From IP to IC: why intangible capital matters

Transcription

1 From IP to IC: why intangible matters Attendees at this year s IP Business Congress in Boston learned that understanding and leveraging intellectual is one of surest ways to maximise the value of their intellectual property By Kenan Patrick Jarboe Imagine the following. You are buying a new machine for your factory, but you do not buy a power cord to connect the machine to its energy source. You do not train any workers how to use the machine. You do not figure out how the machine fits into the production process. You simply buy the machine and assume that it is a good investment. Absurd, right? No one would ever do that. Yet that is exactly how some people manage their intellectual property: as a standalone asset disconnected from the larger set of assets needed to put that intellectual property to work. This is not to say that standalone intellectual property is not valuable. But the value of a patent is ultimately determined by its utilisation. Utilisation often requires access to the know-how (tacit or formal) behind the patent. We explored this concept at a session at the recent IP Business Congress (IPBC) with Glen Weinstein of irobot, Gabe Fried of Hilco Streambank and Mary Adams of Smarter-Companies. Weinstein explained the difference between standalone intellectual property and intellectual property embedded in a broader set of assets by contrasting two recent IP portfolio purchases that his company had made. The first was one that was for a little money. This relatively inexpensive purchase was a standalone patent purchased for defensive purposes, to strengthen the moat. The second portfolio purchase was for a lot of money and was done for a different reason. This deal came with a team of technologists who could apply the technology to speed up product development. In other words, the additional value in the second portfolio was due to the extra assets that came as part of the package. The broader ecosystem That broader set of intangible assets included information, workforce skills and know-how, effective management and marketing, business models, relations with suppliers and customers, and software and databases, as well as traditional intellectual property (ie, patents, copyrights and trademarks). They are the building blocks of business today. As Federal Reserve Chairman Ben Bernanke said at a conference hosted two years ago by my organisation, the topics of innovation and intangible assets are central to understanding how we can best promote robust economic growth in the long run. Recent work by The Conference Board and others has demonstrated the importance of intangible assets to economic growth. Already business investment in intangible assets such as R&D, worker training and organisational structures is greater than that in tangible assets, such as buildings and equipment. Patents, copyrights and trademarks are some of the most visible and tangible intangibles. According to the US Bureau of Economic Analysis, approximately US$650 billion is invested annually in software development, R&D and the creation of entertainment, literary and artistic originals (what it labels IP products ). Thus, it is easy to understand how intellectual property can come to dominate Intellectual Asset Management November/December

2 Figure 1. The intellectual framework Human Strategic Employees collaborating together and with external partners to create re-usable knowledge, designs and processes that meet market needs via a viable business model Relationship Source: Smarter Companies Structural the discussion about intangibles. Yet intellectual property constitutes only a portion of a company s intangible value. Today organisations succeed by marshalling the assets that have traditionally been considered as secondary, soft and hard to define things like smart people, good processes, big data, unique designs, strong networks, engaged cultures and creative business models. IP must be connected to all of these parts. An IC framework At company level, the broad range of intangible assets is captured in the concept of intangible (IC). To understand a company s IC, we use a four-part model: Human this includes all the talent, competencies and experience of employees and managers. This is the intangible that goes home at night. Relationship this includes all key external relationships that drive business, including customers, suppliers, partners, outsourcing and financing partners, to name a few. This kind of also includes organisational brand and reputation. Due to the growing importance of networks in organisational structures, this is also sometimes called network. Structural this includes all knowledge that stays behind when employees go home at the end of the day. There is significant structural in today s organisations, including recorded knowledge, databases, processes, software and intellectual property. Strategic this is a blend of the market opportunity and the business model that an organisation uses to take advantage of that opportunity. This framework allows an understanding of the operations of any type of business even those thought of as based on tangible assets. At our IPBC session, Fried cited the example of the trucking industry, which is easily viewed as heavily tangible based, dependent on trucks and shipping warehouses. These tangible assets are needed even to get into the game. But, Fried asserts, the real differentiation between companies lies in their intangibles, such as scheduling processes and systems and employees. In the trucking industry, human is critical. One key measure of the strength of human is employee turnover rates. This is because turnover affects driver recruitment costs and is a proxy for the ability to attract and retain good drivers. The importance of good drivers shows up in accident rates, which affect insurance rates. Good employees also affect interactions with customers and hence customer satisfaction. And the combination of good employees (human ) and scheduling systems (structural ) also affects on-time delivery, which affects customer satisfaction (relationship ). Linking IC to IP For knowledge and technology-based companies, the framework is even more 75 Intellectual Asset Management November/December 2013

3 Figure 2. The elephant problem Source: Athena Alliance important. Understanding the links between these different kinds of intangible shows how concomitant investments in other forms of IC are needed to utilise the full value of the intellectual property. Let us return to the earlier example of buying a team as well as the patent. The fact that the company hired a team of technologists was not enough. These people needed to be motivated to stay (through an equity arrangement) and integrated into the rest of the organisation. In other words, attention had to be given to the human and structural parts of the equation. Remember also that this portfolio purchase was driven by the opportunity to use the technology to speed up product development dramatically. This illustrates the connection between intellectual property and both structural and strategic. An analysis of structural was needed to understand that the technology would fit into the existing processes for product development; an understanding of the strategic showed that this specific product under development fit with the company s business model. To highlight this last point, Weinstein noted that the company has specifically turned down offers to purchase related technologies because they do not fit in. For example, it has been offered patents on robots to cut grass at golf courses, but neither the potential seller nor the company has any inroads into that business that is, no contacts with golf courses. Thus, it believes that the technology does not come with the structural, human, relational and strategic needed to operationalise it. Such accompanying IC could be created, but would require a major additional investment. At the IPBC session, Fried seconded this point based on his experience selling intangible assets through his company Hilco Streambank (often in distressed situations). Fried noted that legally protected intellectual property (which includes customer lists as well as patents, copyrights and trademarks) is like the bones of a transaction. The monetisation process must bring the connective tissue to the deal this includes access to engineering knowhow, test results, laboratory notebooks and other substance behind the legal document know as a patent. In essence, a successful monetisation requires the full range of IC to bring the deal close to that of a going concern purchase. To be successful, links are needed with human and structural to ensure the transfer of the background knowledge between buyer and seller, so that the buyer can maximise the return on the investment in the intellectual property. This often requires turning the seller s employees into consultants to the buyers sometimes with the deal structured to include specific knowledge transfer milestones. Fried gave an example of this link in the case of his sale of a patent portfolio from the chemical engineering group of a tier-one auto supplier. The patents and applications spelled out the chemical components. But the utilisation of the recipe required the buyer also to understand the materials handling and product development processes associated with that technology. To be successful, the transaction needed to be structured to include this transfer of know-how in this case, training by the seller s engineers. Connecting the dots Management s task in IP transactions is to make these connections among all the elements required to succeed. Unfortunately, most of the components of IC are housed within specific organisational silos. Activities involving intellectual property are seen as a function of the legal department. The development of the actual technology is in the hands of the engineers and scientists, who pass it off to the lawyers only when it is ready for the legal patent filing. Human is often, and mistakenly, thought of solely as the province of the human resources department. Operations and manufacturing do not get brought into the loop until much later in the development process. And Intellectual Asset Management November/December

4 Table 1. IP-IC Quick Scan Human How would you rate the management team s understanding of what it will take to commercialise this technology? How would you rate the management team s knowledge of the industry related to this technology? competencies related to production/ delivery of this technology? competencies necessary to renew and continue to build this technology? competencies necessary to support customers of this technology? Relationship understanding of the target market for the technology? How would you rate the fit between this technology and the company s existing customers? access to the right prospect group for this technology? access to the right partners to produce and deliver this technology? brand as consistent with this technology? Structural ability to create an effective process for producing the technology? ability to create marketing processes appropriate for creating demand for this technology? ability to create sales processes appropriate for selling this technology? knowledge base related to this technology? access to related technologies that it will need to commercialise this technology? Strategic How would you rate the fit between this technology and the company s existing business model? ability to create an appropriate business model for this technology? How would you rate the opportunity in the marketplace (strong opportunity usually means fewer incumbent competitors)? How would you rate the outlook for the market need that this technology is addressing? How would you rate the level of freedom from regulation in the market for this technology? Table 2. ICounts Inventory What is your brand? Who are your customers? What do you do to create value for your customers? What are the key processes and knowledge that support this value creation? Who are the key partners that support the model? What are the key competencies your people need to support the model? What are the key elements of the culture your organisation needs to keep this system working? accounting does not understand and cannot cope with these activities as investments; they are all expenses to them. We often call this the elephant problem, as it mimics the situation in the poem The Blind Men and the Elephant, where each blind man touches a different part of an elephant and makes a mistaken assumption about what the whole animal looks like (see figure 2). In a similar way with IC, each person makes his own assumptions about the overall picture based on his role and experience (eg, lawyers see intellectual property and marketers see brand). Tools to see the whole system In the course of the panel discussion, Adams shared a couple of open-source tools to help all of the players involved in intellectual property to develop a shared understanding of the ecosystem around it. The starting point is an IP-IC QuickScan. This open source tool was developed by Smarter-Companies and IPR Plaza to provide a fast overview of the IC ecosystem for a piece of intellectual property. It consists of 20 questions (see Table 1) that examine the basic elements of human, relationship, structural and strategic needed to commercialise a piece or portfolio of IC successfully. Scoring each of these elements helps to clarify whether the company has what it takes to get the most out of a piece of intellectual property, and the opportunities to improve. This generic questionnaire can be a great place to start a conversation. It can also be an important step to securing buy-in from everyone on the team to spend some time looking at the IC for IP. But ultimately, it is a generic list of questions. Once the team is engaged, it will be looking to go deeper. The second tool introduced in the discussion starts to create a customised view of the specific intangibles needed by an organisation. It uses a tool called the ICounts Inventory. This tool helps business people to move from the abstract to the concrete when talking about their intangibles. This open source tool consists of seven questions (see Table 2) which get at the essence of the unique intangible of an organisation. This is a much more powerful discussion, because you are no longer talking in the abstract about people and processes you are naming the specific processes, competencies and partnerships that are needed by your unique organisation. The inventory creates a shared blueprint for the full IC needed to commercialise IP. 77 Intellectual Asset Management November/December 2013

5 Action plan A By learning how intellectual property fits into the wider world of intellectual (IC), in-house IP professionals can increase the value creation potential of IP assets and improve senior management and investor understanding of IP. An organisation s IC consists of human, relationship, structural and strategic. Typically, these four elements and their components tend to be siloed, with IP assets (a part of strategic ) seen as a function of the legal department, human a function of the human resources department, and so on. IP professionals therefore need to work with business leaders in these other parts of the organisation to maximise IP value. One way to achieve this is by using specially developed software tools (such as IP-IC QuickScan and ICounts Inventory) to map out their organisation s IC and to use these analyses to engage in conversation with other business leaders. Further information on these tools is available at com/page/icounts IP put into context It was clear from the comments of the panellists and the lively audience participation that there is a growing appreciation for the context within which intellectual property is built and optimised in today s organisations. That context is important not only for full utilisation of the IP, but also to help to leverage the IP and the broader IC to create greater value for the company. IP professionals routinely talk about how difficult it is to get senior management and investors to understand intellectual property. To overcome this difficulty, IP professionals need to be able to understand how to connect the dots between IP and IC. Businesses need to be able to talk about their IP and IC when they go to a bank or an investor. Leaders need more than a balance sheet to track their infrastructure. Marketers need more than fancy slogans to connect with stakeholders. Employees need more than orders to engage with your xxx organisation. Everyone in organisations needs to have a shared understanding of what they have, how it works and how to make it better. Taking the broader view and placing your IP in the broader context of your IC is a key element to successful IP management. The tools shared at our IPBC session are a step in that direction. They are meant to be used, so go and try them out. Worksheets and background information on these tools is available at com/page/icounts Kenan Patrick Jarboe is president of the Athena Alliance, Washington DC Intellectual Asset Management November/December