Between 1985 and 2015, the number of new U.S. patents granted grew more than 300 percent, to almost 300,000. Over the same period in China, annual patent grants grew by an astounding 816,527 percent – from 44 to 359,316.
This growth illustrates a broader transition. Profits and business value have shifted from tangible assets such as equipment and property to the intangible assets that make up intellectual property (IP). Intangible assets come with their own challenges; namely, they can be difficult to recognize, quantify, value and protect, as well as a potentially improper reflection on a company’s balance sheet. Increasingly, this highly valuable yet underprotected asset is also becoming a target of theft and litigation. From industrial espionage to patent wars between companies, IP is increasingly lucrative as companies seek to gain competitive advantage.
“Understanding how to properly value, maximize and insure intangible assets is exponentially heightened in the digital era,” says Lewis Lee, global head and chief executive officer of Intellectual Property Solutions at Aon. “Intangible assets are a board of directors–level issue.”
The fact is, IP represents an enormous source of value for many companies, and companies that focus appropriately on their IP can increase the value of their enterprises and improve investor perceptions. Consider the 2015 merger of two consumer foods companies, in which one company valued its goodwill at $7.1 billion and other intangibles at an additional $8.3 billion.
Realizing IP’s true value, however, requires busting some common myths.
The value of intangible assets – and their share of overall corporate value – has increased dramatically in recent years. In fact, intangible assets now represent nearly 85 percent of the value of the S&P 500, some $21 trillion.
Not understanding a company’s IP can result in an undervaluing of the asset, which can affect anything from IPO valuation to deal value in M&A.
Understanding IP is also vital to protecting it. From 2005 to 2015, the number of patent lawsuits filed annually in the U.S. more than doubled. The average damages amount for a successful patent claim in the U.S. are $6 million, with many much higher. Yet companies have struggled to mitigate this risk, potentially leading to loss of revenue, business disruption, damage to brand and reputation and even bankruptcy. Indeed, a $30 million patent infringement loss led a manufacturer of synthetic grass products to file for bankruptcy protection in 2016.
Aon’s 2019 Global Risk Management Survey underscores the extent to which organizations are failing to adequately understand IP risk. Loss of intellectual property or data fell five spots in this year’s risk ranking compared with 2017.
“The loss of intellectual property or data is an underrated risk, as seen by its surprising drop to number 34,” says Rory Moloney, chief executive officer of Global Risk Consulting at Aon. “This is likely because of the value of intangible assets – as well as the risk associated with its loss – not being fully understood by various groups within an organization, including those within the risk organization.”
Another measure of companies’ failure to adequately protect IP comes from the 2019 Intangible Assets Financial Statement Impact Comparison Report conducted by the Ponemon Institute. The survey found that respondents had insurance coverage for only 16 percent of their potential loss of information assets, such as trade secrets and unpublished patent applications, compared with 60 percent of potential property, plant and equipment assets.
Busting 5 Common Intellectual Property Myths
To capture the full value of their IP – and help protect it appropriately – companies need to bust some widespread misconceptions.
Myth: Intellectual Property Is A Cost Center – And Only Legal’s Concern.
Reality: Securing A Robust Intellectual-Property Strategy Is An Organizational Effort.
IP often gets pigeonholed as patent management, a necessary administrative function and expense customarily handled by general counsel.
“Thinking about IP as a purely legal issue is simply a mistake,” says Brian Hinman, chief commercial officer of Intellectual Property Solutions at Aon. Patent filings are critical, and IP actually represents a tremendous source of value. “A company’s overall value can be increased by focusing on the ‘IP stack’: patents, trademarks, copyrights, trade secrets and know-how,” says Hinman.
According to Hinman, maximizing the value of IP requires organizations to deploy a broad, cross-functional stakeholder group. This bloc should be represented by finance (including the CFO), risk management, strategy planning, legal and any other teams that are responsible for IP – including those who produce it, likely within technology roles across business units.
Myth: More Intellectual Property Is Better.
Reality: The Volume Of Intellectual Property Doesn’t Guarantee Quality Or Value. Context Matters.
“People struggle to qualify their intellectual property, so they depend on quantity,” says Poh Chua, senior managing director and co-head of Intellectual Property Solutions, Asia at Aon. “This leads to the ‘more is better’ myth. But with IP, context is everything. Quantity is important, but only when it’s properly qualified.”
Drawing an analogy to a traditional physical property, Chua compares two companies: one that has 100,000 acres of land to one that has only 100. In looking at the numbers alone, the larger quantity might seem more valuable; however, location and land use are not being considered. The “where” context may render the smaller plot of land more valuable, for example, if it’s located in an urban rather than a rural or undeveloped area. Chua explains that such thinking can also be applied to intellectual property – the amount of IP does not necessarily equate to value. “A single patent can change an industry.”
Subjective self-assessments of IP quality can fall short of providing true understanding. Evaluating IP quality with an objective methodology, likely best performed by a third party, can help companies make better IP decisions. For example, a company that innovates its products without fully understanding the market landscape might miss the mark. In contrast, if the same company were to enlist an objective third party to evaluate the innovation in the context of competition, the company could make a more informed decision about which of the several innovations to invest in most.
Myth: Filing A Patent Is The Only Way To Claim An Idea.
Reality: Other Options Are Available To Document And Protect Companies’ Innovations And Intellectual Property.
Trade secrets have long represented a challenge for companies to quantify, organize and manage.
“Keeping an idea or innovation as a trade secret means there’s no need to disclose publicly how it works, so there’s a lesser chance of copycats, for example, after filing a patent,” says Chua. “But should a competitor independently replicate an idea, without a patent, the originator has no legal basis to stop it.”
One way to solve for this challenge, explains Chua, could be through registration managed by a credible third party and using blockchain technology. In this scenario, an encrypted registry could validate the existence of a company’s trade secrets without needing the company to disclose the secrets’ details. This way, should there be market competition and a need for legal action, the blockchain could verify the trade secret’s originator and its date of registry.
Myth: Intellectual-Property Risk Can’t Be Quantified.
Reality: The Risk Of Loss Can Be More Easily Quantified Once Valued By A Specialist In The Industry.
A comprehensive risk assessment can help quantify the level and potential severity of a company’s IP risk exposures, Hinman advises. It could estimate losses possible from the potential legal costs, disruption of revenue streams and damage to brand.
An assessment can also help evaluate risk level across key IP dangers – such as infringement, employee theft and source code vulnerability – and help companies develop plans to better mitigate those risks. For example, as part of their new IP strategy, a company may opt for IP liability insurance to help cover costs of potential infringement claims. Or, a company may roll out a new process to ensure its IP specialists work closely with product developers throughout project life cycles to ensure work doesn’t infringe competitors’ patents.
Myth: Understanding Intellectual Property Is Only Important For Large Organizations Or Those In Intellectual Property-Heavy Industries Like Technology Or Pharmaceuticals.
Reality: All Organizations, Regardless Of Industry Or Size, Have a Responsibility To Understand Their IP – Though For Different Reasons.
IP maturity is a spectrum. Larger, established companies may have a solid grasp on their IP strategy and valuation but look for guidance with understanding levels of IP risk and developing a solid patent litigation strategy. Start-ups often prioritize product delivery, cost-consciousness and speed to market, so building IP portfolios often takes a back seat, which can be a huge mistake, Hinman warns.
“For start-ups, in particular, investing the time to develop a proactive IP strategy, securing an IP portfolio and conducting IP risk assessments can also help with the liquidity challenge,” Hinman says. “Having that assessment allows start-up leaders to provide a report for potential investors to say, ‘We see these risks – here’s how we will approach them.’ That kind of market-savvy perspective can positively influence funding opportunities.”
Understanding Intellectual Property As A Competitive Differentiator
The roster of the world’s largest companies has transformed – today’s S&P 500 is starkly different from just a decade ago. And a better understanding of IP can help a company transform itself for the better.
“Is it truly your products that will sustain your business?” asks Hinman. “Or can your intellectual property translate to a services business that fundamentally changes what your company is and the value it creates as a company? Foundational IP assessments can help leaders take their organizations boldly into the future.”
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