Getting Smart About Intellectual Property Is A No-Brainer

July 2, 2007
U.S. firms leave $1 trillion on the table every year by under-using their intellectual property.

A colleague was talking recently with executives of a company based in India, and they told him something startling. They said that when their scientists made a breakthrough, they would scribble notes describing those ideas, and mail them to their lawyer based in the U.S., who would then, presumably, apply for American patents on the company's behalf. But they couldn't immediately recall how many or which ideas had been forwarded, or had actually earned patent protection.

Soon thereafter, a colleague was talking with a global company with a reputation for producing products of high quality. Over the years, they had pioneered innovative processes for developing, engineering and assembling their products, but until recently, had not aggressively sought patent protection for many of those ideas. They were just now making a concerted effort to do so.

In both of my conversations, the lesson was clear: businesses are, or should be, waking up to the idea that their intellectual property may be the most valuable, but under-appreciated, asset they own. In fact, U.S. firms leave $1 trillion on the table every year by under-using their intellectual property, according to the Harvard Business Review.

The management of intellectual property has gone from a necessary evil and an expense, to a competitive advantage and profit center. Businesses now have to not only create and track R&D and patents, but also increase, improve, license, share, sell and protect intellectual property. Not surprisingly, the shift of intellectual property from the back to front office was one of IDC's top 10 trends for 2006.

As with companies that work with experts from outside their company to manage their information technology operations, we now see companies partnering with experts to manage intellectual property. These experts not only provide software tools to simplify and automate the mechanics for accomplishing this, but also help companies think more strategically about the processes that make intellectual property more of an asset, and less of a burden.

The need for such management is more pronounced in industries such as financial services, which traditionally had not sought to patent as many ideas as companies in the technology or pharmaceutical fields. These days, firms with financial products and services are increasingly linking their offerings with unique technology that help them conduct research, crunch numbers, or present information.

Correspondingly, the number of financial services patents filed for, and earned, has risen steeply. A decade ago, there were just under 1,000 patent filings for the sector, while in 2006, that number had billowed to 6,226. Last year, there were five times as many financial patents that earned approval than in 1997, which saw only 200 or so granted. The importance of patents for other industries that deal with intangibles are surely also rising.

Legal matters figure prominently when it comes to intellectual property, given how valuable and litigious it tends to be. (Hopefully, recent patent reform bills in front of Congress will make it less prone to abuses.) In fact, intellectual property in the U.S. is worth as much as $5.5 trillion, more than the gross domestic product of any other country, say economists Kevin Hassett and Robert Shapiro.

With so much at stake, there was vigorous patent litigation last year, with awards valued at $3.4 billion. Industries such as financial services are seeing litigation rates of nearly 30 times the average, according to a study by Harvard Business School professor Josh Lerner.

Companies need to be aware of others that may be infringing on their patents, as well as ensure that they are not, themselves, infringing. Customers are also increasingly demanding to be indemnified against legal action, so that they cannot be held liable if the product they use is found to infringe on the intellectual property of others.

More strategically, businesses need to determine where the company's intellectual property can best be of use. How can ideas be implemented in products, or reflected in product branding? Companies may own a great deal of intellectual property, but it is another matter entirely to put it to work in the right way.

Therefore, companies need to continuously examine their portfolio of intellectual property to determine which patents might be licensed to others, sometimes in return for cash income, or other times in return for their rights to use the intellectual property of others. In other instances, a company may want to assign, or sell, their patents to others. They may also want to buy unused patents as a defensive measure to take them out of play, so that future products are not in conflict with anyone else's ideas.

Finally, many companies today are becoming globally integrated, with decentralized operations in far-flung locales. The intellectual property laws and their enforcement may be rather different than those of the home country. So, it is not hard to imagine a company with research laboratories in Brazil, China or India that create enormous amounts of intellectual property prone to unpredictable or weak protection. Businesses need to be aware of these imbalances and navigate them.

These days, as American small businesses begin conducting commerce outside the U.S., they, too, need to be knowledgeable about at least the ABCs of intellectual property. For example, the U.S. Patent and Trademark Office found that only 15% of small companies that do business in foreign markets knew that American patent protection did not extend overseas.

Similarly, foreign companies that seek entry into more developed countries, such as the U.S. or in Europe, need to educate themselves about intellectual property. For instance, Chinese-based enterprises may find themselves at a disadvantage because they may not have obtained the rights to products that they have created, or may not have bothered to license technology used in their products -- making it hard for them to conduct business in more regulated marketplaces.

In China-based Lenovo's case, the company positioned itself well to enter the U.S. market by acquiring IBM's PC business. In one bold stroke, they had ensured the integrity of their intellectual property. But not everyone can enter a country in such fashion, or acquire a company with a clean bill of intellectual property health, so most will have to be even more creative and patient to crack marketplaces with strict intellectual property laws.

What's apparent is that the days of recording ideas on paper and mailing them to the legal department really are over -- at least for those who hope to compete. The complexities of intellectual property, and its newfound importance, require deep, strategic knowledge at many companies, large and small, domestic and foreign. What's more, the people that manage a company's IP need to wear a variety of hats -- legal, marketing and R&D. In a world where, increasingly, the idea is the product, having such expertise on hand is a concept whose time has come.

Pat Toole is a vice president for IBM's Technology & Intellectual Property group. IBM's T&IP group collaborates with customers and business partners to develop and share intellectual property, and to promote innovation. It acts as a bridge to the company's manufacturing and R&D initiatives, spanning such areas as software, hardware and nanotechnology. Aside from being instrumental in cultivating IBM's scientific talent, Pat's group also works to gain industry consensus in the area of open computing standards, so that technology can be universally compatible.

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