The third branch of IP outsourcing

Traditionally, the terms ‘intellectual property’ and ‘outsourcing’ have been linked together in two contexts:

• IP issues arising from outsourcing of business activities (ie, manufacturing, design and component supply) – this area deals with a constellation of legal issues.
• Outsourcing by lawyers, patent attorneys and in-house legal departments of perceived lower-value legal functions to offshore legal or IP service providers such as patent searching or patent drawings – this area deals with a revision to the existing legal business model.

This chapter considers a third important context for IP outsourcing: where operating companies and research-intensive organisations outsource all or some of their internal high-value IP function to external providers. This area deals with the creation of an entirely new market and business model.

For example, this third branch of IP outsourcing could involve an organisation outsourcing its IP strategy to an external IP strategy specialist, or the administration of patent and trademark filings being outsourced to a specialist IP administration provider.

As companies increasingly recognise the critical role played by intellectual property in commercial performance and longevity, it is axiomatic that their IP functions are:

• growing in scale and complexity;
• assuming an elevated status within the organisation; and
• moving from a niche, specialised function to one that is more broadly ‘business as usual’.

This shift is driving the need for external providers offering some or all of the IP strategy and management functions that companies have either managed in-house or not needed at all.

Precedents and precursors

There are many precedent and precursors for the emergence of this new form of IP outsourcing.

Many organisations already outsource aspects of their IP function to external patent attorneys or law firms. The obvious example is patent filing and drafting activities. Small to medium-sized enterprises’ (SMEs) use of patent attorneys to file patents is an outsourcing of IP services. Similarly, the outsourcing of renewals and maintenance activity represents the same basic principle: the SME is utilising a specialist provider to complete functions that economically or strategically makes no sense for it to perform itself.

Patent filing and drafting as IP outsourcing is common among SMEs and less R&D-intensive multinational organisations. Large multinational corporations and more R&D-intensive firms have historically tended to bring patent drafting and filing activities in-house; however, in recent years activity has increasingly been outsourced and the in-house IP manager essentially coordinates filing and maintenance activities. In addition, organisations frequently seek external advice on specific or non-standard issues or questions.

Hence, this third branch of IP outsourcing represents an important extension of the existing situation of outsourcing patent or trademark filing to more fundamental aspects of intellectual property (ie, strategy and portfolio management).

In response to arguments that businesses would never voluntarily choose to outsource a function as critical as IP strategy, we offer two important observations:

• Many organisations regularly engage external consultants to set, refine or review their entire business strategy.
• Many organisations have made a habit of outsourcing what were previously considered ‘critical’ functions to enable them to focus more effectively on the thing they do best. Examples include financial and back-office functions, information technology, even assembly lines – all critical functions that are nevertheless successfully and profitably outsourced.

Emphasis on IP strategy, not IP ownership

Why should we care whether or how intellectual property is outsourced? In the past 40 years the proportion of intangible to tangible assets of S&P500 companies has grown from 20% to 80%. The value of many companies now lies principally in intangible assets, including IP rights. In short, intellectual property is now critical to the performance and longevity of most companies and plays a central role in the innovation race that lies at the heart of much commercial competition.

However, despite this, virtually all studies that have looked for a positive correlation between intellectual property (generally using metrics such as patent ownership) and stock performance have failed to find a decisive link. In short, as many patent-rich companies outperform the indices as underperform the indices. Mere ownership of intellectual property is not enough.

When we examine this conclusion, it begins to make sense. For example, if the number of patents held demonstrated a strongly correlative relationship to stock performance over time, companies with large portfolios should consistently outperform those without. No such correlation exists. In fact, there are many examples of companies with large portfolios which stumble or fail (Nortel, Kodak, Nokia), while others with few intellectual assets have prospered.

So what makes the difference? It has become increasingly clear that IP strategy and management ultimately unlock the value, which in turn drives organisational performance and longevity. The seminal example is Marvel Comics. After it was bankrupted in 1996, a new management team took a completely different approach to its treasure trove of intellectual property and strategically managed it over the next 13 years as a high-yielding, high-value asset. The result: in 2009 Disney acquired Marvel for $4.2 billion. The intellectual property had not changed, but the strategy and management approach had.

The implications for IP-owning organisations are profound. If how the organisation uses intellectual property is what counts, outsourcing this function to external experts whose raison d’être is identifying, managing and leveraging intellectual property makes commercial and strategic sense. This is reinforced by the fact that many organisations lack the kind of deep strategy and management expertise required to unlock IP value. Nor is it cost efficient, strategically aligned or sometimes viable to build such expertise in-house. This is precisely the same logic that drove the outsourcing of information technology, which unlocked major efficiency gains in the 1990s and 2000s. In short, this third branch of IP outsourcing can convert what is often a reactive, defensively focused cost centre into a proactive, strategically important performance driver.

IP strategy, IP management or both?

The IP function includes both IP strategy and IP management. Any organisation must have a clearly defined IP strategy which guides staff to make deliberate decisions around critical macro issues (eg, where R&D resources should be focused) through to micro issues (eg, how different innovations should be protected and where). IP strategy must be intricately linked with the organisation’s business strategy and thus should undergo periodic review. It requires a high level of expertise and experience to set correctly, and is the kind of role carried out by the chief IP officer (CIPO).

IP management, on the other hand, involves the largely administrative process of ensuring that intellectual property is correctly managed and protected by the organisation. As a function, it is largely defined by processes, systems and policies. Examples include ensuring that maintenance fees for patents are paid on time. This is the kind of role carried out by an IP manager.

Thus, the IP function involves ensuring that intellectual property is proactively identified, assessed, protected and exploited, and that the processes for doing this are efficient and easily understood throughout the organisation. In addition, it should have a clear impact on relative business activities such as R&D, marketing and corporate strategy. Carried out correctly, it can dramatically reduce IP costs, ignite innovation, reduce risks, increase opportunities for engagement with suppliers, vendors and partners and generate increased revenue. It can also reduce the probability of being blindsided by disruptive technologies and increase the ability of the organisation to bring in intellectual property from external sources, while whetting the appetite for licensing out.

These two functions conform to the 80:20 rule: strategy takes 20% of the time, but adds 80% of the value; while management takes 80% of the time, but adds 20% of the value. Thus, resourcing such roles can be challenging: a good IP strategist will cost $250,000-plus. A competent legal executive can perform the administrative function and will cost $80,000-plus. Economically, it is unwise to combine these two functions in a single person: the organisation ends up paying either its expensive strategist to do administration or its underqualified executive to set strategy. Some organisations may ask whether they should hire a CIPO or an IP manager. The correct answer is that the organisation should be looking to outsource the aspect of the IP function that is lacking in that organisation – be it strategy, management or both.

Benefits of new form of IP outsourcing

Organisations outsource some or all of their IP functions for a number of reasons.

First, outsourcing allows an organisation to focus on its core business. This is a key argument behind virtually all outsourcing. It reflects the fundamental economic principle that specialisation increases economic efficiency. In an IP context, it allows the organisation to do what it does best while having its intellectual property managed by an organisation that specialises in precisely this area. This enables the organisation to focus its resources.

Second, most external IP strategy providers work as part of a broader professional organisation providing clients with access to multiple viewpoints, skills and experience sets. With well-established providers, this can include global networks and relationships – a huge resource that can be tapped for knowledge and connections. This kind of knowledge ensures that the organisation gets the best IP strategy.

Third, redundancy can be an issue. The IP function develops critical insight and it can be dangerous to have one person managing what is often a highly valuable set of assets. Outsourcing means that if a key employee leaves, critical knowledge does not leave with him or her. Instead, by outsourcing to a professional organisation, a team of individuals and suitable systems are in place to ensure that IP knowledge is easily available, current and clearly articulated to enable immediate and seamless handover.

Fourth, for smaller organisations, outsourcing is considerably cheaper than recruiting a full-time employee, and cheaper still than hiring the strategy and administration skills required to deliver the service effectively. Applying the 20/80 time split between strategy and administration, a full-time strategist will be fully utilised only once the portfolio is of a size to require four administrative staff. Frequently, it makes sense economically to resource in-house only once the IP function is large enough to engage an entire team rather than a single individual. Further, because the IP function involves both strategy and administration, it is almost never cost effective or advisable to combine these two different skillsets in a single person. A good provider can deliver both services in a high-quality, cost-effective way, utilising different staff specialised to each role. Moreover, there are no overhead, holiday or training costs associated with an outsourced engagement – with a full-time staff member, these are typically 15% to 30% of salary. With outsourcing, the organisation can still have a highly professional IP function by utilising a virtual CIPO or IP manager until such time as the function has grown large enough to fill one or more of these roles full time.

Fifth, successfully identifying and recruiting an effective CIPO or IP manager is a difficult, lengthy and expensive process owing to a lack of suitably qualified individuals. In addition, considerable risk is involved in hiring such a specialised person to look after critical assets – what happens if the individual recruited is unsuitable? Not only must the organisation remove the individual (which can be a complex and costly process), but in the meantime he or she will have been exposed to that organisation’s most valuable secrets and information.

Sixth, by managing the delivery of the IP function through a service-level agreement, both flexibility and service can be achieved in a way that is extremely difficult to achieve through a conventional employer-employee relationship. As the organisation’s needs increase or decrease, the provider can increase or decrease the engagement scope and complexity. Similarly, service delivery can be guaranteed through contract and is delivered by an entire organisation with insurance and indemnity cover, rather than a single natural person.

Outsourcing and multinationals

Many of the reasons why an organisation would outsource its IP function are constant, no matter what its size. However, the driver for outsourcing for a multinational corporation may be different and so the outsourcing engagement itself may look somewhat different from engagement with a SME.

An obvious difference is that multinationals can afford to employ a team with both high-level strategy expertise and the administrative function in-house. So given that IP capability is a critical function, why would a multinational outsource it?

Although it could involve a complete replacement of in-house IP capability (this is unlikely), it is more likely to either involve either:

• outsourcing one aspect of the IP function (eg, administration); or
• providing an alternative, independent perspective and the ability to regularly access a source of expert external advice.

The first is relatively obvious and is largely driven by cost considerations and economies of scale: a professional body which manages the intellectual property of hundreds of organisations can typically deliver this at a cost base meaningfully below that of a single organisation. On occasion, the IP strategy aspect of the function could also be outsourced if capability cannot easily be recruited.

The second reason relates more to the particular needs of MNCs. Often there is a significant need for an independent view of key functions. An analogy is the requirement for a company to have external auditors rather than its own accounts department carrying out audit functions. By bringing in external support, an organisation can get the shake-up it needs to optimise IP strategy, having been asked the tough questions which challenge the status quo. Essentially, the external support can act as a ‘white hat hacker’ and stress test any internally developed strategy piece – far better than a competitor being the first to identify weaknesses. In addition, such independent advice can apply in respect of providing a second opinion on advice from other providers, not just the in-house function itself. Independence can also be important when developing an IP strategy, to avoid becoming blinkered against new trends and opportunities that may be counterintuitive or against received wisdom or conventions. This is especially true of organisations where ‘not invented here’ has become a dominant culture.

External support can be valuable all the way up to governance level. In many jurisdictions, boards of directors are personally liable for IP-related issues, including mitigating freedom-to-operate risk. Providing the board with expert advice allows it to make independently informed decisions relating to the fundamentals of the organisation’s strategic direction.

Conclusion

Most of the value of successful organisations now lies in intellectual property. This trend is only likely to accelerate as the global economy continues to focus on technology and innovation as the principal source of competitive advantage. However, ownership of intellectual property in and of itself is not enough – value is unlocked when intellectual property is carefully and diligently managed and leveraged via robust and far-sighted strategy. Historically, however, intellectual property has been seen as a non-core, primarily administrative function within organisations. Outsourcing this function to specialist providers who can deliver experience and knowledge at economies of scale and capability not available to the organisation itself offers a host of economic and strategic benefits. This movement towards IP outsourcing has been anticipated in a number of the previous waves of outsourcing, including information technology. The end result is the ability of organisations of any size to leverage the full value of what is arguably their most valuable asset: intellectual property.

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Paul Adams

Chairman and CEO

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Paul Adams is the Chairman and CEO of EverEdgeIP, a global leader in IP strategy and commercialisation. Before EverEdgeIP, Mr Adams was IP manager for Brunswick New Technologies [NYSE: BC], where he managed the intellectual property for 500 engineers and scientists. Mr Adams also developed The Icehouse Incubator, which Forbes magazine named as one of the top 10 technology incubators in the world. Mr Adams holds degrees in law (honours) and arts (economics and history) from the University of Auckland. He sits on the board of Lewis Holdings Ltd (a NZ$350 million investment vehicle) and the advisory boards to New Zealand’s Health Innovation Hub, Callaghan Innovation (the New Zealand government’s commercialisation vehicle) and the McDiarmid Institute for Advanced Materials and Nanotechnology.

Paul Davies

Head of intellectual property

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Paul Davies holds a degree in civil engineering from the University of Auckland, is a registered patent attorney and was named in the 2014 IAM Strategy 300. Before joining EverEdgeIP, Mr Davies held a number of senior positions with patent attorney and law firms, including Deacons Hong Kong, Baldwins and AJ Park, before moving into IP strategy and portfolio management. Significant experience across a number of aspects of IP strategy and commercialisation allows Mr Davies to help clients to develop their own strategy required to negotiate complex markets based on their IP position. His extensive experience in Asia provides him with a unique ability to strategise across jurisdictions with significantly different approaches to IP law and practice.

Georgina Rae

Strategist

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Georgina Rae is a strategist at EverEdgeIP, coming from a mixed background of life sciences and marketing, and has held positions as a molecular biologist in both government institutes and the biotechnology field. Dr Rae graduated from the University of Auckland with a BSc in biology, a BCom in marketing, a PGDipSci (distinction) in biology, an MSc (first-class honours) in biology and a doctorate in molecular biology. At EverEdgeIP, Dr Rae works with clients to develop IP strategies for their innovations. Her marketing background allows an important emphasis on branding within the IP strategies developed, while time spent in the laboratory facilitates a deeper understanding of the reality of undertaking R&D for her clients.