Creating and Following a System for Strategic Management of Intellectual Property Assets: An Executive’s Toolkit

Intellectual property (IP) can create significant profits for your business. In that sense, IP is like any other type of asset that makes up the value of your company. However, IP can be more challenging to manage than real estate, inventory, or capital investments. It takes specialized knowledge as well as an understanding of processes to maintain, value, and commercialize IP. Is your company making the most of its IP assets to capitalize on an often substantial investment and sharpen your competitive edge? Consider these questions:

• What IP assets does our organization possess?
• What does it take to create and maintain them?
• What profits and/or competitive advantages can we associate with them?
• What should our organization do with the IP it has?
• What additional IP should we create or pursue?

An IP Strategic Management program can contribute to the overall success of your organization by providing a framework for regular review of IP assets to inform strategic and tactical decisions. Once you have created a strong framework, you can plan for systematic updates to maintain your IP inventory. This article offers steps in developing a strategic management program for IP assets as well as downloadable tools your organization can use as a starting points for analysis.

Which Asset Type Is Right for Your Company?

The United States Patent and Trademark Office compares the three forms of federally-protected IP as follows:

In addition to federal protection, various states have their own frameworks governing copyrights, trademarks, and trade secrets. According to the World Intellectual Property Organization, or WIPO, a trade secret is just what the name implies, and has the following characteristics:

• commercially valuable because it is secret,
• known only to a limited group of persons, and
• subject to reasonable steps taken by the rightful holder of the information to keep it secret, including the use of confidentiality agreements for business partners and employees.

Which type of asset is right for your company’s situation? That is ultimately a question for your legal department, but consider the relationship between the strength of protection, the costs involved, and the outcome desired.

For example, a trade secret may provide stronger protection than a patent in some situations. A trade secret, by definition, is not disclosed to the public and has no legal end of life, so it has the potential to be maintained as a competitive advantage as long as it is technologically viable. By contrast, patents can be relatively expensive to prosecute and maintain and have only a 20-year legal life in most cases. But they can serve as a blocking mechanism that disadvantages competitors and may lead to higher product/service profits and/or licensing revenue.

Surprisingly, many organizations may be sitting on assets they do not even know exist. Imagine a group of engineers at TechCo who are performing research into a new product area. TechCo has historically been focused on filing patents to protect its technology and obtain competitive advantage. The engineers may be identifying know-how and other non-patentable processes along the way, but may not focus on these activities, which may be valuable to the organization as potential trade secrets. If the organization does not have a formal mechanism for submitting, evaluating, approving and cataloging developed technologies, this important element might not be recognized because it does not fit into the company’s research and development approach.

Cataloguing Your IP Assets

Creating and implementing a mechanism to survey the organization’s existing IP assets should be a joint effort between the research and development, product management, finance, and legal teams. Organizations that already have a framework in place should implement and continually update their IP asset list to include at least the information in the downloadable detailed asset tracking tool found here: IP Asset Tracking Tool

Valuing Your IP Assets

Once you have catalogued your IP assets, you can explore ways to realize the objective that led the company to develop these assets in the first place: to generate profits and create value. Your organization can achieve this goal by:

• launching a product or service line that uses the protected technology;
• blocking a competitor’s product or service line that would infringe on the protected technology;
• staking out the direction of a nascent technology space to maximize future market share;
• licensing the IP asset in return for royalty payments; and/or
• assigning or selling the IP asset to a third party in return for payment, an ownership stake, forbearance from infringement claims, or other benefit.

To evaluate these potential opportunities, your organization can use the income approach to valuation. Compare a project’s expected benefits with development and maintenance costs attached to the IP assets over a forecasted time horizon. This assessment requires hard data (to the extent it is discoverable), and managerial judgment to fill in any gaps.

Here is a simple example of this approach using a product by TechCo:

With $1,500,000 in expected product profits from product sales and $1,008,000 in expected overhead costs (Scenario 1), the nominal expected return of $492,000 makes TechCo’s decision to proceed with the project is easy to make.

The timing of the decision is key, however. Projections are an educated guess and must be updated as new data is discovered. A project that once looked favorable at the outset may look more or less so over time. Therefore, as the development process evolves and the anticipated product launch nears, the calculus should be continually monitored and the project may need to be course-corrected or abandoned. For the TechCo example, assume the company updated its forecasting in the third year of the project to include the following additional/updated information:

TechCo now has a better outlook for the prospective product’s sales and profits than it did before the development stage, with $1,800,000 in expected profits versus the same $1,008,000 in overhead costs, for a nominal return of $792,000 (Scenario 2). However, the decision is clear – all else equal, TechCo should license the patented technology to the market leaders in this space rather than launch its own product. Doing so would bring in $2,000,000 in licensing profits ($200,000 more than the expected profits from product sales), reduce overhead costs by $250,000 to $758,000, and leave a nominal return of $1,242,000, while eliminating the risk of the product underperforming (Scenario 3). TechCo can look to comparable licensing transactions in the industry to evaluate whether the expected royalties are fair and achievable (a market approach to valuation).

Developing projections and making decisions based on future events is necessary even though these actions involve a great deal of uncertainty. Your analysis must be based on the best data you can get regarding the potential value of your IP assets in contributing to the bottom line of the firm. The resulting data, analyses, and projections can be evaluated using standard investment return concepts such as net present value, internal rate of return, and return on investment. Templates for some simple return calculations (with the data from each of Scenarios 1, 2, and 3 included) can be found in this downloadable tool: Return Calculations Tool

The metrics in the tool include Net Present Value (NPV), Internal Rate of Return (IRR), and Return on Investment (ROI). The NPV of a project is its economic return after factoring in the time value of money and the company’s cost of capital, using a discount rate such as weighted average cost of capital. The IRR is the discount rate that results in a Net Present Value of zero, such that the firm will experience a positive economic return as long as its discount rate is lower than the IRR percentage. The ROI is a simple comparative metric reflecting the nominal return of a project divided by its nominal costs. Using the tool, TechCo would choose Scenario 3 over Scenario 2 (Scenario 1 is no longer in force), all else equal, which has the highest NPV, IRR, and ROI of the three options. Note that these metrics are evaluated as of the time of the decision, which means that Scenarios 2 and 3 reflect a present value at the end of Year 3. It should be noted that the costs in Years 1 through 3 in those scenarios should be disregarded as sunk costs, but they are included in the tool for comparison and clarity purposes. With or without these sunk costs included, the decision would be the same – Scenario 3 is the clear choice at that point in time.

Strategically Managing Your IP Assets

Of course, business is not linear and all things are not equal. The decision analysis in the TechCo example involves a capital investment or financial budgeting view of the organization’s projections and results. In making decisions about creating and maintaining the organization’s IP assets, management should also look at the bigger picture with a strategic assessment of the firm’s overall goals and direction. Consider:

• the organization’s capabilities for creating IP versus the benefits of purchasing or licensing it from third parties;
• the market(s) in which the organization plans to compete;
• the way the organization plans to interact with other market players; and
• whether the organization aims to be oriented towards technology research and development or product development and operating activities (or both).

Suppose TechCo has the goal of being a bigger player in the smartphone market in the future. The decision to license its patents to market leaders might be a good financial decision in the short to medium term. However, positioning itself as a provider of technology inputs to other firms could preclude TechCo from being a viable competitor to those firms in the future. With this in mind, TechCo could decide that, in spite of the increased risk, selling its own product rather than licensing its patents is a better decision. Further, although the data inputs and expected outcomes might change, selling the product and also licensing the technology at the same time might be a viable option.

What Does This Mean for My Company?

The different functions of your organization should be evaluating the following issues in a continuous feedback loop with the other functions:

Putting It All Together

In summary, when it comes to IP assets, your company should focus on developing and protecting IP assets with the greatest potential for supporting your overall success. It takes a strong commitment to working together within the organization, with third party professionals if needed, to collect and analyze the data necessary to make the right decisions based on the organization’s strategic goals, resources and assets. The key is to begin early in the process, with a collaboration between technical research and development, product/service development, legal, marketing/sales, and financial and business management teams to match the company’s development efforts with its immediate financial goals and its long-term strategic goals. Workflows to consider when launching an effective IP Strategic Management program include:

• Asset tracking
• Asset valuation
• Budgeting/forecasting
• Cash flow analysis
• Cost analysis
• Legal clearance
• M&A / Transaction advisory
• Make or buy decision analysis
• Monetization advisory
• Project Prioritization
• Royalty audits
• Tax strategy analysis

We encourage you to use Weaver’s downloadable, customizable tools discussed in this article to develop an itemized inventory of your organization’s IP assets and assess the value of those IP assets. To learn more about how Weaver’s team can help you develop a program for strategically managing your IP assets, contact us today.

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