Building an effective, business-focused patent portfolio

“[I]nnovation without protection is philanthropy.” So claims Kevin Rivette, founder and partner in the Sherpa Technology Group and former chairman of the US Patent and Trademark Office Public Patent Advisory Committee. Even with protection, Harvard Business Review estimates that the United States wastes $1 trillion in underutilised patents, a figure that highlights the importance of effective IP strategy and management.

According to research carried out by Ocean Tomo, intangible assets account for more than 85% of the value of the S&P 500, which illustrates the material effect that intellectual property has on the valuation of publicly traded companies. One would expect the alignment of a company’s IP strategy and business strategy to be a top priority for senior management, yet even today intellectual property remains a poorly managed asset.

IP strategy is integral to the business model of a successful technology company and remains a key source of competitive advantage. The lack of an IP strategy leaves money on the table from lost licensing opportunities and may lead to increased product costs due to a company’s inability to enter into cross-licensing deals with third parties to decrease the burden of technology in-licensing or to settle litigation. The company will have less leverage in negotiations to access valuable technology and may even be blocked by third-party patents from using its own technology.

Yet research and interviews performed by the Blekinge Institute of Technology (BIT) in 2017 showed that less than 60% of the companies interviewed had an IP strategy. Larger companies (based on revenues and IP assets) are more likely to have an IP strategy than smaller companies. Those with no strategy blame the lack on time and cost pressures or argue that it is not necessary due to their size.

Of the companies that do have IP strategies, only 60% had actively attempted to integrate this with their corporate strategy, and in those cases the initiative came from upper management. In some cases, companies lacked the competence to integrate strategies in this way, but sometimes they merely lacked awareness of the benefits of doing so.

The knowledge that integrating IP strategy and business strategy increases the return on IP investment is not new. A Harvard Business Review case study describes how in 1994 Dow Chemical initiated an audit of its 29,000 patents. Each patent was assigned to one of 15 major business units, which assumed financial responsibility for its use. Intellectual asset managers from each business unit reviewed company-wide patent activity regularly and identified licensing, commercialisation and joint venture opportunities for individual patents or groups of patents. Dow Chemical achieved savings of $50 million in taxes and maintenance fees on patents that were not needed and increased its licensing revenues from $25 million to more than $125 million.

The ability to actively extract value from intellectual property has been shown to be related to the involvement of top management, cross-functional collaboration, a comprehensive and regularly updated IP strategy and IP awareness throughout the entire organisation.

So why is there still a problem? In one word, complexity. Many influencing factors make this a difficult problem to solve.

In this article we describe six actionable tips that companies can utilise to build an effective, business-focused patent portfolio.

IP strategy and business strategy

The goal of aligning a company’s IP strategy with its business strategy is to both increase the number of patents that contribute value and to increase the value that the patents contribute. However, differences between business units may present some challenges. Teams and departments within an organisation can have vastly different cultures and limited or no interaction with other parts of the company.

Data from BIT regarding the active use of IP rights in technology-based companies across multiple industries illustrates the importance of alignment. Companies that have their IP strategy aligned with their business strategy actively use a significantly higher fraction of their registered intellectual property.

In companies that have multiple business units, each unit identifies the needs of target customers and translates these into research plans, development plans and product plans. Each business unit may be responsible for procuring and drafting its own contracts, sourcing open innovation, meeting regulations, complying with standards, creating software and hosting information. As a result, the appropriate IP strategy may differ vastly from one business unit to another.

At the business-unit level, IP teams can work seamlessly with the business-centric innovation efforts of that unit to associate present and future business requirements with the ability to create valuable intellectual property. This close collaboration can improve the quality of IP assets by creating a portfolio that covers not only core technologies, but also complementary products, applications and improvements.

IP teams must understand and articulate the competitive advantage of their products or services and be aware of competitors. They must define the scope of their strategy, ultimately with the goal of capturing and growing market share and managing competition by setting barriers to entry and protecting differentiated products. Business unit IP teams at this level manage the generation and protection of intellectual property, identify technologies relevant for customers, define the IP filing scope and manage the acquisition or in-licensing of intellectual property. They also manage branding, trademarks and any trade dress associated with their unit’s products, and identify opportunities for exploitation and enforcement, including out-licensing and litigation.

Table 1. IP strategy challenges and influencing factors

At the corporate level, IP departments can align themselves with the overall goals of the company by understanding its business, identifying key stakeholders and looking for ways to use intellectual property to create business opportunities by evaluating the challenges that the company faces. Strategic IP tasks at the corporate level include a high-level analysis of industry attractiveness from an IP perspective, M&A IP implications, litigation, taxation and the design of organisational IP structures or processes that connect different parts of the IP value chain.

The IP department has a unique ability to serve as a bridge between different departments – transcending silos, fears of idea theft and other esoteric behaviours that can develop within research and engineering teams and form a barrier to collaboration. For example, one part of a company may be conducting research in a similar area to another part of the company, but be completely unaware of this. This can lead to the development of contradictory inventions, or even inventions from one business unit that later become prior art against inventions from another business unit.

One executive from a member company of the Innovation Research Interchange (formally the Industrial Research Institute) stated: “In our firm, there is a tight link between IP management and the core strategic business unit roadmap. We manage our IP estate with a strategic purpose around the business. When intellectual asset management is part of the business dynamics, things go well. When they drift apart, we lose the support of senior business leaders.”

In companies that lack close alignment between IP strategy and business strategy, it is typical to see that 10% or less of IP assets contribute to over 90% of the total value of the IP portfolio, while the remaining portion of the portfolio costs money to own and maintain.

IP strategy in small and medium high-growth businesses

It is too often the case that IP protection is an afterthought for many companies. Intellectual property is frequently viewed as insurance rather than a vehicle that can add value to a company’s bottom line. Large companies have increasingly begun to develop IP strategies, more specifically patent strategies. On the other hand, in many small and medium-sized technology companies intellectual property is seen as a delay, which distracts from the cycle of generating a business idea, attracting finance, undertaking R&D and manufacturing a product – if it is considered at all.

Figure 1. Intangible asset contribution to market value

Source: Ocean Tomo, LLC

To be seriously considered by investors, entrepreneurs must often prove their ownership of the rights to the proprietary technology underlying their innovations. The success of a growing company in attracting investment, whether it is a private placement or a public offering, hinges on convincing investors that it has obtained patents or patent licences that fully protect its products or processes, and that it can operate without infringing the IP rights of others.

Unfortunately, many entrepreneurs believe that they can simply file a ‘coversheet’ provisional patent application with the exact text of a white paper and that this will be sufficient to prove to potential investors that they have a patent. The most basic form of due diligence will quickly expose this fallacy. More important to investors than the number of patent filings is the existence of a comprehensive IP strategy that is aligned with business goals.

Be clear as to why you are filing a patent and review this periodically

A high-quality, productive and useful patent costs the same to own and maintain as a low-quality patent that is irrelevant to your business. Patent offices do not charge annuities according to whether a patent is used. So why then do companies continue to own and pay for patents that are of no use to them?

The simple answer is that most companies do not know the purpose of all their patents in relation to their business.

This situation can occur when patents are filed independently of a detailed IP strategy that is closely aligned with business strategy. Even where an IP strategy exists, it is not uncommon for it to lack definition of what technologies to patent and why, become swiftly outdated or never even be communicated throughout the company. Where such a vision is lacking, other factors will dominate which patent applications are filed, including an inventor’s status or influence in the company or an attorney’s preference based on his or her expertise.

For existing portfolios, patent analytics tools, including those driven by newer artificial intelligence technologies, can reduce the time required to sort, classify and identify assets. However, patent assessment in view of a business strategy is highly contextual – and nothing can replace a technology and business savvy IP professional assessing each asset individually to identify its strengths, weaknesses and opportunities.

A recent study by Marcus Holgersson showed that 45% of the patents in the companies studied were not used in products, services or processes but instead were used for strategic reasons, such as blocking competitors or preventing invent arounds. In-depth competitive intelligence and IP expertise can be leveraged in a cross-functional team to determine what should be done with an asset (eg, if it should be abandoned, donated, sold or licensed, or added to a patent pool), all with a view to ensuring that certain rights remain with the company.

Figure 2. Companies with business-aligned IP strategy use more of their intellectual property

Beyond IP landscaping – continually assessing the knowledge environment

A 2008 study by Bo Carlsson and colleagues of 15 companies in Northeast Ohio, ranging in size from 25 to 95,000 employees and in age from start-ups to those that have been operating for 135 years, showed that the majority of intellectual property comes from in-house development, but that companies still rely on external sources for R&D (eg, joint ventures, company acquisitions, technology licences and university collaborations).

Developing a robust, business-focused IP strategy starts with accurate competitive and internal assessments. Central to the foundation of these is a clear understanding of the technology landscape. This includes a detailed understanding of the IP portfolios of competitors and relevant third parties, including details about how they are using them.

A strong assessment of the knowledge environment requires a cross-functional team to view opportunities through multiple lenses, breaking free from confirmation bias that results from a singular point of view. Identifying potentially relevant adjacent or disruptive technologies as well as industry convergence trends is key to understanding your company’s peer group and the position you hold in it.

Detailed and up-to-date information on the knowledge environment can enable a company to perform a regular gap analysis between requirements to secure market advantage and the intellectual assets it has or controls. Competitor strategies can be teased out from their IP portfolios, their activities and broader industry trends and key pockets of intellectual property that may be available for acquisition. This enables companies to make strategic moves and decisions that reduce future risk. For example, competitors whose products and technologies are on the decline and who have strong or significant IP portfolios may turn to the monetisation of these portfolios to make up for declining product revenue. It may be strategic to obtain an early licence to the portfolio at a preferable rate to clear the risk in case the portfolio falls into the hands of a patent assertion entity. If the patents are of high business value, it may make sense to acquire the intellectual property outright to provide the failing company with much-needed liquidity.

Intellectual property as a part of all business roles and commitment to employee education

A fact of post-secondary technical education is that most often, unless students (including PhD candidates) get first-hand experience of patents, trademarks or copyright as part of their research, they do not typically encounter intellectual property until they enter the workforce. While there is a shift in law school curriculum to include more specialised and practical training, there is no requirement for JD candidates to take business or strategy courses.

Figure 3. Business-aligned IP strategy generates more patents with higher value

The MBA curriculum offers some basic law courses; however, these tend to focus on corporate law, business structure considerations and regulatory requirements. In practice, even IP lawyers and patent professionals need a better understanding of the fundamentals of a company’s business strategy and specific technologies to propose a relevant, business-centric IP strategy and participate in strategic business planning and decision making.

Business professionals tasked with making the decisions may not understand the value and importance of intellectual property and typically delegate IP planning to IP lawyers. In addition, corporate leaders may not appreciate the technological and long-term financial implications of their choices. Managers may not choose the best way to extract value from intellectual property and may not understand how it can be used to suppress competition, let alone to develop alternative products or services, secure licences and deter litigation.

Patents can quickly become a burden on engineers, taking time away from R&D and putting them behind on projects and product delivery schedules. Early integration between business professionals, IP lawyers and engineers is critical to identify the best opportunities for IP investment, yet there are few people who have significant expertise in all three areas.

Much can be done within an organisation to educate employees about the importance of intellectual property, including company-wide IP seminars, targeted business training and technical lunch and learn, or brown bag sessions. Many companies have these initiatives in place and yet the obstacles to collaboration still exist.

Figure 4. IP strategists combine business, legal and technical acumen

IP strategists are a key part to the solution, particularly if they sit outside all of these groups and can more easily transcend underlying boundaries and silos. Outside IP strategists may be even more productive in this role, as they will be unaffected by cultural biases that can be ingrained in a company.

Unfortunately, even if an IP strategist listed in the IAM Strategy 300 is engaged and a comprehensive and actionable plan is put into place, it may be extremely difficult to get employee behaviour to follow consistently. Individuals will act according to the incentives that they are exposed to and often these are misaligned.

CPA Global, Innovation Leader, and Innosight have published various studies and articles on IP metrics and key performance indicators. Innovation metrics fall broadly into two classes: activity metrics indicate that you are doing the right things now that have been shown to lead to high levels of innovation in the future, while impact metrics measure the outcomes. IP strategy is a long-term game and there is often a significant lag between the conception of an invention and when it affects profit and loss. In addition, it can prove challenging to tie together specific patents and the exact effect they have on business outcomes, which makes it especially important to track activity metrics. These help drive businesses to create a quality portfolio that is managed competitively and efficiently.

Single point of ownership for IP and portfolio strategy

Organisational structures where IP professionals are included in top management decisions have been linked to better IP management performance, while structures where aspects of IP function are embedded in the business units have shown significantly improved alignment. However, there are different variants on how companies structure their IP function.

In a poll conducted by Helios IP Insights, a benchmark group of IP professionals were asked about the most effective organisational structure for their IP function. The results were almost equally split between a centralised approach (55%) and some variation of the IP function being located within business units (45%). Of the 45% without a purely centralised approach, 27% reported that their IP function was split between centralised management and business units, 10% reported that it was managed entirely from within the business units and 8% indicated that their IP function was managed regionally.

All organisational structures have pros and cons. In a centralised structure, which is more conducive to maintaining patent expertise, leveraging intellectual property across divisions can be slow and unresponsive to divisional needs. A decentralised structure can respond rapidly to business unit needs and develop a deeper understanding of specific challenges, but it will not be as easy to find synergy across divisions.

Decisions such as joining industry consortia and standard-setting organisations may make complete sense for one business unit, but the IP policies of these groups may have significant detrimental consequences to the value of existing or potential intellectual property. A regionally decentralised approach may have heightened expertise of case law and policies of geographic significance, but they too will be unable to realise corporate-wide advantages or avoid value-destroying pitfalls.

Ultimately, some form of hybrid organisational structure with a single point of ownership at the corporate level and professionals embedded regionally and within business units may be the best way to enable the needs of the business units to be met while leveraging intellectual property across the entire enterprise. This model enables better organisation-wide knowledge sharing, while maintaining top-level executive involvement for decision making, providing rewards and managing incentives.

Figure 5. Careful choice of metrics drives a quality portfolio

IP portfolio costs may be shared among divisions, creating a strong incentive to align the business and IP strategies. Having a single point of ownership and responsibility for IP strategy at the corporate level ensures that strategic decisions regarding individual assets are taken with a view of the totality of the portfolio.

To be clear, this is not simply a matter of spreading the lawyers and patent professionals around. A cross-functional team is imperative. Companies can create IP management departments that include representatives from every business unit and from every geographical location. The members of this team will be responsible for increasing institutional knowledge and decreasing friction in the patent process within their business unit or location. Their insider status will enable them to understand the culture and speak the language.

The communication and links between this team and the centralised IP organisation will ensure that they fully understand actions that may devalue the intellectual assets of the company, including:

• joining standard-setting organisations;
• signing an adopters agreement;
• using open-source software;
• drafting software licences that may explicitly or implicitly grant patent rights;
• entering into collaborative R&D agreements with joint IP ownership terms;
• drafting confidentiality agreements with partners;
• creating employment agreements;
• using open innovation; and
• understanding freedom to operate.

The process of innovation benefits from the participation of technical experts in R&D, marketing, senior management, finance, legal, outside consultants, suppliers, service providers, business partners and lead customers. Early engagement between all parties will result in products and services being designed in a way that reflects customer needs and market demand, as well as the legal opportunities and constraints to allow better exploitation of the resulting intellectual property. When an IP professional is part of the team, legal questions are addressed alongside business concerns so that the process moves forward efficiently.

Figure 6. IP function organisational structures

Source: Poll by Helios IP Insights

This is a clear goal, but the reality is that it is not one that every company can or has set out to achieve. Research conducted by the Fraunhofer Institute reveals that the connection between company size and the existence of patent departments is almost linear. Unsurprisingly, large enterprises tend to have their own patent departments with patent attorneys and engineers, and these can be deployed throughout the organisation in a hybrid way. One major electronics company employs over 300 IP professionals worldwide to maximise the value of its thousands of patents.

On the other hand, small and medium-sized enterprises (SMEs) may need to outsource IP resources because it is not cost effective to build a diverse team in-house and there may not be enough work to keep a large team fully occupied. SMEs may use specialist providers to complete functions that it makes no sense for them to perform in-house economically or strategically.

Many organisations already outsource aspects of their IP function to external patent attorneys or law firms (eg, to draft, file and prosecute patents or to handle renewals and maintenance payments). An in-house IP manager can be utilised to coordinate IP activities performed by outside service providers, but this may not be cost efficient, strategically aligned or even viable.

If how the organisation uses intellectual property is what counts, then it makes commercial and strategic sense to outsource this to external IP strategists whose primary purpose and competency is to identify, manage and leverage intellectual property.

Big room for improvement

The increasing monetary and strategic value of intellectual property has brought attention to the importance of effective IP strategy and management, but it remains an area with tremendous opportunity for improvement in most companies. Even where companies have IP strategies, these tend to be static, outdated and not aligned with business strategy. An IP strategy aligned with business strategy ensures management buy-in and that patenting efforts are focused in areas that can generate growth or increase market share for the company.

Bad and good patents cost the same to file and maintain, yet companies continue to spend money on patents that sit on a shelf because it is not clear why they were filed in the first place. Every patent should be filed with a purpose, which should be reviewed and updated throughout the life of the patent. This vision is part of the overall IP strategy, which should be continuously updated with information from the knowledge environment – an outdated strategy can be as ineffective as a non-existent one.

IP management has traditionally been viewed as being the responsibility of IP lawyers and patent professionals, but as the pace of innovation continues to accelerate, cross-functional teams – including legal, business and technical professionals – will be necessary for effective IP management. These professionals will need to acquire skills that are not traditionally taught in post-secondary education; companies can provide these through mentored work experience, seminars and targeted business training.

Finally, IP teams should have a single point of ownership at the corporate level and embedded professionals within business units to meet the needs of individual business units and to leverage intellectual property across the entire company. IP strategists utilise a combination of technical, legal and business expertise along with communication and collaboration skills to help companies increase the value of their intellectual assets through bespoke strategies tailored to their individual needs.