United States: Measuring the Patenting Success of Companies: Metrics and Measurement for Patent Departments - Part 1

Many companies are increasingly recognizing that a general intellectual property (IP) strategy plan and a specific patent strategy plan should be included within their overall business objectives. IP and patents are becoming much more than a legal issue. Rather, IP and patents are becoming an embodiment of a company's competitive position. As such, companies are starting to devote as much emphasis on developing the value and impact of their IP as they are on creating and maintaining it. Certainly many good studies discuss this growing importance.¹ Books devoted to the subject of intellectual asset management have been populating the shelves in the "business" sections of U.S. bookstores for a number of years.

Microsoft has been an example of how change is occurring. In the mid-1990s, Microsoft made the decision to rework its IP strategy after finding itself at the wrong end of a series of patent infringement cases brought by rivals.² As a result, Microsoft began to place a far greater emphasis on securing patent protection than it did in the past, when it instead relied much more heavily on copyright protection. While copyrights cover only the expression of an idea, patents cover the underlying idea as well, meaning that patent protection is generally much broader. Seven years ago, Microsoft possessed only a handful of patents; now the company's portfolio comprises many hundreds of patents and they are aggressively enforced. More recently, Microsoft sought to further advance its patent successes by hiring Marshall Phelps from his successful career in banking and consulting to become Microsoft's corporate vice-president and deputy general counsel with responsibility for intellectual property.³ What made this announcement so stunning was Phelps' previous position of VP of intellectual property and licensing at IBM from 1992 to 2000. During that time he played an instrumental role in turning IBM from a net purchaser of IP rights into the world's largest IP licensing machine – it now reportedly generates more than $1.5 billion a year from the activity, over 85 percent of which goes straight to the profit line at IBM.⁴ Microsoft's transformation into an IP "powerhouse" is now well on its way to being completed.

With the increased importance on IP generally comes increased scrutiny of IP activities by a company's business management. IP is becoming a common consideration at the heart of a company's business processes.⁵ Such inclusion should start by ensuring that existing decision-making processes and corporate governance make visible both the strength of the IP portfolio and the quality of its management. Further, IP policies, strategies, and accountabilities should not only clearly identify the actions that individuals should take in the management of the company's IP but also provide guidance to facilitate decision-making.⁶ For an IP strategy to be of value it must provide a vision that assists the business to make decisions on the protection, maintenance, licensing, and disclosure of IP. Accordingly, with this greater scrutiny is coming a wider audience for reports on patenting activities. This audience is not only internal to the company but also is external, such as stockholders, potential investors, and analysts. Reporting of a company's patenting activities never had a wider audience.

Another factor raising the importance of IP within a company is that IP is receiving an increased national focus. While IP has been an important aspect of U.S. trade policy for many years, Japan is a more recent adherent to such a focus. However, Japan has made continuous progress toward strengthening domestic IP protection with the government's establishment of the Strategic Counsel on Intellectual Property in 2003 and its "Intellectual Property Policy Outline." Other examples in Japan of this progress includes changes related to the initiation of IP lawsuits and the general strengthening of IP protection through the litigation system.

Another growing audience is investors. Investors are demanding more and more information about a company's inner workings related to IP and patents.⁷ Investors – such as institutional investors analysts – want this information to allow them to better evaluate companies to weigh the decision of whether to invest in a company's stock. Investors hope for the appropriate disclosure of information on technologybased intangible assets of which company managers are aware for the purpose of increasing their own profitability and corporate values, and which can then be applied into their own corporate valuation model.

The purpose of this study is to consider what objective benchmarks, metrics, and/or measurements an IP department could use to describe and demonstrate its "patent successes" to its senior management, its board of directors, any other relevant audience internal to the company as well as to external investors and market analysts.

The need for such values and measurements is clear. Corporate patent departments are still largely viewed by management as "cost centers" or as a "staff expense" rather than as a creator of strategic assets.⁸ Companies have historically built portfolios of patents because it was "the right thing to do" or as a way of keeping their engineers and scientists happy. Intellectual property was viewed as a cost, not an opportunity. Perhaps driven by a lack of appreciation or understanding of IP assets and due to lesser importance of IP assets compared to other corporate assets, senior managers generally had the perspective that patents were a "necessary evil." Money was budgeted for patenting activities but not much was expected in return.

Indeed, there is currently in the United States an active discussion among corporate legal departments – not yet focusing on "corporate IP departments" – about how to measure success. Attached as Exhibit 1 to this research study is a reprinted article from Corporate Legal Times, entitled "Legal Departments Learn How to Measure Success" (Vol. 14, No. 150, May 2004). This article discusses the proceedings from a "Counsel to Counsel Forum" entitled "How Do You Measure Up? Metrics and Measurements for the Law Department." A number of general counsel or chief legal officers from some of the largest companies in the United States participated as speakers in or attended this forum.

The discussion at the forum was somewhat surprising. The observations were made that a number of corporate legal departments themselves have no meaningful metrics by which to measure anything. These legal departments are now starting to look for metrics and measurements to diagnose the root causes of inefficiencies and to report on their respective accomplishments. The conclusion was made that, in today's corporate culture, implementing the proper metrics and measurements is crucial to a legal department's success, especially as corporate budgets remain flat. Also, perhaps more important, such metrics and measurements provide information that helps a department gain the trust and respect of company business executives. Finding the right measurements was said to be the crux of any strategic planning

initiative. Additionally, the observation was made at this forum that the first thing that needs to be done is to succinctly define the role of the corporate legal department within the company.

It is respectfully submitted that such observations and conclusions for the need of such metrics and measurements for .patent activities. within the IP functions of companies are needed even more than for general corporate legal departments. The typical senior business manager in a company has perhaps greater familiarity and interactions with legal departments than with IP departments. Legal departments can handle issues relating to human resources, distribution, contracts of many types, and so on, all of which are issues that many senior business managers outside the research function handle. It is perhaps interesting that patents have been transforming from just legal documents into key strategic business assets while many senior business managers are still relatively uneducated about them.⁹ For this reason the need for IP departments to show their efficiencies, accomplishments, and contributions to the corporation is greater today than it has ever been before.¹⁰

This study attempts to begin to catalog any number of metrics and measurements that can be used to measure the success of a company's patenting activities. Companies can then choose among those metrics and measurements that seem to fit best for its owner's particular needs and corporate culture. The choice of such performance indications is critical. The correct ones can be used not only to identify areas where improvement is required, but more important serve as guidance on the activities that should be undertaken to improve performance.

It is obviously not possible to review the alignment of all of a company's IP to the Company's business strategy. Instead, the challenge should probably be to pay particular attention to the "health" of that IP's underpinning to the company's key "differentiating" and "enabling" capabilities. ("Differentiators" are capabilities to which an organization wishes to have unique access. "Enablers" are capabilities, with limited availability, that are essential to product and service delivery (here the focus is on ensuring secure and cost effective access, rather than pursuing the creation of a unique capability).) Such a system of metrics and measurements would be useful to help in this process. IP perhaps has two basic characteristics that should be examined:¹¹

Role Here metrics will seek to measure the potential importance of a given asset to business success (e.g., the extent to which patents can create a differentiated product)

Utility Here metrics will seek to measure whether a given asset is fit for purpose and if its longevity is consistent with business needs (e.g., whether certain patents have created, and will continue to create, a differential product)

If metrics and measurements are used to represent these characteristics, then any misalignment with the business goals will be identified and need to be considered by management.

In its most cynical description, such metrics and measurements are a "public Relations" ploy, trying to convince people of a patent department's "selfimportance." However, such a "public relations" aspect is submitted to be important in and of itself. Patent departments must exist within a corporate environment and must compete for resources with other departments. Also, spreading the "gospel" of IP importance requires some time at the pulpit convincing others.

This study is limited to metrics and measurements for patent activities only. While the usage is not entirely uniform, the term "intellectual assets" is generally used to refer to innovations and ideas that have the potential to add to a company's revenues or profits and that have been captured in intangible form. The term "intellectual property" typically refers to the subset of intellectual assets that have achieved legal protection as patents, trade secrets, trademarks, copyrights, and the like.¹² Because of the very expansive nature of "intellectual assets" and "intellectual property," a more focused analysis for "patent assets" was thought to provide a more workable scope for this particular study.

During the course of this study, the following information was collected and reviewed:

• Fifteen personal interviews with corporate IP departments, specifically with members of those departments who were significantly responsible for managing the patenting activities within the corporation

• A number of documentary sources that were identified through research

• The author's personal experiences in being significantly responsible for the patenting activities within a corporation and separately of a division within a corporation, albeit as "outside counsel"

Concerning the 15 personal interviews, those were all conducted by the author. A questionnaire was provided to most of the interviewees in advance (Exhibit 2 hereto). This questionnaire served more of a template to focus discussion than for a statistical analysis of the results. Of the 15 companies, 11 were Japanese companies, one was a Japanese university, and three were companies located in the United States, with two being U.S. companies and one being a large U.S. subsidiary of a European company.

To foster cooperation and openness of discussion, it was agreed that none of the companies, the persons interviewed, or the specific companies would be identified or generally described in this study. Therefore, no specific company or its practices are identified in this study.

Several general observations can be made. The fundamental reasons for getting patents should be remembered. Also, it is clear that there is not one "consistent set" of metrics and measurements for all companies to use. Several factors bar such a uniform application. Further, one very important measurement that is missing is the valuation of "risk avoidance."

It is useful to remember the five fundamental roles of patents in facilitating business success.¹³ Such roles should be reflected in whatever metrics and measurements are used. Those roles are:

It is clear that there is not one set of metric and measurements for all companies to use. This observation was made as a result of the individual interviews with the companies. There does not seem to be a "best practices" recommendation to make to all companies. Instead, the patent department of each company has to decide which of the available metric and measurements may be preferred for its unique corporate situation and resources. There are a number of factors that can be attributed to this variability, some of these factors being somewhat subtle. Some of these factors are:

Another factor is that too many members of companies' senior management tend to only see one metric – how much revenue has been generated by the patent activities. In other words, for the specific reporting period, how much corporate dollars or Yen have been collected. (This could be from licensing revenues, etc.) Too many senior managers attempt to simply compare the total amount of money budgeted for the IP department, which is a corporate expense, against any funds that are received going the other way as revenue.

Unfortunately, such a one-dimensional way of tending to view patents does not appreciate the non-revenue benefits of having a patent portfolio, as discussed above. A proper choice of metrics and measurements could help to educate senior management on these non-revenue goals, while providing a measure of the accomplishments attributed to patenting activities. For example, "risk avoidance" seems generally to have very little importance to many corporate managers. For example, if a patent is used as a counterattack to another company's allegations of patent infringement and a litigation is avoided, not much value was seen for such risk avoidance, even if the company would have based substantial liability had the alleged allegations of patent infringement proceeds to litigation.

There also is wide variability among companies in the actual modes of reporting to the relevant business managers. None of the companies interviewed had similar reports that were created. This seems to follow from the observations of different factors made above.

Many of the metrics and measurements may seem somewhat speculative and hard to quantify with real numbers. However, such "qualitative" data or narrative descriptions should not be dismissed as being without practical use. Such non-exact or qualitative data can be very useful in making business decisions involving IP (and patents).

In fact, according to one study done at IIP, based upon an extensive survey, it was actually found that special importance was attached to qualitative information that indicates relationships with strategy and organization among information on technology-based intangible assets.¹⁴ According to the study, this result has revealed a fact that is different from the general trend, which is that institutional investors are requesting the disclosure of technology-based intangible assets that are calculated by an objective method. "Needless to say, institutional investors give relative close focus to the fact that companies internally carry out research and development as well as patent management by a count-based method."¹⁵

As described above, the purpose of this section is to create a catalog of possible metrics and measurements that a company can pick and choose from to report its patent activities. This catalog contains as many practical metrics and measurements as possible. It is expected that some may not be applicable to each company but at least choices are possible.

These metrics and measurements are listed below generally in order from most common or simple to increasingly esoteric.

Each patent department needs to fully and specifically know how it fits into the corporate structure, both on the organization chart and functionally. Such a "charter" sets forth a way to judge whether the patent department is conducting its businesses the way it should be. A "charter" would identify any inconsistencies that different business managers may have about the roles of the patent department.

Clearly, decisions on the maintenance, protection, disposal, licensing, and abandonment of IP should be taken by the business units. However, equally clear is that the patent function – whether based internally, outsourced to private practitioners, or split between the two – will be responsible for managing the legal processes implied by such decisions. In addition, there is a need for an additional managerial role to: (1) review and challenge the businesses' decisions; (2) develop and monitor compliance with company policy and strategy; and (3) provide assistance to those preparing and reviewing IP plans, and so on. The "charter" would consider whether accountabilities between the businesses and the patent department are clear, and, if delegated, whether approval and reporting structures are clearly defined. Responsibilities within the IP process should be captured in appropriate job descriptions. Also, the businesses' key enablers and differentiators should be identified and addressed.

Simply, the "charter" will help to outline the principles that the company will follow in managing its IP. Perhaps logically, there was observed a considerable variation in the details presented within different companies' patent charters. Some had none. Some had a rudimentary charter related to "human resources" issues. Some companies had charters that were limited to a series of statements of principles. However, it is submitted that charters of this type are often little more than "philosophy statements" that do not contribute much in the operation of the patent function. Some companies' policies contained detailed procedures describing not only what should be done but how. Charters of this type may be ignored because of the sheer volume of information users must navigate.

It is submitted that the most effective charters would be structured as follows:

• A number of short policy statements given to define the principles the company will follow in the management of its IP

• Each charter is accompanied by clear accountabilities identifying both those responsible for implementation and the actions that need to be taken to ensure compliance

• Supporting procedures can be prepared where necessary; however, in general, these should be kept outside of the policy framework

The following table shows an example to demonstrate this approach:

This structured approach provides a clear description of: the company's policy, the minimum actions needed to ensure compliance, and those responsible for policy interpretation and ensuring compliance.

Care needs to be taken in deciding where those responsibilities should be placed. In most companies, the patent department is a service provider so thought should be given to how many management responsibilities it should be given.

The next four measurements are most frequently used by companies at the present time.

To view part 2 of this article please click here