Continuing the latest installment of IP Answers, IDT’s Legal Director of Intellectual Property and Licensing Bruce Elder explains how in-house counsel can get attention and budget from the C-suite for their IP program.
In Part One, Bruce began by explaining how to position IP in the context of overall priorities, speak the language of the boardroom, and demonstrate an understanding of risk management and insurance. In PART TWO, he describes how to ascend the levels of the IP value pyramid, the interdependencies of asset groups, and recommends how IP heads can conclusively prove the value and contribution of their programs.
IPfolio: What is the IP value pyramid in the context of the larger business discussion?
Bruce: I think of IP strategy alignment in some simple, perhaps overly simple, levels of alignment. The higher you are, the more aligned the IP strategy is to the business, meaning the more value the business can extract from the investment in IP.
As I suggested earlier, a fundamental layer of any IP strategy is to think about your competition, and identify how you are going to create defensive protection around your company. If you don’t do this, you don’t have a foundation. This is where you have to start.
If you go up a layer, I think you need to start talking about operational excellence. Yes, this is a business school buzzword, but what it really means is that you are constantly thinking of how to do things better. It’s an ongoing and constant evolution, challenging assumptions and asking questions like: Am I spending my time and budget where it will have the most impact for the business, not just now but some years from now? This is also where actively managing the portfolio through activities like directed invention mining and active pruning come into play, and where the workflows and the supporting technology and software can be critical.
Success comes down to maintaining alignment with your differentiation and market strategy, then anticipating the future. What will you need from your portfolio and when? You make sure you have a plan to get it when you need it. Even better, you figure out how to do this ahead of time.
IPfolio: What comes next?
I would argue that turning the IP strategy into part of your company’s net income and profit center is the next step up. Conceptually, you need to be thinking about how you are contributing to the value of your business. You can create value in a lot of ways; it’s not just going out and suing someone for license revenue, although this may be an option for some.
I mean activities like identifying and selling non-core assets as a beneficial good so you can leverage your portfolio, or proactively helping your business secure a partnership or win a sale because you can show that working with you instead of a competitor gives them the comfort of superior patent coverage, or demonstrating that you’re the thought leader in an area.
The requirement to efficiently execute at this level is to know your IP inventory and appropriately categorize it. This is where that prerequisite of deep portfolio knowledge really can pay off. This is how you rise to the top of the IP Strategy pyramid. Yes, it is certainly rare and hard to do, but this is the point at which you become part of the fully integrated business plan of your company.
When you get to this level, the CEO isn't reviewing the business fundamentals, the annual plans, or the three-year strategy plans without you participating at least to some degree. The Board of Directors is unlikely to talk strategy without you in the room or without, at minimum, having consulted you before. In truth, though, it is rare in my experience to achieve this.
Instead, you can too easily be the focus of reactive expectations. “My friend Joe at another company's board said they are making a lot of money on their patents. I wonder why we aren't doing the same thing.” The next day, someone might visit your office with a “there has to be value here; the board insists there is” sort of message.
The truth may be that three years ago, there was indeed value, but some of it has since been lost. I know many IP professionals have had this kind of conversation, and it is never fun to be an “IP guy” who is suddenly and unexpectedly given a revenue target.
IPfolio: Where does IP find common ground with C-level leaders?
By creating value from the business assets—and critically—by communicating how IP is doing so. Here’s a great question to ask IP heads: Have you spoken with your C-suite about how you are helping to create value from the assets you control in the business? Have you had this conversation using their language?
Sometimes, it can be even more preliminary. Do you even have the opportunity to have that conversation? I put it to you that the more IP leaders think and talk in the language of business value, the more likely they will get to this level of conversation and maybe even get more budget support.
IPfolio: How does IP talk about creating value from the assets they manage?
Drawing from my business background, I recommend understanding how assets fit together in the big picture. This is regardless of whether your company is a 60-person startup or a billion-dollar public company.
You have three legs of the stool that the organization is balanced upon. Start with capital, which is your cash, working capital, and fixed assets. Consider these your planting materials. Next, you have human capital, the great people who build relationship webs. They execute on all your wonderful ideas, which is the third leg. Every business has these three assets or legs.
IPfolio: Are the asset groups interdependent?
Absolutely. Most business school folks will tell you that there are three sorts of interdependencies that come together when creating value.
The first interdependency should be fairly obvious; this is leveraging and exploiting your assets to create recurring net income. You are in business to make a profit after all, or even if not-for-profit, you need to sustain and survive long-term. Think of this as the part of the business typically reflected on the income statement and cash flow statement. If you are an early-stage start up, this really isn't your immediate priority, however. In that case, you are burning cash and know you are likely not going to be generating net income any time soon. While you are dreaming about getting there sooner or later, you have other immediate priorities.
The second interdependent priority is to increase the value of your assets. How can I get more value from what I have or bring in more assets? Think of this as the balance sheet part of the business.
The third one is ‘How do I secure my income and my business assets?’ How do I keep someone from encroaching and taking away my net income and the value of my business assets? All these things work together, This is what your CEO thinks about. This is the language he or she uses. You should talk about IP in this context. Here’s a quick mental exercise: Which one is most critical to you today?
IPfolio: Any suggestions to answer the question?
Your priorities depend on your business’s maturity. It’s that simple.
Consider a private venture-backed startup or small company. If you are a startup, you are probably not profitable yet. Your priorities are probably thinking more about increasing the value of your assets and setting yourself up for the next stage. The next stage could be X amount of funding, an exit strategy, or perhaps an acquisition. Maybe it’s going public. Profit is probably not the number one motive.
Growing overall value perception of your business assets, increasing your valuation to get a better round next time, or justifying an offering are probably more important right now. Will this remain unchanged in three to five years? Probably not. Hopefully by then, you will have reached some plateau where growing net income is important.
Contrast this with Google, Facebook or Apple. Take Apple; it’s had a bit of an interesting time after the last earnings announcement. Apple had such an amazing and long stretch of rapid growth over many years, but there’s a limit to exponential growth of anything, even Apple. Now, it’s starting to become as much about securing the income and long-term value of the business and ensuring profitability that has already been achieved.
IPfolio: How does IP conclusively prove the value of what it does?
IP can seem really vague to some people in the executive suite. It’s sometime seen largely as an insurance type of cost, which they can measure fairly easily. Your department budget is clearly visible.
But how do the CXOs measure your value, not just cost? Short of going out and suing people and getting license revenue at the extreme, how do you prove IP value and what are you measuring? Is it just sheer numbers of IP assets? Yes, that’s one strategy. It’s an easily calculated and understood metric, but as I mentioned earlier, it’s a very inefficient one to show the value of an asset or portfolio to the business.
You have probably heard this before - ‘if you can’t measure it, you can’t manage it.’ This is a critical principle because every executive will ask you for proof. Their line of inquiry will be something like this: ‘How do I know that you are doing what you are saying? and What are the metrics? and What is the value?
I try to focus on expressing the degree of IP alignment to business priorities. For example, how IP prosecution is focused on directed invention mining in the high-growth or high-revenue parts of the business, while divesting or cutting non-contributing assets and efforts, and expressly pointing out why that helps secure net income or grow the value of the assets to the business.
I also have used comparisons to illustrate where competitors and threats are active or may emerge, and try to show how the IP portfolio is being proactively adapted numerically and qualitatively to match those perceived threats. I try to identify areas where IP can be, or has been, leveraged to secure a partnership or help in sales or marketing campaign. As much as possible, I try to do this using metrics and visuals or dashboards that make sense in a language and lexicon they are used to dealing with.
Starting with a baseline, if you can show positive change over time, and positive business results that leverage the IP portfolio, then the executive team is going to be much more inclined to listen. When they start listening, you’ll have their attention and a better opportunity to lobby for the funding your contribution to the overall organization merits.
We’d like to thank Bruce for his perspective and time. In an IPforward Conference presentation that captivated attendees followed by this expansive Q&A, Bruce has definitely provided Heads of IP with a roadmap to produce a closer relationship with their company leadership. We look forward to presenting more of Bruce’s expertise in future IP Answers.