Originally published March 2004
Introduction
The Growing Importance of Intellectual Assets
Today more than ever companies are actively seeking approaches to convert the "intangible" value of their intellectual assets into revenue, cost savings and other forms of tangible benefits. Some organizations rely on the ability to protect their intellectual property as a means to maintain or gain competitive advantage. Others depend upon income obtained from intellectual property—such as through licensing—as a source of high-margin revenues. But irrespective of the strategy a firm employs, it is well recognized that more and more of a firm’s current and future value is being attributed to intangible assets. A recent Gartner report1 stated that, "By 2007, intangible intellectual assets will account for more than 90 percent of the value of the Global 2000 enterprise, up from 20 percent in 1978 and 70 percent in 1998". Consistent with this view, a November 2002 McKinsey & Co. study found that while the 40 technology and innovations companies studied could add 10-20% to their operating income by better exploiting IP, only a small number even reached the 0.5% mark2. Suffice it to say, companies are leaving a wealth of value in their intellectual assets unrealized.
Since the mid-80s there have been discussions around how to quantify the value of and reliably account for intangible assets. The dot.com crash has renewed and expanded these concerns outside of the accounting realm in an effort to explain significant differences between the "book value" of an organization and its market capitalization. In discussing the unique challenges facing those companies who depend on intangible assets for profitability and competitive advantage, FASB (the Financial Accounting Standards Board) states, "traditional financial statements do not capture – and may not be able to capture – the value drivers that dominate the new economy." Historically, companies have fundamentally recognized two forms of assets—hard assets and intangible assets. While approaches to managing hard assets—such as plants, equipment, real estate, etc.—are well-developed, intangible assets have largely been viewed as the most difficult to quantify and the most unmanageable.
Recognizing the role of intangible assets in the economy and the unrealized potential these assets have on current and future value, companies are now seeking to understand the value of their intellectual assets as it relates to market capitalization and how to leverage that capital to its fullest extent. Firms seek to broaden what has been typically been viewed as primarily a legal function to an enterprise wide Intellectual Asset Management (IAM) competency: that is building the culture, framework and decision making capabilities to convert intellectual assets into profits.
Challenges Facing Corporations
Many organizations have difficulty understanding and maximizing the value obtained from intellectual assets because they lack visibility into the IP contained within their organization. For example, it is estimated that each year, U.S. companies waste $1 trillion dollars in patent assets3. Many IP heavy companies have extracted only a small fraction of their IP portfolio’s true value and are looking to identify new revenue streams while using their intellectual assets to gain a strategic edge over their competitors. Corporations with large patent portfolios also have problems with the various costs tied to managing those intellectual assets. Some of these costs associated with managing IP, which include prosecution fees, maintenance fees, and application fees, are unnecessary and can be reduced with an IAM solution. While many corporations see the potential in shortening innovation cycles, developing more advanced technologies, and streamlining business processes.
Some companies in an effort to effectively manage and extract as much value as possible from their intellectual assets have sought to develop an Intellectual Asset Management (IAM) competency. Large enterprises such as IBM, The Dow Chemical Company Philips, Lucent, and Texas Instruments have significantly increased revenues by successfully managing their intellectual assets. For example,
- Dow Chemical Company in a campaign to lower maintenance taxes paid by aligning its intellectual assets with business strategies reduced its annual costs for obtaining and maintaining pates by $1.5 million. By reducing its patent portfolio from 12000 patents to 8500 patents from 1993 to 1999, Dow estimates it saved $ 40 million in maintenance tax savings4.
- IBM has increased patent licensing royalty revenues 3,300% from $30 million in 1990 to $1B today. This recurring revenue stream is mostly unrestricted cash flow that represents 1/9 of IBM’s pretax profits and equates to $20B in product sales revenue5.
- Philips Electronics, which receives a significant amount of income from licensing, increased licensing revenue by 45% and filed 35% more patents in 2000 than in 19996.
- Within the first six months of its new IP licensing strategy, British Telecommunications generated close to $14 million in new licensing revenue by data mining its patent portfolio and unlocking new sources of revenue.
With the trends clearly in sight, the future will require that the success of most company’s overall business strategy will be directly linked to how well they can effectively manage their intellectual assets.
What Does Cultivating an Intellectual Asset Management Competency Entail?
To build an Intellectual Asset Management competency is to develop the ability to operationally extract value from intellectual assets. As a multi functional competency, the skills required for successful IAM span a broad range of capabilities including technical and IP subject matter expertise, financial valuation expertise, and business strategy and process knowledge. It involves developing a vision and strategy, implementing best in class processes, and creating an IAM focused organization structure.
Implementing a well-constructed Intellectual Asset Management system plays a critical role in developing an effective and successful IAM competency. Such a system supports the processes and decision making needed to create, manage and use the estate to its fullest potential. Without a system that provides electronic management of assets, a systematic way of conducting the series of activities required to manage Intellectual Property (IP), and tools for strategic analysis of IP data, developing an IAM competency is difficult if not impossible.
In fact, industry analysts and IP professionals predict that by 2005, more than 50 percent of companies in the pharmaceutical, aerospace, high technology, consumer goods and biomedical sectors will have adopted an Intellectual Asset Management (IAM) system7. Such a system should integrate functionalities that have been historically isolated, such as patent searching, licensing, and docketing. An enterprise wide central repository should allow sharing of IP information across the organization or between businesses. Analytical tools allow strategic analysis of data and reveal linkages between groups of data previously unknown. An integrated approach that links these functions will enable companies to manage their intellectual property in a way that will fully leverage IAM’s strategic power.
What Should Companies Gain From Implementing an IAM Solution?
Maintaining an Intellectual asset management competency presents a broad range of potential benefits to today’s technology and innovation driven companies. These benefits can be categorized into "Direct" and "Indirect" based on how readily cost-savings and revenue can be attributed to improved IAM.
Overview of Direct Benefits
Overview of Indirect Benefits
Indirect benefits are those that are linked to strategy or vision, and often do not readily lend themselves to easy measurement. These benefits are well recognized and accepted, however typically require longer payback periods. These benefits include added value through strategic positioning (i.e. increased market share, blocking of competitors, increase in IP quality), increase in return on R&D dollars invested, support of sophisticated IP value extraction opportunities, and enhanced management of risk
There are a number of indirect benefits that will enable organizations to achieve greater profitability and strengthen their strategic decision making capabilities after implementing an IAM competency. Integrating the various functions of IP within one enterprise system will allow companies to manage the entire lifecycle of an intellectual asset, from pre-creation to retirement. From the pre-creation stage, a company can assess the competitive landscape to target potentially profitable technologies and focus R&D efforts to obtain patents in those key areas. Once the patents are secured, an IAM system can help an organization decide whether those intellectual assets should be used as a measure to protect current revenue streams, or be licensed out. Tools of an IAM solution can help a company view the IP competitive landscape more clearly to reduce the risk of possible infringement and protect current investments by creating a barrier of entry around key products that are integral to the company’s revenue base. These numbers may be more difficult to quantify, but the Dennemeyer ROI methodology will show that these strategic benefits probably have a greater impact than the potential direct benefits of IAM.
Costs of Implementing IAM
Software and Hardware Expenses
The costs associated with implementing an Intellectual Asset Management software solution include expenses from: software, hardware, services, change management activities, and internal resources. The costs associated with an implementation of Dennemeyer’s software solution, including Dennemeyer’s IP Portal, Invention Submission and Evaluation, Portfolio Management, Portfolio Visualization and Advanced Report modules, include Dennemeyer’s License Fee and the costs of hardware required to support Dennemeyer’s solution (i.e. servers, desktops, network upgrades, and maintenance fess).
In addition, Dennemeyer’s software supports interfaces to a variety of third-party systems and services such as docketing systems, web-based patent research services, HR and financial systems, and document management systems. These interfaces can provide added efficiency and effectiveness to the IAM deployment, but generally have additional integrations costs or service fees.
Consulting Services
The enabling technology of the IAM system is important but remains only one component of the complete solution. A sound plan is needed to provide the vision and foundation for an integrated business solution aligning IAM with the business goals and objectives. As a product, Dennemeyer is capable of supporting an Intellectual Asset Management process that meets an organizations business needs. It is imperative to the efficacy of the software, therefore, that an optimized and efficient process be put in place that effectively supports the entire IP lifecycle within an organization.
Dennemeyer offers professional services that enable an organization to build the foundation and framework to support the implementation of an enterprise IPM software suite. At a minimum these services include basic configuration, installation of the software and training. Installing an enterprise wide IAM solution, however, is just one element of an IAM competency. Through Dennemeyer’s IP Partner Program, company’s can meet additional strategy, process and organizational change requirements by working with industry-leading IP service providers. These services include assisting clients in building an IAM organization, developing intellectual asset strategies aligned with business objectives, classifying and analyzing the existing portfolio of assets and executing change management strategies that will firmly establish IAM as a key competency within the organization. In addition, Dennemeyer provides customization services that will allow the tailoring of the system to specific client needs.
Personnel
For each IAM deployment, it is important that the client lend key personnel throughout the duration of and after the close of the project. Client personnel are critical to ensure that the company’s specific requirements are being met and that the new system is being properly integrated with legacy systems. After the solution has been implemented, client personnel are important in ensuring users are properly trained and communication plans are properly developed and executed. In addition, executive sponsorship is critical to the success of an IAM initiative. Therefore, it should be recognized that there is a cost associated with employee time necessary for a successful project from management, IP staff, and IT staff. Dennemeyer’s ROI methodology recognizes the opportunity cost of the client’s time and categorizes the time sacrificed under Initial Costs, and Ongoing Costs. The initial costs represent the personnel that are needed during the initial deployment of the system; while the ongoing costs are the costs to maintain IT professionals such as database administrators and other IT support professionals.
Detailed Direct Benefits
As discussed earlier, the latent value of intellectual assets provides a wealth of opportunities for companies to convert intellectual assets into both top-line and bottom-line financial benefits. Dennemeyer takes a focused approach in enabling companies to:
- Revenue derived from new licensing opportunities
- Revenue recovered from uncollected royalties
- Cost savings derived from increased productivity
- Cost savings from reduced maintenance and filing fees
Identification of Unused Assets also Provides Revenue Opportunities.
In addition to reducing maintenance taxes paid (discussed below), the identification of unused assets provides a revenue opportunity for organizations. Unused assets can be sold, licensed-out or donated. Selling or licensing market-ready assets provides direct revenue to the company through sales revenue and through recurring royalty revenue streams. The untapped licensing potential of a company’s intellectual property portfolio can be enormous. For example, British Telecommunication estimates it only uses a quarter of its patents in its existing products while Phillips Electronics says that is only uses between 35 and 40 percent of its intellectual property portfolio8.
One vehicle with certain specialized applicability is the use of intangible donations. In certain appropriate situations, corporations may find both philanthropic and possible tax benefits by donating technology and associated IP to universities, research centers or other not-for-profit organizations. Intellectual property donations can in appropriate situations provide an effective strategy for extracting value from underutilized intellectual assets.
Uncollected Royalty Revenue
Surprisingly, many companies receive far less in royalty payments than is outlined in the firm’s licensing agreements. Dennemeyer’s licensing management module includes an electronic repository of licensing and agreement activities. All material terms and conditions, both financial and non-financial, are tracked and monitored by the system. As a result, firms are able to easily audit royalty payments to ensure licensee’s continuous compliance with contractual obligations. The following chart outlines, potential royalty revenue that could be recovered through implementation of an agreements management system. This chart assumes that 5% of an organization’s royalty revenues from existing agreements goes uncollected a year.
Potential First Year Revenue from Uncollected Royalties
Current Licensing Income
|
Number of Current License Out Agreements |
$ 250,000 |
$ 500,000 |
$ 750,000 |
$ 1,000,000 |
$ 2,000,000 |
$ 5,000,000 |
|
5 |
$ 62,500 |
$125,000 |
$ 187,500 |
$ 250,000 |
$ 500,000 |
$1,250,000 |
|
10 |
$ 125,000 |
$250,000 |
$ 375,000 |
$ 500,000 |
$1,000,000 |
$2,500,000 |
|
15 |
$ 187,500 |
$375,000 |
$ 562,500 |
$ 750,000 |
$1,500,000 |
$3,750,000 |
|
20 |
$ 250,000 |
$500,000 |
$ 750,000 |
$1,000,000 |
$2,000,000 |
$5,000,000 |
Increased Productivity
Dennemeyer helps manage the complex series of activities required to manage an organizations’ intellectual property. By allowing activities to be managed by the system and providing tools to IP professionals to more efficiently perform administrative functions, IP staff (including IP attorneys, IP liaisons and agents, IP support staff and licensing professionals) can spend time performing more value added tasks.. Upon implementation of Dennemeyer a direct benefit is realized from increased productivity.
- Electronic disclosure forms provide a time efficient process for submitting invention disclosures.
- Electronic invention analysis functionality improves the flow of potential patents into the patent decision process, enables the optimization of time and effort spent by subject matter experts on IDF evaluations, and allows the easy identification of related disclosures, application and patents relevant to the invention to help reduce rework.
- Business development and licensing management functionality supports the efficient processing and tracking of projects, agreements, leads and opportunities. It also eliminates duplicative efforts or inaccuracies in business development by allowing accurate, timely and comprehensive information to be shared with team members.
- More efficient licensing processes will also decrease the cycle time for accounts receivables saving the company a substantial amount in interest.
Savings from Reduced Maintenance Taxes and Filing Costs
Dennemeyer’s portfolio classification and visualization tools enable companies to record the strategic importance of each asset in combination with a business strategy. The system allows classification and organizing of these to facilitate searching reporting and efficient archiving. As a result organizations are able to actively, quickly and routinely identify assets that are not being used to protect products, technologies, competitive position or future opportunities. These assets are then available to be sold, donated, abandoned or licensed out. Selling, donating or abandoning unused assets provides an opportunity to gain immediate savings from reducing maintenance fees paid on assets that are no longer useful.
In addition, Dennemeyer’s invention analysis functionality provides the tools necessary to evaluate the patentability, commercialization potential and business relevance of an invention before it is filed to reduce the amount of unused assets in portfolio overtime. The prevention of unnecessary filings results in savings from reduced filing and issue fees, application preparation fees, prosecution fees and maintenance fees.
As an example, the following chart outlines potential savings in the first year from reduction in unnecessary maintenance and prosecution fees paid. The chart outlines savings for organizations with various amounts of unused assets in their portfolios and unnecessary filings and various numbers of patents in their portfolios. The top line represents the number of patents in a company’s portfolio while the column on the far left represents the % of unused assets each year and the % of unnecessary filings in a year (these are assumed to be the same).
Potential First Year Cost Savings from Portfolio Management
Number of Patents in Portfolio
|
% Unused Assets or Unnecessary Filings Each Year |
250 |
500 |
750 |
1000 |
1500 |
2000 |
|
2% |
$ 50,380 |
$100,760 |
$ 151,140 |
$ 201,520 |
$ 302,280 |
$ 403,040 |
|
5% |
$ 125,950 |
$251,900 |
$ 377,850 |
$ 503,800 |
$ 755,700 |
$1,007,600 |
|
10% |
$ 251,900 |
$503,800 |
$ 755,700 |
$1,007,600 |
$1,511,400 |
$2,015,200 |
|
15% |
$ 377,850 |
$755,700 |
$1,133,550 |
$1,511,400 |
$2,267,100 |
$3,022,800 |
Note: This chart assumes the 10% of the total patent (family) portfolio comes due each year, that 15% of the total patent portfolio is made in original filings each year and those 4 foreign equivalents are filed for each original filing.
A company with roughly 1000 patents in its portfolio with 10% unused assets each year and 10% unnecessary filings each year can save almost one million dollars in reduced filing, application, prosecution, and maintenance fees in the first year. Many times the cost savings alone from more efficient portfolio management can justify the cost of an IAM implementation.
Detailed Indirect Benefits
As indicated the above, building an Intellectual Asset Management competency within the organization provides many long term, indirect benefits. These firms will undergo a transformation in how they do business by implementing long-term methods and systems for extracting value from their intellectual capital. Most of IAM’s true value is realized from the potential indirect benefits, which Dennemeyer classifies into four main categories: Improving Competitive Advantage, Increase in Return on R&D Dollars Invested, Support of Sophisticated Vehicles for IP Monetization, and Management of Risk.
Improving Competitive Advantage
Intellectual assets provide a market differentiator and critical source of competitive advantage. Some organizations use their IP to gain market share, strengthen recognition for innovation leadership, and generate customer loyalty. Others seek to protect innovation that provides them freedom to operate, and thereby manage the risk associated with significant R&D investments. Still others seek to increase shareholder value by being able to articulate the quantifiable future potential in their intellectual assets. Although strategic position and competitive advantage are difficult to quantify, assisting an organization in moving toward it strategic position or better operationally undeniably benefits an organization.
Dennemeyer provides a number of mechanisms to support organizations in executing strategies to strengthen its IP portfolio and realizing value from IP. As an integrated IPM system, linkages between technologies can be identified and analysis can be performed on large amounts of data that had heretofore been unrelated providing exceptional visibility into an organization’s total IP portfolio. Business and R&D management will have access to tools to understand how an organization’s existing IP maps to business strategy and how key innovation may remain unprotected. Organizations are able to understand the value of an asset, including its use in products, future potential, value in blocking competition, associated revenue potential and alternative value opportunity. Organizations are able to quickly and effectively report and disseminate information about the portfolio and strength of intellectual assets to invention relations and market analysts.
This functionality provides organizations with knowledge about their IP, a critical enabler of using Intellectual assets as a strategic tool.
Increase Return on R&D Dollars Invested
Dennemeyer’s portfolio visualization and reporting tools provide visibility into how IP is being deployed in an organization and helps companies to quickly identify areas of strengths or weaknesses where IP might be lacking. Intellectual Property, as a legal means to protect others from commercializing the patented technology, is a key mechanism for companies to ensure a return on dollars invested in R&D. Currently, companies are spending a significant portion of their overall budget to R&D, which totals $200 billion a year for the United States9. Even a fractional percentage of improvement can impact a company’s revenue by millions of dollars.
Supports Sophisticated Vehicles for IP Monetization
As part of building an IAM competency, it is important that an organization take a holistic approach to extracting value from its IP. In addition to shorter-term direct revenue generating opportunities, Dennemeyer enables organizations to develop and sustain sophisticated monetization programs such as a license out program, a joint venture and strategic alliance competency, and other tactics such as IP holding companies and structure finance approaches (i.e. IP securitization agreements, asset backed loans and sale back leases). By offering the ability to classify and categorize existing assets against business strategies and business development and license management tools (i.e. project management, lead target identification, opportunity management, and agreement and obligation management), Dennemeyer supports the management of sophisticated financial transactions and processes. Such functionality allows organizations to identify the assets available for such opportunities and allows organizations to effectively and efficiently manage these opportunities once they have been formed.
Manage Risk
Infringing on another company’s patents can lead to very costly and problematic legal suits. In 1986, Kodak infringed on several of Polaroid’s instant photography patents and was forced to pay $925 million in damages, $100 million in legal fees, and spend $500 million to buy back 16 million instant cameras. Kodak also had to shut down its entire instant photography division and close its $1.5 billion manufacturing plant10. Not every patent suit will lead to such disastrous consequences, but infringement suits can still be an expensive headache for many corporations. Infringement suits can cost a company a significant amount in damages and legal fees. Perhaps more importantly—and costly—the significant investment in R&D to develop the technology or product would become a wasted investment. Dennemeyer can help minimize the risk of infringement and reduce wasted R&D efforts, saving the company valuable time and money. Electronic tracking of business development and licensing activities reduces risk by ensuring obligations are paid on time and royalty payments are collected on all license agreements. An integrated system ensures that the organization is made aware of potential infringement possibilities when pursuing innovation, reducing monies paid to litigation awards. Finally, identification of possible infringers allows proactive enforcement of rights and provides opportunities to achieve revenue from assertions.
Conclusions
Previously the IAM solution market was non-integrated and segmented across functionalities, which severely limited IAM’s potential to be used strategically. With the integration of these systems under one enterprise solution, the strategic value of intellectual property can be more fully realized. Companies such as IBM, Dow, and Lucent have shown the positive impact that well-managed intellectual assets have on corporate profitability. Also, an increasing number of enterprises are carving out new executive-level positions in IP management. This market validation has spawned a proliferation of vendors seeking to provide the complete IAM solution.
As IAM initiatives become more of a corporate priority, the need to financially justify these costs will become increasingly important. In this relatively new market of IAM enterprise, there can be a difficulty in calculating an ROI because of the lack of precedence of previously implemented with measured results. The Dennemeyer ROI methodology provides a framework and starting point by structuring the costs and quantifying some of the IAM benefits. The financial justification of IAM can be rooted in the solution’s potential direct benefits of reduced costs and increased revenue. These "direct benefits" numbers provide the foundation for this ROI analysis because they are easier to quantify and in most cases, will more than justify the costs of an IAM implementation. This fact is assuring when moving on to calculate the potential indirect benefits, which is where most of IAM’s true value is stored.
Finally, it is important to note that some of the benefits of an IAM solution extend beyond the confines of this methodology or spreadsheet. With this ROI analysis, Dennemeyer attempted to focus on the IAM benefits that are the most relevant and the most easily quantifiable.
For Additional Information about the value of intellectual asset management and Dennemeyer’s solution capabilities please visit us at www.dennemeyer.com.
Footnotes
1. "How to Manage IC in the Knowledge Enterprise", Gartner Report, Regina Casonato, Debra Logan, October 24, 2001.
2. "Intellectual Property: Partnering for Profit", McKinsey Quarterly, 2002 No. 4, Jeffrey J. Elton, Baiju R. Shah, And John N. Voyzey
3. Harvard Business Review
4. "Value Driven Intellectual assets: How to Convert Intangible Corporate Assets into Market Value" Patrcik H. Sullivan, John Wiley & Sons, Inc, 2000.
5. "Discovering New Value in Intellectual Property", Kevin Rivette, David Kline, Aurigin, Harvard Business Review, January- February 2000.
6. "Making a Profit From Ideas" Michael Kenward, July 3, 2001.
7. "Intellectual Property Asset Management Systems", Gartner Report, Debra Logan, October 23, 2001.
8. "Making a Profit From Ideas" Michael Kenward, July 3, 2001.
9. "The X Factor: Exchanging Intellectual Property" Mark Voorhees, December 20, 2000.
10. "Rembrandts in the Attic" Kevin Rivette and David Kline, 2000.
Copyright © 2004 Dennemeyer & Company
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