By David Oh
Intellectual Property Consultant and Director
Mindvault Sdn Bhd
This is the second in a four-part series published on 7 July 2003 in the [email protected] pullout of The Edge, Malaysia’s leading Business & Investment Weekly.
Hidden treasure worth US$100 million discovered!
You might be wondering which lucky guy armed with a metal detector and shovel this headline is referring to. Actually, it is referring to The Dow Chemical Company, a Fortune 500 company.
In 1992, Dow Chemical conducted a “treasure hunt” which uncovered intellectual assets that eventually produced more than US$100 million in licensing revenues for the company. Furthermore, strategic decisions undertaken by the company’s management led to additional savings of more than US$50 million in taxes and fees.i
Many companies have treasure buried within the crevices of their business that are yet to be discovered. This buried treasure is the company’s intellectual property (IP) or intellectual assets, as it is often referred to today.
In Malaysia, there are five major categories of IP rights:
- Industrial designs; and
- Trade secrets/confidential information
There are also other IP rights such as geographical indications and layout designs of integrated circuits.
Last week, the concept of managing IP as a strategic asset was introduced. In order for top management to do this, it needs to know what IP resides throughout the organisation. Without a knowledge of their IP and the various businesses and market segments it relates to, management cannot decide on the appropriate strategies to unleash their value.
Intellectual Property Audit
The IP “treasure hunt” is more correctly referred to as an IP audit. This is an internal review of the organisation to determine the IP environment in order to define its IP portfolio.
Do not be fooled by the word “audit”. The IP audit is more than a legal exercise, such as those undertaken for due diligence purposes. It is also more than just a stocktake of a company’s IP assets.
The IP audit is undertaken for strategic commercial purposes and is therefore a task that involves expertise from the business, technical and legal fields. The end result of the audit is to provide management with a snapshot of the organisation’s IP — showing its commercial value and competitive use in relation to the company’s business. This information is essential if the company’s IP is to be managed strategically.
In the example mentioned earlier, Dow Chemical actually conducted an audit of its 30,000 patents. From the information collated, Dow’s management was able to classify the patents into three categories — core patents it would maintain, non-core patents it would license out and non-core patents that it would abandon.ii
It was the licensing of non-core patents that led to Dow’s patent licensing revenues to skyrocket from US$25 million to more than US$125 million and the abandonment of non-core patents that resulted in savings of more than US$50 million in taxes and maintenance fees.
The IP audit plan is like a treasure map where “X” marks the spot of the buried treasure. Hopefully, management will not only discover one “X” but many “X’s” marking out numerous intangible assets peppered throughout the organisation.
Without delving into the precise methodology of an IP audit, an effective audit should have the following elements:
Catalogue all known and uncover all unknown IP to answer the following two questions — is my IP adequately protected? And is there IP that I have failed to recognise and protect?;
Determine the scope, strength and vulnerabilities in those rights;
Value the IP;
Classify the IP according to its business use, product categories and market segments indicating its competitive significance;
List IP which may be of value to other business units in the organisation or to strategic partners in the value chain such as distributors and suppliers;
Map out the IP that have been commercialised, detailing the form of commercialisation such as licensing as well as its business life cycle; and
Collate and review all IP-related company policies.
As can be seen, there are actually two major stages in this audit. Firstly, the IP assets have to be identified. Thereafter, those assets have to be analysed, bearing in mind that the purpose of such an exercise is to eventually formulate strategies to extract maximum value from them.
Strategic Action Plan
Knowing the scope of ownership of IP and the role these assets play in the marketplace is critical to success. IP audits provide that knowledge. Management will then be able to develop and implement internal or market-based strategies to realise the commercial value.
The resulting IP portfolio should provide a clear picture of the following:
Strategic IP that gives the business a competitive edge and which can be used for competitive purposes;
Valuable IP which is not part of the company’s plans but can be commercialised through licensing; and
IP that is not part of the company’s present or future plans that can be abandoned.
With the current emphasis on good corporate governance, an effective audit also has the added advantage of contributing to risk management. It is recommended that the audit be conducted periodically, preferably annually. With the completion of this stage in the management process, the next two stages of protection and commercialisation can be undertaken more effectively. These next two stages will be covered in greater detail in the next two articles.
i See Rivette & Kline, Rembrandts in the Attic: Unlocking the Hidden Value of Patents; Harvard Business School Press 1999
ii See Fitzsimmons & Jones, Managing Intellectual Property, Capstone Publishing 2002