Finance: Find Me the Money
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Written by Eric Openshaw and Scott Wilson   
Thursday, 01 May 2008
Finance: Find Me the Money - American Executive - RedCoat Publishing
Deloitte’s IP experts share their ideas for using intellectual property to increase revenues.
In 2007, IBM was issued 3,125 patents, bringing its total patents in 15 years to 38,707. Not surprisingly, the company generates more than $1 billion annually in technology licensing revenue. Indeed, current data suggests that collective domestic US revenues from patent royalties are approximately $50 billion and show signs of increasing.

Executives concerned about the softening economy and searching for revenues may want to follow the lead of IBM and others—effectively exploiting IP is a way of both increasing the top line and creating a tremendous competitive advantage.

Firms like IBM, HP, and Microsoft have long recognized the financial and competitive potential of their IP, but too many businesses let their intangible assets collect dust. Although many companies do have a chief IP officer, by and large, IP is still considered a legal issue and relegated to the firm’s lawyers. That means a great deal of IP languishes, along with potential income. Indeed, past studies have shown that US companies waste an estimated $1 trillion annually in patent assets.

How does a company turn this around and create a revenue-driven approach to intellectual property management? At Deloitte, we’ve developed a strategy around three core IP capabilities—value, protect, and exploit. Value refers to determining the value drivers, categorizing the assets, and valuing each asset. Protect refers to positioning the IP portfolio according to strategic objectives, analyzing technology and patent lifecycles, and deploying patent blocking strategies. Exploiting refers to formulating and deploying a licensing strategy, managing the IP regime, and instigating an IP venturing program.

Each application of the VPE strategy is critical to creating a comprehensive IP strategy, but since we’re talking strictly about generating revenues here, we’ll focus on that.

What’s on the shelf
The obvious question is how do you begin determining the value of your intellectual property? Companies like Philips Electronics and Toshiba started at the most fundamental level—dedicating groups at both the corporate and business unit levels to manage IP. These groups handle all the activities for filing and enforcing IP rights. They’re responsible for increasing the capacity of the firm’s licensing revenues and implementing value extraction programs.

Of course, before you can extract value from IP, you have to know what you have. Organizing and valuing IP assets strategically should always come first. Alongside that, you need to understand your existing competitors’ IP strategy, bolstered by an analysis of the prevailing IP environment. This analysis should be compared to the company’s strategic goals to bring them into alignment.

An internal IP group can then take a close look at existing IP and develop a list of patent value determinants, everything from lifecycle analysis and level of novelty to difficulty of inventing around the IP and portfolio positioning. With this punch list, companies can begin analyzing existing patents on a simple high/medium/low value basis.

Beware the common mistake of categorizing intangible assets based on the perceived immediate value. What may be considered non-core today could, five years from now, be the next disruptive technology. In fact, it could represent some of your firm’s most innovative thinking.

Going on the offense
Once you have an understanding of the value of your IP, you can develop strategies for exploiting it. There are a number of defensive options you can enlist that can give your firm technological advantage for the short-term before the patents expire or the technology evolves. There are also some revenue-generating strategies you can employ.

Most methods of IP exploitation revolve around licensing strategies for firms holding valuable patent rights to high-demand technologies. In other words, you have a technology that the market wants, you license it strategically to one or more firms, and you accrue royalties as it is used.

In the technology sector, we have seen sophisticated licensing strategies implemented by companies like Qualcomm, with its licensed CDMA wireless network technology, and Cisco Systems, which used licensing to establish and grow markets for its networking equipment.

That’s not the only option, though. You could cross-license your patents with those of another firm. These collaborative deals are most prevalent in sectors where co-development of technology standards is the norm. For instance, cross-licensing is common in the semiconductor industry where knowledge-sharing between competitors reduces the risk of patent infringement and enables companies to significantly reduce operating costs.

Companies can also generate revenue through strategic patent donations to nonprofits such as universities. These donations may result in tax deductions and possibly operating cost reductions—and they may provide opportunities for innovation partnerships with the patent recipient. In some cases, non-core patents are developed via “spin-outs” and new venture developments into potential areas of new business growth. This strategy enables the firm holding the patent to take an equity stake in the company developing the patent instead of taking the usual royalties route.

Being proactive in exploiting your firm’s intellectual property can create a powerful competitive advantage with the potential of yielding revenues long into the future. But this can happen only if IP management is promoted from being a task for the legal team to a critical component of good strategic planning.

Eric Openshaw is vice chairman and US technology leader at Deloitte LLP. He has more than 30 years of experience advising clients on business issues ranging from enterprise transformation and merger and acquisition analysis to technology strategy. Scott Wilson is a senior manager at Deloitte Research, the think tank for the member firms of Deloitte Touche Tohmatsu.
 
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