IP and Business: Managing IP as a Set of Business Assets

1. Define what your company expects to gain from the management of its IP;
2. Determine the specific roles IP can play in support of your company’s business;
3. Select and pursue a basic IP strategy to meet these objectives.

Let us look in more detail at these three steps.

What does your company expect from its IP management?

In their book, Edison in the Boardroom: How Leading Companies Realize Value from Their Intellectual Assets, Julie Davis and Suzanne Harrison identify five levels of sophistication in the way that companies approach the management of their IP. This hierarchy, shown in the pyramid below, is a useful way to think about company expectations.

A hierarchy of IP management, from Edison in the Boardroom

Beginning with the bottom of the pyramid and working up:

• Defensive level. Companies at this level use their IP for defensive purposes only. Their goals are to protect their own innovations, to ensure that they don’t infringe the IP of others, and to obtain more IP. The costs in filing fees, enforcement and other legal expenses can be high.
• Cost control level Companies at this level still have a defensive approach, but now focus on finding ways to obtain protection while simultaneously minimizing the costs of creating and maintaining their IP.
• Profit center level Companies reach this level once they begin to license out their IP, or otherwise to use it in support of their company business activity.
• Integrated level. Here the company’s business units have grasped the power of using IP for a range of business roles. IP use for business becomes integrated across all of the company’s business activity.
• Visionary. At this level of IP management sophistication, companies take a long-term view of the company’s role in business and in its industry. They seek to use the company’s IP to create more strategic value.

It should not be inferred from this pyramid that the highest level of sophistication equates to the “best” level of IP management. What matters is to determine which level best suits the needs and capacity of your particular company. A thorough understanding of what the company at large, as well as its executive management, expects from IP is an important first step toward determining whether, and to what degree, the firm aspires to obtain business value from its IP, or whether it wishes to obtain purely defensive value.

What business roles can IP play?
 

The companies participating in the ICM Gathering (Procter and Gamble, Hewlett Packard, Microsoft, Philips, Visa, Johnson, Du Pont – to name but a few) have identified over 40 different business roles that their companies have assigned to their IP. These are shown in the table below. 
 

To determine which of these roles make sense for your company, bearing in mind the company’s expectations for its IP management, try the following: First, review the company’s strategic vision and its corporate strategic plan. Then, ask yourself what IP might do to support the company’s business strategy and hasten its journey toward the long-term vision. Thirdly, look at the table and select the IP business roles that seem most applicable to your company. (Most companies actually focus on three to six roles.)
 

There are a range of IP strategies available to your company, many of them tailored specifically to unique business needs, industry position, or business tactics. Nevertheless, four basic IP strategies can act as a foundation for later refinements. These correspond broadly to the levels of expectation described in the pyramid of IP management:

• A path to minimize risk. Companies following this strategy see IP as a legal asset. Programs to minimize risk are usually grounded in the legal department, and focus on process compliance, processing product clearances and protecting innovations in the marketplace. A key activity for those pursuing this strategy is portfolio building andcross-licensing to avoid litigation.
• A path to cost reduction. Virtually all companies above the first level of the hierarchy follow a cost reduction strategy. They look to maintain the effectiveness of their IP protection program while cutting the cost of doing so. This involves screening the portfolio to eliminate unnecessary patents, tightening the criteria for protecting innovations with patents, creating a standard country-filing list, minimizing exceptions, tightening internal review processes, and aligning the trademarks and brands with products.
• A path to value. Companies following this strategy view their IP as a business asset as well as a legal asset. IP is managed centrally, with the company seeking out business opportunities for its IP (e.g. out-licensing and use in joint ventures). The companies seek to profit from direct use of the IP itself, rather than only through the products and services protected by the IP.
• A path to strategic value Companies following this strategy see their IP as corporate and business assets which can produce a range of value (both revenue and strategic value) for the organization. The focus is on utilizing IP to change the nature or direction of competition, relying on strategic patenting, refocusing R&D and rethinking partnerships with customers, suppliers, or any other relevant parties.

Extracting value from IP

If you follow strategies 3 or 4 above, you will be concerned with extracting value from the firm’s IP. To do so, one option is to process the company’s protected innovations through one or more complementary assets (e.g. manufacturing or distribution) and then sell the resulting product or service. Alternatively (and simultaneously) you may convert the IP directly into revenue. Experience has shown that there are only six ways to convert an innovation or an IP right into cash:

• Sell it
• License it out
• Use it as the basis for a joint venture (to provide access to needed physical assets)
• Use it as the basis for a strategic alliance (to gain access to markets you may otherwise be denied)
• Use it to protect products and services in order to extract premium prices for them
• Create and spin-out a new company based on the IP

Companies seeking to maximize the amount of value extracted from each protected innovation do their best to “turn on” as many of these six cash conversion mechanisms as possible. Few companies are capable of using more than two, but those that can are able to generate significant additional revenue.

Managing IP to extract business value is a new and still evolving field. The greatest advances have been made in North America, driven by the need to produce ever more sustainable revenue streams to satisfy the capital markets. But companies in many other parts of the world are becoming increasingly aware of the potential of IP to enhance existing revenue streams or to create new ones.