Tuesday, 21 February 2017

How intellectual property became the strategist's darling

Strategists are finally
learning to love IP
Here's another in our series of features built upon the survey conducted last year by Aistemos into IP strategy and attitudes found within the boardroom.
How intellectual property became the strategist's darling

A decade ago, the majority of boards dismissed intellectual property (IP) as a cost centre. When it came to business strategy, IP wasn’t even on their radar. Today, things are changing, albeit slowly. Patents and trade marks, among other intangible assets, cost significant sums to acquire, yet their economic benefit is frequently ill-defined. Rather than view IP as a valuable asset, boards see it as a necessary evil, best left to legal departments or, at a push, the R&D or marketing team.

This has long been a worrying disconnect. Boards understand the need to protect competitive advantage, yet often fail to understand that very advantage is dependent on the existence and strength of the company’s IP. If boards do not make IP management and performance a priority, how can they know they are making the most of their innovations? That risk and value are being properly managed?

There are of course exceptions to the rule. Pharma, biotech, high tech and media (audio and visual) companies that rely heavily on IP for their livelihoods have typically been proactive in their management of intangibles such as patents, copyright and trade marks.

The wider business ecosystem is now playing catch up. New research by Aistemos, which surveyed a wide range of business leaders including BAE Systems, Siemens and Bayer, and founders of fast-growth start-ups, has unearthed some interesting shifts in attitude towards IP.

It found that, while approximately 30pc still view intellectual property as a cost centre, and almost the same number (28pc) see it as a risk, 7.7pc regarded IP to be a value driver. This figure remains disproportionately low, which proves there is still a long way to go. Only a quarter of companies have incorporated IP into their wider business strategy, the research revealed.

Why have boards neglected IP?

Intellectual property has yet to find its true place in the boardroom -- but where does the blame lie? According to Anders Arvidsson, founder of the intellectual property consulting firm Parallel North:
“There are a lot of boards not familiar with IP. They don’t know what to do with patents, or understand the risks. It is perhaps not their job; you can always blame the board of directors but it is also the responsibility of the rest of the managers to educate the board.”
The onus, therefore, lies on the Chief Executive to communicate the importance of IP to the board of directors, and ensure that stakeholders are aware of its relevance.

IP has long been a complex area, full of arcane rules. Many business leaders, when asked to detail the extent of the IP owned and managed by their company, have struggled to give a comprehensive overview.

Jennifer Wuamett, Deputy General Counsel for IP and Litigation at NXP Semiconductors, added her voice to the report:
“I think most business leaders know instinctively that there are many important reasons to invest in IP protection, but monetary return on the investment in terms of revenue generation often tends to be a focal point as other benefits are more difficult to measure and quantify."
The drivers of change

There have been several developments in recent years that have spurred boards to take more notice of IP. One of the most powerful has been the marked increase in litigation activity. This meant that boards have had to learn the hard way that failing to manage IP risk could leave their company exposed to expensive and distracting infringement actions.

According to patent risk solutions provider RPX, the number of patent litigation cases rose significantly last year in the US, rising by 28pc on 2014 levels. The emergence of patent trolls - companies that attempt to enforce patent rights for pure economic advantage (they typically have no other business as such) - have significantly contributed to this upward trend.

Litigation is not the only growth area; licensing is also increasingly seen as a smart way of releasing value from IP. And as businesses across the globe begin to generate serious revenues from so-called monetisation activities, IP rises inexorably up the corporate agenda.

The start, in 2008, of the longest recession of living memory prompted many boards to change their approach, claims Michael Lin, partner at global IP firm Marks & Clerk: 
“Because the economy isn’t doing as well as before, boards are looking at risk differently and are asking more questions and becoming more cautious.”
The world is currently in the midst of a new industrial revolution: an age of technology. Increased innovation means more IP. And IP can no longer be seen as a standalone asset: it touches every aspect of corporate value. As more sectors become impacted by technology, the challenge will be for the value of IP to be understood by management and the board.

Dr Bobby Mukherjee, Chief Counsel for Group Intellectual Property for multinational defence, security and aerospace firm, BAE Systems, told Aistemos researchers:
“There has been a significant change over the last 10 years. With over 50pc of corporate value being intangibles, it is now increasingly understood as a main board issue.”
Not long ago, bust-ups between boards and investors over patent monetisation would have been unthinkable - now, insiders claim they are happening more and more frequently. Recent years have also seen a rise in activist hedge funds attempting to invalidate patents to devalue stock in order to take over whole companies. This is how fundamental IP has become: it has the potential to make or break a company.

Legislative changes are also affecting the wider IP landscape. Talk of a “post-Alice” environment (referring to a recent US Supreme Court decision) has resulted in much tighter standards over the kinds of software and business method patents that courts will enforce. Seismic shifts such as this are receiving widespread industry attention - and well beyond the specialist confines of IP attorneys.

Globalisation continues apace and more companies are operating across borders. According to Janhavi Dadarkar, training course leader for “Role of the Director and the Board” at the Institute of Directors (IoD), this has prompted business leaders to look more seriously at their IP:
“Companies looking to move into new countries acknowledge they need to manage their IP better. When crossing borders, even boards recognise that IP must be a big part of business strategy. They talk more about management and commercialisation but also remain focused on mitigating the risk of IP value loss.”
The data revolution is also making it much easier for business leaders to understand what IP is held -not just by their own organisations but also by peers and rivals. Having access to trusted sources of IP data will make it easier to incorporate IP into business strategy.

As Nigel Swycher, CEO of Aistemos puts it: 
“Data and analysis relating to IP needs to be just as accessible as financial data, and not require a PhD or a law degree to understand it. That’s why we developed Cipher - if you put the right information into the hands of senior management at the right time, they will make better decisions. It’s that simple”.
The movement towards transparency will bolster this trend. Initiatives such as the Open Register of Patent Ownership (oropo.net) will help. In order for IP data to be trusted it needs to be accurate.

"We should expect very significant improvements in the quality, accessibility and effective use of IP data in the next few years, with much clearer linkages to value - otherwise the world's growth engine will stall" says Tony Clayton, board member of ORoPO and former chief economist at the UK IPO.

The future of IP in the boardroom

“Boards tend to focus on two areas: conformance and performance,” said the IoD’s Dadarkar, adding 
“There needs to be a balance of the two: not just conforming, in terms of corporate governance, but looking at future performance too. Boards should not just be looking to mitigate IP breaches; those processes should already be in place. Boards are just getting involved in the ‘performance’ side of IP.” 
According to Dadarkar, boards must evolve further if they are to leverage their innovation. “Risk and opportunity go hand in hand,” she said. “If your IP is one of your biggest assets - and for many companies it is their lifeblood, of more value than the product itself - then it has to be part of ongoing future strategy.”

To understand how boards might view IP in future, we can look at the behaviour of IP-rich companies today. Philips, the technology giant, is the largest patent applicant at the European Patent Office. It filed its first patent - to extend the burning time of a lightbulb - in 1905, and the corporation now owns 76,000 patents, 47,000 trademarks and 91,000 design rights.

“IP strategy is developed and implemented by my organisation across each of the Philips business groups,” says Brian Hinman, Chief Intellectual Property Officer (CIPO) at Philips.  He adds:
“The IP strategy is an integral component of the overall strategic plan on record for each of these businesses, and we always ensure an effective, integrated intellectual asset management (IIAM) approach in implementing these IP strategies.
This IIAM is a holistic approach whereby my organisation carefully analyses the needs of each business group and secures the optimum blend of each type of IP in order to maximise IP protection for the business. Intellectual Property & Standards employs a centralised organisational structure led by me to ensure speed of decision making and IP strategy execution."
One of the changes that has helped is the appointment of a new breed of CIPOs that report directly to the board. Some observers say that this does not go far enough and that C-suite status means that board representation is essential. Whatever the right answer to this question, what defines this new role is the ability to integrate IP into a business context - and this requires clear communication supported by verifiable data.

Nigel Swycher, who organised the Aistemos survey, does not see the need for such strict delineation: 
“Anything that goes to the heart of corporate value should be managed by the board. This means that tangible and intangible assets should receive equal scrutiny and attention."
Earlier posts in this series:

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