Anatomy of an IP-centric company

Now that you know a bit more about the various types of IP rights, it’s worth placing this in the context of what a company looks like that has IP at its core, instead of being just a product- or service-driven company.

So, what does an IP-centric company look like? What makes it different to other types of companies and what can you, the budding entrepreneur, learn from these companies? Well, many of the best IP-centric companies are start-ups themselves, while there are other multinational giants out there that only discovered the value of IP much later in their corporate lifecycles.

The Value of Intangibles – Lessons from the S&P®500

In an earlier post, I made mention of the fact that more than 80% of the market capitalization of the S&P500 (a tech-heavy stock index) was not to be found in the physical assets that could be accounted for. If the market cap of a company was say, $10 billion, this meant that accountants and auditors could only find, on average, $2 billion of bricks, mortar, and other physical assets to point a stick at. The remaining $8 billion can simply not be accounted for and is ticked-off on a box marked ‘intangible assets’, ‘intellectual capital’, or intellectual property’.

Intangibles are generally things that you cannot see or feel or touch, but that does not mean that they don’t have any value. There are many ways of slicing and dicing IA, IC, and IP. In the 1970s, less than 20% of the value of these companies could be accounted for by intangibles.

This increased rapidly in the 1980s and 1990s, eventually reaching the levels they are now – 80%, and in certain cases, more. While this could also be associated with more speculative trading on the stock markets or just plain old greed, the fact that companies are commanding such large market capitalizations while not having many physical assets indicates that there is something else happening here.

IP That Reaches Across a Company

IP-centric companies are companies in which IP is central to everything they do. It cuts across all aspects of the business and represents an overarching umbrella under which each of the company functions operate.

So instead of being confined to something that the legal team has to sort out, or the guys at R&D, it is woven into the fabric of these companies and their employees and management realize the immense value that it brings to their company and their shareholders. It cuts across marketing, operations, health & safety, R&D, project management, human resources, public relations, business development, environmental impact, and guides the directors’ thinking and decision-making in the business. It’s used to decide future courses the company will take and spills out of the company, positively impacting on relationships with its outside partners.

The IP-centric company works proactively with its business ideas to ensure that it captures as many good ideas as possible, that it protects they most important ideas, and that it implements and exploits those rights through any combination of new-product development, product improvement, licensing out, brand development, anti-piracy measures, sales of patents, and, in certain cases, assertion of their IP rights.

If each part of the enterprise can realize a small gain because of enhanced use and awareness of the value of intangible assets when captured in the form of IP rights, then combined they provide a huge boost to the bottom line.

Using IP in marketing

The most obvious use of IP in marketing is to use trademarks to protect your company brand, product names, logos, and slogans. However, your company will also own the copyright in any new adverts that you have created, as well as in the pithy copy that goes with it, provided you have had your designers assign (or make over) the rights in those copyrighted works to you. In the absence of such an agreement, they own the IP, not you.

Even patents have their role to play in marketing – not patents for new ways of marketing, but rather making mention of your patents in your marketing campaigns. Audi used this to great effect a few years back when they launched a campaign showing that they developed more patents in developing the new Audi A6 range, than NASA has filed for the space program. (You’ve got to ask yourself why they aren’t sending up the astronauts in Audis, then).

L’Oreal has also used their patents in their marketing, and it’s interesting to note that a recent study showed that referring to patented products was seen by consumers to indicate that these companies are leaders in their fields, the originators of these products, and they were generally held in higher esteem because they made use of their patents. You can also use this to stop those pesky business listings from listing your name in their registries, frequently in unfavorable circumstances such as with the wrong address or under the wrong category.

If you have a trademark for your name, then you and only you can decide how to use it.

Using IP in HR

It’s critical that people entering your company or working with you know that you take IP seriously. It’s important that all of you employment agreements are vetted to ensure that they contain clauses stating that all IP generated in the course and scope of your employees’ employment accrue to your company.

Although this isn’t strictly necessary in terms of the laws of most countries, this is something that you can use to signal to new employees that IP is very important to your company. Contractors are a different story. Here, it is crucial that you have an agreement which addresses the ownership of IP rights, as in the absence of such an agreement the contractor owns all the IP. Bear in mind that they will be working with you and may end up owning some of the ideas that you or your staff have developed! So it’s important that you get this out of the way.

It’s also useful to have an IP training specialist stop by to give a presentation to your staff and management on how to identify IP, what the various forms of IP are, and how they should work with the IP of others. I sometimes picture in my mind a large empty box at the front door of a company – as employees leave the company to go and work elsewhere, they should be putting the ideas that they have created on company time and with company resources inside the box – it’s the only way of avoiding corporate amnesia and ensuring that your competitors don’t ride on your coattails.

I have encountered many companies who think that they cannot stop the flow of information from their companies. This is not the case – there is a lot that can be done, especially through education, to ensure that employees only leave with the tacit IP in their heads (i.e. the basic knowledge and mental tools that they can use on the next job) and not the codified IP that should have been captured. Once it has been captured and adequately protected, it can be used to weed out cases where it makes its way to competitors.

Using IP when working with suppliers and distributors

If you are successful, people will want to be seen to be associated with you. It may happen that a distributor or supplier wants the world to know that they do business with you and this may not always be to your advantage or may in fact be detrimental to your brand and to your business. Using trademarks to protect your name and stop others from using it without your permission is the best way of accomplishing this.

In one of my companies we had failed to secure a domain name for one of our product names. One of our distributors then tried to register the domain name in their own name, but we were able to thwart this under threat of legal action. If we didn’t have the trademark registration, it would have been very, very difficult to achieve this.

With a trademark registration you dictate how you want your brand to be used, by whomsoever you feel should be allowed to do so. Without it, you’re quickly sliding downhill, as there is no certainty as to why suppliers and distributors (who can very, very quickly start becoming competitors) cannot just go ahead and use your name.

Using IP for management and strategy

It should go without saying that IP is useful in the upper echelons of business and not just at the coalface. The most successful implementation of IP strategy is when the CEO, board, and senior management are on board with the proposed IP strategy and policy of the company. This makes decision-making a lot easier if everyone realizes that corporate IP can be used to capture ideas and ward off corporate amnesia, making sure that competitor’s IP is avoided, and that adequate protection is sought for viable new ideas.

It also makes their tasks easier when deciding to launch new products or services, as they can ensure that their managers check that these new developments are adequately covered by patents, trademarks, design registrations, the usual copyright notices, and confidentiality agreements.

Using IP to reward and drive culture

Companies that are IP-centric know that IP is valuable and that they should reward those that contribute to the pool of IP. They can do this by acknowledging the filing of a patent, the grant of a trademark, or the identification of a trade secret which can save the company money or give it a competitive edge. This needn’t be in the form of monetary incentives (these tend to backfire if not managed strictly). Rather, having an annual ‘silver dollar’ type of award ceremony or tea break where you give the contributors a framed copy of the patent that was granted, or the trademark that was registered. This serves to help your staff feed new IP into the system and also makes them aware of the IP rights of others. Sometimes, the biggest risk to a company is the unauthorized use of another company’s IP such as copyrighted technical drawings, client lists, confidential products guides that just ‘happened’ to find the way on to your computers. Providing an indication of the worth of IP to your staff will also make them respect that process and the fact that they should not be abusing the IP rights of someone else who has also worked hard to produce a new innovation.

IP for profitability

Is there any evidence that companies that manage their IP rights are more profitable than companies that don’t? Is there any way of seeing whether IP-centric companies outperform their peers and competitors? Fortunately, there is useful data out there which shows that IP-centric companies do indeed having higher, sustainable profits and market capitalizations than companies which are still stuck in the old paradigm of actively managing on their traditional asset base.

The Ocean Tomo 300 is an index of 300 IP-savvy companies. It is designed to be evenly balanced across market capitalization and types of operation.

The sectors with the greatest percentage of stocks in the index are Information Technology, Healthcare, and Industrials with 42%, 20% and 12% respectively. When compared to the S&P®500, it’s clear that the OT300 significantly outperforms the S&P®500, which is remarkable given the tech-heavy make-up of the S&P®500.

From its inception in January 2007 through October 31, 2012, the OT300 outperformed the S&P® 500 by 635 basis points. This performance record is significant and provides one of the first real pieces of evidence of the value of IP to companies in a competitive, free-market economy.

Another example is the sports-car manufacturer, Porsche. Dr Ing. h.c. Ferdinand Porsche A.G. (to give it its full name) has one of the highest, if not the highest, number of patents filed per vehicle sold. This means that their investment in IP is much higher per vehicle volume than other car manufacturers.

The result: Porsche has far and away the highest profitability of any vehicle manufacturer in the world. Being IP savvy, they have also realized that they can protect their ideas first, then freely use them to collaborate with others but hiring out their engineering teams as consultants to other manufacturers.

IP for Funding

How about companies at the start-up stage – how does an IP-centric company look at start-up and what are the benefits?

Starting with the benefits, these appear to be manifold. One of the main benefits of being IP-centric appears to be that you have easier access to venture capital and other forms of funding. A study published in May 2012 by Joern Block and his collaborators investigated the role of trademarks in start-up valuation by venture capitalists. Their results suggest that the presence, breadth, and number of trademarks in a start-up are positively related to its valuation. Better trademark protection for the brand equates to greater value. Start-ups as well as established corporates need to ensure that they review their intangible assets for even seemingly mundane processes that could turn out to be lucrative cash cows.

The now-ubiquitous ‘pull-to-refresh’ feature found in certain mobile applications was invented by an inventor named Loren Brichter a few years ago and when Twitter saw the potential of this seemingly trivial feature, they bought the rights to the invention and it is now core part of their IP monetization strategy.

A recent TechCrunch article also showed that there is a clear trend for the funding arms of large companies to place a significant emphasis on patents when investing in start-ups. For example, 88% of companies invested in by Samsung Ventures, 86% of companies invested in by Johnson & Johnson Development Corporation, and 81% of companies invested in by Motorola Ventures have at least one published patent application. Investors in the healthcare field also value patents highly, with the highest patent application rates belonging to companies funded by De Novo Ventures (96%) and Delphi Ventures (91%). Some major Silicon Valley investors, such as Khosla Vantures, DAG Ventures, Menlo Ventures and Kleiner Perkins have patent application rates that are substantially higher than average.

Using IP for Collaboration

Good fences make for good neighbours. If you have looked after your ideas and protected them adequately, then there is no need for secrecy and you can share them freely. I’ve had to deconstruct the myth of ‘secret’ patents many times to my corporate clients, large and small. The word patent means ‘open’: this is because it is a document that becomes open for public inspection and it must contain a full description of your idea. You can’t hide anything in there and you can’t leave anything out, otherwise you forfeit any protection you may have been entitled to.

That’s the way it works – you can only get protection for something if you’ve actually disclosed it (and ‘claimed’ it) in your patent specification.

When I was still a young biologist, I would sometimes try and replicate the experiments using the techniques published in some of the leading academic journals. These sometimes tended to be very vague descriptions that resulted in me having to do lots of undue experimentation just to validate their techniques, much less generate my own results based on my biological samples; so much for freedom of information in academia. Truly, without adequate ways of protecting information, people leave out crucial bits. This has been going on since the first recipes were exchanged between mothers-in-law and daughters-in-law. But patent laws specifically address this – your patent will be held to be invalid if a person skilled in the field of the invention cannot replicate your results without undue experimentation.

Similarly, a mechanism as simple as a confidentiality agreement signed between two parties removes most of the barriers that would have been there if such an agreement was not in existence – by controlling the IP aspects, they can engage in frank discussions, ventilate the issues, and ensure that a deal is struck which represents the true aspirations of each of the parties.

This is also something that is being embraced by companies all over the world as they realize that they do not have all of the smartest people on their payroll. There are always more smarter people outside your company than inside it, no matter how big you are. Outsourced innovation and collaboration are the order of the day.

Think of Apple making their systems available for third parties to write applications for Apple products – Apple can only do this because they’ve protected the very platform on which all of this occurs.

Similarly, A.G. Lafley, the CEO of Procter & Gamble, created a huge stir when he announced an open innovation plan at P&G called Connect & Develop. P&G is one of the largest consumer goods companies in the world and it had, until Lafley’s arrival, been intensely inwardly focused when it came to innovation. However, Lafley recognized that P&G needed the help of outside inventors and collaborators, but that they could only do so if all their systems were in place and they could own the IP. Doing so unleashed a remarkable growth spurt in the number of billion dollar brands being sold by P&G today. Eli Lilly, manufacturer of many of the biggest blockbuster drugs in the world, has independently come to the same conclusion and has an extensive system in place with which it engages with smaller outside companies to come up with the next generation of pharmaceuticals. This is discussed in much greater detail in the latter half of this book.

I am a big supporter of using IP for collaboration, simply because we can only get ahead if we help each other. It’s also based on the fact that sustained patent wars are an excellent recipe for mutually assured destruction that not even the most well-funded companies in the world can sustain. Litigation is a huge drain on resources (both money and distraction of senior management and researchers) and most cases ended up settling anyway. Once companies realize that patent rights usually aren’t completely watertight, they stop using them in the traditional ‘sword & shield’ fashion (in which IP is used purely to attack others or protect intangible assets) and rather use them to build bridges of sustainable co-operation that are to the benefit of consumers around the globe.