should be understood before it is granted, not just when it is bought or sold. Companies need to understand the link between IP and market share if they are to retain their competitive advantage, as one US science and technology giant discovered when it decided to cut back on its R&D spending as part of a larger company-wide series of cuts in 2003.

Unsurprisingly, the reduction in R&D investment also led to a decline in the number of patent disclosures, applications and grants. Concerned that the short term cost savings in R&D and IP were coming at the expense of long-term value, a project team was established to try and measure the value of its R&D. What they actually did was measure the value of its IP.

The balance sheet showed that the company was investing approximately 4% of its sales in R&D, in excess of $500 million annually. The project team assumed that the value of R&D could be partly measured by the value of the IP that it produced. In its case, IP generated income in two main areas: licensing (a revenue that would be lost without IP protection) and the profit from higher margins charged for IP-protected products. They found that licensing revenue accounted for about £100 million (or 20%) of annual R&D spending. They also found that a significant share of the R&D investment was earned back through the higher margins earned on the IP protected products. This was calculated by linking the company’s current patent rights with the company’s financial database, allowing for the measurement of margins for IP-protected versus non-IP protected products. In fact, on average, IP protected margins were 8% higher than their non-protected counterparts.

This helped to reinforce the importance of IP (and R&D spending) in the company. However, it didn’t serve as a push to increase R&D spending; rather it prompted them to analyse how to get more from the R&D investment that was already being made through IP registrations. As a result, extra investment was dedicated to building the company’s team of patent attorneys and the company’s business unit managers were asked to incorporate the potential advantages of IP into their strategic planning. After all, if IP conveys a competitive advantage, companies should be asking whether they are getting the most from that advantage in terms of price and/or revenue growth.

IP in the boardroom
As all CEOs should now be aware, ours is no longer a culture of bricks and mortar assets; we are operating in a knowledge-based economy in which the ownership and management of intangible assets, such as IP, is directly linked to corporate success and failure. In such an environment, protecting, developing and exploiting IP assets should be at the very forefront of business strategy; however, for many companies, this is not yet the case.

Ultimately, the growth in value of IP necessitates a step change in the manner in which companies and, by extension CEOs, view and utilise the IP assets that they own. Properly managed, IP can be a source of innovation, creativity and corporate growth. But to succeed, it needs to be understood at boardroom level. Trademarks, patents, domain names, design rights and other forms of IP interlink with every aspect of a business – from the way in which it markets its products and services to the way its assets are reported financially. Companies need to recognise this importance if they are to maximise the benefits to all sides of the business, and to ensure that any move into a new market or business area is supported by the requisite IP.

For the full version of this white paper, email ipreview@cpaglobal.com or visit www.cpaglobal.com/ceo_guide.


This article first appeared in IP Review, issue 19

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