Measuring the Patenting Success of Companies: Metrics and Measurement for Patent Departments - Part 2

This metric is "product centric" rather than "patent centric." It attempts to correlate the patents issued or patent applications filed to commercialized properties or proposed products. Product protection has certainly been one of the main purposes for seeking patent protection.

As discussed, one of the fundamental rules of patents is to provide a "fence" of exclusivity around products or technologies. The key to maintaining healthy profit margins is to avoid "commoditization" of a company's products. This invariably involves a commitment to innovation and to building fences around those innovations to prevent others from copying them. Decisions on which intellectual assets to protect are important because the costs of protection are high. This metric recognizes that companies simply cannot afford to protect innovations that will have marginal economic value. This metric may help to assist the company in recognizing a consideration and value between the company's products and the patents protecting them. Accordingly, this metric takes into account the importance of the patents in protecting the company's core business.

It is perhaps surprising how many companies cannot readily tell which of its patents – both domestic and foreign patents – cover which product. Such a correlation is arguably the cornerstone of any patent strategy. Some companies are actually using this metric in their advertising or branding campaigns.¹⁶

This metric can even go to the next level of understanding with a description of how the patents cover the products. For example, the patents cover particular features of the product, the product's manufacture, the product's packaging, etc. This next level provides the contours of the proverbial "fence" constructed using the patents. Graphics which illustrate the "fence" can be especially persuasive. However, narrative descriptions also can be helpful.

For illustration, as is known, there are several strategies that could be used to protect a product or technology using patents. One strategy is to protect the product by a single foundation patent. This patent must be broad enough and strong enough to deter competitors from trying to copy the product and to design around the patent. Another strategy could employ additional, ancillary patents that relate to those products to guard the foundation patent. In other words, the additional patents would be used to build a fence around the foundation patent. A third type of strategy would be to develop blocking power for a production technology by using multiple patents, even non-foundation patents, to provide strength by sheer numbers. IBM and Dell are two companies that widely use this type of strategy. A fourth type of patent strategy is the "surrounding" strategy. The goal would be to fence in, around, or otherwise block a strategy or foundation belonging to some other company. This could be used to gain access to that technology through cross-licensing.

It is suggested that explaining what specific strategies are being used to protect a product or technology would be beneficial to demonstrating what patent department has been proactively doing to protect key products and technologies.

If the company does not have any products or proposed products, this same metric can be used but in an obviously modified way by referring to the specific technology that is being protected.

One advantage of this metric is that it directly shows the cost effectiveness of the patents obtained and applied for.

It also can be envisioned that some very persuasive graphics or illustrations could be used to explain this metric. For example, the author has seen an exhibit where an automobile manufacturer cut away one of its cars and put a flag on every part that was covered by a patent. The resulting array of flags was very persuasive in showing apparent comprehensive patent coverage of the product.

Another function of patents is to protect products from being copied by others. Being able to exclude competitors from marketing a "me too" or copied product certainly has value. A patent or patents that are able to protect market share for the patent owner is generally extremely valuable.

Yet, this type of metric is not used very much in showing patent value or success. This is even true in the situation when the patent owner and one of its competitors are first involved in a patent dispute. Further, during a litigation the amount of such loss of market exclusivity, and sometimes even "price erosion" of the patent owners' prices and the value to the accused infringer of "accelerated market entry," is calculated by economic and accounting experts. (In the United States, this is done during the phase of the federal court litigation called "expert discovery.")

The litigation experience shows that a fair estimate can be made of the value of market share protection. In the litigation experience the value is of alleged market exclusivity lost, not potential. Estimating the alleged market exclusivity lost when facing an actual competitor is arguably easier than estimating what a competitor may or may not be convinced on what to do because of the existence of a patent. Certainly it is not possible to know when a competitor had reviewed a patent, convinced that the patent is strong enough to be avoided, and then taken steps to avoid a sector of the market. Such an estimation may seem too speculative. Nonetheless, it may be possible in some circumstances to estimate these values.

In other situations, it may be possible to at least qualitatively describe how and what portion of the market has been protected. This ability to qualitatively describe such may depend on first identifying which patents cover which products and which portions of the products are covered by the patents. Then, talking with sales or marketing people about the potential products and/or features thereof may help to provide information for the valuations. It also may be possible to compare the covered products to other products similarly being commercialized.

This type of analysis also may be done if the patent owner is not using the patents but knows that others want to enter the market but are precluded by virtue of the patents.

This type of indicator considers what corporate patents and pending applications are currently in use by the company or corporate license, of potential business use for the future, or of no interest to the company.^{17 18} One measurement could be a percentage of patents used in a company's products, such as 30 percent of a company's patents being used in products. Another possible classification system could be "in use," "not in use but valuable," and "not in use and no value seen."

Counts of patents do not reflect patent quality. Not all patents are used or otherwise generate value to companies. One way to gauge the value of patents is to survey the perceptions of the patents' value and use. If a patent is used, then it has to have some sort of value. This technique also can be used to compare how value changes from year to year. This technique also could be used to compare competitor companies to each other. The strength of this measure is that it separates used patents from unused patents, something that can not be done in looking at appropriate patent counts.

The disadvantage is that the classification requires some research and is subjective. Use/value perceptions may not be related to the inherent value or potential value of the patent but may reflect a company's ignorance or business decision not to exploit the property rights of the patent.

This ratio compares the patents issued to a company to commercial products produced from patents. In fact, one major U.S. company used a variation of this ratio as an indication, both internally and externally, to show how "innovative" its products were. Specifically, 3M used to target at least 50 percent of its new product introductions from innovations created within the prior three years from a representative sample of patents.

According to one study, for every 3,000 ideas, 300 patents will be generated but only one commercial success will occur.¹⁹ Other literature suggests that for drug companies there are 6,000 to 8,000 ideas needed for each commercially visible product. Most companies do not know how to measure the value of their Research and Development (R&D) departments. A good R&D department is critical for generating new ideas, patents, and ultimately a commercial product. If a company has several successful products it can be assumed that the R&D department and the patent department are very productive.

This measure is grounded in solid academic thinking and has been used in several studies and publications. It also focuses on the "output of the patent" – new products. The potential weakness is

that not all new products are equal and this measure would not differentiate between extremely innovative products in one year and mediocre products in other years.

This metric calculates the ratio of the dollar value of sales to the number of patents held by the company. This measure was discussed in several academic articles on the subject of intellectual property valuation. However, no actual instances of use were identified in the interviews that were conducted.

This measure presumes that the innovativeness, usefulness, and value of a company.s patents are reflected in a company's sales and profits. Analysis of data from this measure will indicate whether there is a positive connection between the number of patents held by a company and the amount of sales the company has on an annual basis (i.e., are the company's innovations translating into sales/profits?).

This should reveal which patents are more valuable than others. The weakness is that this measure is based upon company sales, which can be subject to many variables other than patents.

This measure relates to the percentage change in market share (or company sales) that occurs when a potential product is introduced into the marketplace for the first time.²⁰ Such a percentage change could be attributed to the patent or patents covering the product. Companies and market research firms routinely measure the impact of new product introductions in the structure and dynamics of a market. This is probably a more "quantitative" measure than the previously-discussed "market exclusivity" factor.

There must be a sort of value obtained by company for the benefits it derives for being first to market with a new product. This measures innovation of a company, which may translate into increased market share, revenues, or profits. It also measures the exclusivity the company enjoys in the market place as a result of its innovation and the resulting boast to its competitiveness. This measure gauges a patent's value to the company that developed the innovation and brought it to market.

However, sometimes it is difficult to measure unless actual sales figures and increased market share can be linked to a new innovation. Accordingly, it may be difficult to clearly quantify the market impact of a new exclusive innovation.

This measure looks at the average percent increase in the value of a product when a patented feature has been added as calculated by looking at price and sales changes to a product before and after a specific patented innovation.

Certainly, the full value of most products encompasses the patented technology and value of unpatented features. This measure attempts to isolate the added value of a specific patented feature added to a product.

On the other hand, not very many products sell solely because of a patented feature. The resulting analysis could be too subjective and the data too much to collect. Nonetheless certain patents may lend themselves to this type of analysis.

Several of the measurements discussed above related to determining which of the company's patents cover which of the company's products. Once that exercise is completed, then the total monetary value of sales each year derived from products that are patent protected can be easily derived.²¹ This is a relatively straightforward measure, which would show the impact of patents by focusing on the revenue generated by protected innovations.

Patents expire all the time, even ones that are important to a Company's business. Before a patent expires, it is necessary to assess how the patent's expiration will affect a company's continued profits. Such an analysis could best be prepared together with the business team.

However, the patent department could then help to strategize how the expected effect could be minimized or if this patent "monopoly" of the product could be extended by other patents that additionally cover the product. This is particularly done by the pharmaceutical industry – when a patent expires that covered the chemical moiety, other patents may be available that relate to the process of making the chemical moiety, its purity, its combination with other active ingredients, and so on.

While this metric may not be one that highlights a patent Department's success, it is one that demonstrates that forethought is being given to how to handle to adverse patent events before they happen.

Money Saved by Abandoning Patent Protection for Products Removed from a Product Line or No Longer Being Developed for Introduction As discussed in connection with the last metric, the author and his colleagues have been surprised how many companies – including those with highly sophisticated management in other areas – simply have no idea which patents they are using in which of their products.

It will rarely make sense for a company to maintain patent protection for a feature it has removed from its product line. Without such a consideration, it is very difficult to make intelligent decisions as to where to file or maintain the company's patents. Ideally, the company should maintain a database that allows the business decision-maker to see at a glance which products incorporate the features covered by each patent, and what the sales of those products have been and are forecast to be in each country where patent protection is being sought or maintained.

The future cost savings of patents that are no longer being sought or maintained can be tabulated.

Of course, there are situations in which it might make a great deal of sense for a company to have patent protection even in countries where its sales are low – for example, in a country where its major competitor's manufacturing facilities are located or where the competitor's sales are very high.

Another reason to abandon a patent is after a recognition that the patent is actually of .low quality. from a legal perspective. "Low quality" can be assessed a number of ways. Does the particular patent in that particular country have exceptionally narrow scope? Will it be impossible to enforce? In the United States, does the patent have an inordinate number of "means plus function" clauses?

After assessing whether a patent is of "low quality" and the decision is made to no longer maintain the patent, then the future cost savings of that decision can be quantified.

Certainly licensing patents is a way to generate revenues and aboveaverage profit margins. The examples of IBM and Microsoft can certainly be supplemented by the success stories of other companies. Generally speaking, a company should consider licensing to maximize the value of its patents when:

But with anything in business, increased profits and sales do not just happen. Shrewd investment and strategies planning are essential to maximizing the value of IP.

On a simple level, this metric involves totaling up how much revenue is generated through patent licensing. This can be simply calculated by adding up the amount of royalties collected. One common variation is to compare "licensing revenue in" to "licensing revenue out."

However, many companies – even large companies – do not have any significant licensing programs. Therefore, other metrics and measurements are needed.

Senior managers certainly understand licensing revenue as such a metric does not involve an understanding of the underlying patents or its technologies.

The strength of this metric is that it measures the market value of a Company's patents and focuses only on patents that can indeed be "used." If patents cannot be used, then they could not generate royalties. In addition, this measure would show changes in the market value of things that are being patented. However, royalty values are difficult to measure objectively.

One variation is to compare the revenue received through licensing to a predetermined target.

Graphics could be used to allocate the amount of revenue. For example, revenue could be categorized as relating to certain categories of technologies, geographical regions or between patents and trade secrets.

However, the true value of a license is frequently more than just royalties. Perhaps the license was also a cross-license, where some value should be assumed to the non-monetary value received. It is always possible for a value to be placed on such non-monetary benefits from a license. Those benefits should be included in any report.

For example, non-monetary components can include cross-licenses, business that is to be received as part of the deal, stock, other assets, and so on. Therefore, in addition to any actual monetary revenue that has been received, any conceivable other concrete benefit also should be included as a measure of success.

Companies interact with other companies frequently relating to IP/patents. This could be in the form of licensing "in" or "out," which is described above, but also for purpose of joint development, general cross-licensing, joint ventures, and so on. Information could be included that describes those interactions and also how IP/patents contributed to the creation of such interactions.

The measurement considers the median age of patents cited within the company's patent portfolio. This may be a more meaningful measure for relatively larger patents portfolios than smaller one. This measure has already been used by researchers as an indication of the speed with which a company is developing new technology. In fact, at least one "hedge fund" is using this measure of stock performance for individual companies. CHI Research, a private company, perhaps pioneered this measurement.

This measurement reflects the length of time it takes for a given technology to produce additional innovation. Patent citations reference the length of time it takes for a given technology to produce additional innovation. Patent citations reflect the knowledge produced by earlier research and development. Researchers have conducted studies that indicate that the "younger" patent citations have a faster turnover cycle of innovation.²² For example, Japanese patent citations are seven years old on average, compared with 10 to 20 years for U.S. citations. Researchers contend this indicates that Japanese companies tend to be more rapid in their citation of new technology in the companies' patent processes.

This measure could be a good measure of growth in innovation and technological development.

This is a rather esoteric measurement. However, it actually forms the basis of the "TR Scorecard" described above. This metric was developed by CHI Research but publicly available. The drawback is that availability to the appropriate database is needed. According to the "TR Scorecard," however, "technology strength" is the best measure on how a company is doing as it relates to technology.

There are two calculations that must be done. First, the "Current- Impact Index" must be calculated. This is supposed to measure the broader significance of a company's patents. This index is calculated by how many times a company's patents that issued during the last five years were cited as references in last year's patent of others. A value of 1.0 is an average value.

The second calculation is that of "Technology Strength." This is calculated by multiplying the number of a company's U.S. patents by its "Current Impact Index."

There is a growing body of studies that explores the usefulness of patent citations as a measure of the importance of a company's patents, as indicated by the stock market valuation of the company's intangible stack of knowledge.²³ (Patent citations occur when patents are cited as references in other patents of the same company or in the patents of other companies. Such analysis utilize so-called "Tobin q equations" on the ratios of R&D to assets, patents to R&D, and citations to patents. These analyses generally conclude that each citation per patent impacts market value. However, such analyses have generally not been used as patent management tools yet. Therefore, this metric is mentioned but perhaps reserved for future consideration.

This measure calculates the present monetary values of the economic benefits from commercialization of a patent or a group of patents as calculated from a discounted cash flow analysis.^{24 25} Venture capital companies, banks, and other lenders often use this method to forecast the value of a patent before agreeing to fund the commercialization phase of a patented process.

Data to be used in this analysis can be derived from company information. Most corporate plans or budgets have the expected cash flow from a particular product that is expected to be developed and commercialized. The plan on budget may have projected data for the next 10 or 15 years.

Valuable patents should be expected to generate future cash flow if they are commercialized. These cash flows can be discounted to obtain the present value using the company's opportunity cost of capital. This would give us today's value of a patent or group of patents, based upon its future potential to generate cash flow. We can obtain the net value by deducting the current and historical costs such as patent development costs.

The strength of this measure is that it focuses on the future benefit of a patent produced today. Obvious weaknesses are that business projection are many times overly optimistic, may not always work as expected, and may have significant deviations from actual outcomes.

This would be a measure of all of the IP of a company, not just the patent portfolio. This measure would separate the intangibles from the tangible to focus on the contributions of patents, trademarks, and other IP to the value of a company.

Under this measure, the average market value of intangible assets of a company is measured by subtracting the book value of all assets (fixed assets, working capital, etc.) from the market value of the company's underlying equity.²⁶ This is a measure that is commonly used by accounting personnel and stock analysts to calculate the company's excess value. Company financial information is available on such parameters as the value of fixed assets, current assets, current liabilities, long-term liabilities, market value of equity, and so on.

The problem is that this measure does not relate to the value of just the company's IP, but of the company's intangible assets as a whole. Certain intangible assets may not be patented or trademarked, making them difficult to separate out.

Under another way to view the value of intangible assets, the market value of this intangible property is calculated by dividing the prices of common stock by the balance sheet (book value) of the underlying equity. This measure is commonly used by accountants to assess the market-to-book ratio.

The theory is that more revenues from less investment in fixed assets and working capital are highly desirable characteristics of successful companies with intangible assets. The market places high value on these companies. These intangible assets are often patents and trademarks.

This measurement is easy to collect data for and to calculate. Ratios can be collected and compared from time-to-time, which would be useful in assessing corporate value.

However, as with other measures of intangible assets, IP alone may not be responsible for this value. In addition, this measure uses stock prices, which can be highly fluctuating and influenced by factors other than the value of the IP held by the company.

The rate of return attributable to the intangible assets can be calculated. This rate of return is calculated by dividing the value of intangible assets by total profits of the company.²⁷ Accountants use this method to measure the value attributable to patents, trademarks, other IP and other intangible property.

This measure demonstrates the excess returns earned by employing intangible assets. The return obtained is due to the presence of patents, trademarks, and other intangibles that contributed higher value to the company. Using this metric, the company could monitor the annual rate of return for the property it protects.

As with the prior two measures, this metric does not measure the specific value of a patent or patents but of the company.s intangible assets as a whole. Accordingly, intangibles other than IP could be included. Additionally, the cost of capital changes over time, the value may not be consistent for comparative purposes.