You Paid WHAT for that Patent?! or How the Choice of Patent Law Services at Many Companies is Like the Vice Presidential Wardrobe Selection Process

The recent hullabaloo regarding Sarah Palin's "gold plated" wardrobe from Saks and Neiman Marcus got me thinking about how many companies select patent law firms. This may seem like a non-sequitur, but bear with me. . .

Those responsible for dressing Gov. Palin apparently believed that the large expenditures at Saks and Neiman Marcus automatically translated into value for the Republican ticket by allowing her to be viewed as more "Vice Presidential" than she would otherwise been considered. Notwithstanding the high cost of her new wardrobe, as reported in the New York Times, her overall "look" remains the same as when she campaigned for and served as Governor of Alaska: business-appropriate jackets, feminine skirts and high heels. The response to this wardrobe makeover by a major fashion commentator: "Honey, I could have dressed you for a lot less than that." From this comment, as well as the continuing backlash about the cost, it appears that the expense of Gov. Palin's wardrobe does not directly correlate with the value provided to the McCain-Palin presidential ticket.

Not dissimilarly, when I review patent portfolios for clients for valuation and strategy analysis, I often think to myself "you paid WHAT for this patent?!" All too often, otherwise smart business professionals effectively engage in "magical thinking" by assuming that the act of throwing money at a high end patent firm will translate into creating business value. Of course, these same professionals would not believe that the mere act of spending of money will result in value creation in other areas of their business. So why do they do this in the patent realm?

I believe that the information costs associated with vetting and selecting patent legal services make it difficult for busy business professionals to make informed decisions in their company's patent matters. Without legal training or substantive business experience in patent matters, the vast majority of business managers likely do not believe themselves to be capable of directing strategic decisions about their company's patent portfolio. They therefore cannot rationally make the decision to identify a low cost, but otherwise excellent, patent law firm to work on their patent matters. For lack of any other means by which to select counsel, they assume that company value will be increased if they hire the patent law firm equivalent of Saks and Neiman Marcus, even when they could have obtained the same patent "look" by hiring a much less expensive law firm.

Fortunately, there is a solution to the patent law firm information cost problem. The emerging speciality of intellectual property ("IP") business strategists can provide business professionals with the information necessary to make educated and more cost appropriate selection of patent legal counsel. An IP business strategist can effectively operate as a business professional's "personal shopper" in selecting patent counsel and in assisting in managing patent legal expenses. In this role, the business IP strategist can obtain the right patent "look" for a company by knowing where to shop for legal services.

This is not to say that the business IP strategist would never select the Saks or Neiman Marcus equivalent of a patent law firm. Situations certainly exist where the cost of such a patent firm would be justified, such as in a so-called "bet the company" invention or litigation. However, as a "personal shopper" for patents, an IP business strategist can allow a business professional to make an informed decision about the appropriateness of such higher costs.

Moreover, the IP business strategist also understands the profit margins associated with patent law firms and, as such, will be better able to negotiate a discount with the law firm. That is, the patent "personal shopper" can help a business professional to obtain Saks and Neiman Marcus quality at a "sale price." And, who doesn't love to get a high quality product at a discount?

A "personal shopper" for patents will not necessarily result in reduction of a company's costs, however, I can virtually guarantee that the quality and overall value of the patent portfolio will increase. Also, it is highly likely that the cost savings enabled by a company's engagement of an IP business strategist will cover the cost of hiring this specialist. As more companies become aware that legal cost does not necessarily equate with patent value, the more IP business strategists will be seen as a useful way to improve the way one obtains patent legal services.

Taking a Disciplined Approach to Protecting Innovation Investment Allows You to Reduce Legal Spends While Still Obtaining Necessary Patent Rights

This week, I am intrigued by what appears to be a recent convergence of reporting and blogging about the state of innovation in the US. There is an obvious concern by those who keep track of such matters that, in the current economic climate, government and business will "take a hatchet" to R & D and innovation budgets in an attempt to reduce overall costs. Such cutting is, of course, a rational short term solution to address today's problems. Government and corporate leaders taking the long view will nonetheless understand that, when it comes to R & D and innovation spending, it is much better to apply the proverbial "scapel" to one's budget.

Moreover, as discussed by Tom Donahue (President and Chairman of the US Chamber of Commerce) recently on The Huffington Post (h/t Front End of Innovation), intellectual property protection is a critical component of successful innovation efforts. No organization wants to give its competitors, whether another company or country, free R & D--but, that is exactly what happens when an innovative organization fails to include patent protection a critical component in its innovation strategy. It is therefore mandatory that an organization that chooses to "bite the bullet" and invest in innovation during today's challenging business conditions also develop a strategy to obtain intellectual property protection for those innovations.

Fortunately, protection of innovations does not necessarily mean that an organization must increase patent legal spends. An organization can actually reduce the amount spent on patent protection by adopting a disciplined and strategic approach. When operating in this way, all decisions regarding patent protection are made only when the legal spend supports the recognized objective served by the associated innovation investment.

Successful implementation of such a plan necessarily requires that business issues drive the go/no go decisions regarding patent protection. Decision rights for patent procurement must therefore become either singly or jointly the responsibility of those corporate managers who are responsible for selecting and supporting the organization's innovation investment.

Business managers who obtain responsibility for ensuring return on innovation investment can act to reduce patent spends by adopting a disciplined approach to patent protection. Each organization will view this disciplined approach in relation to its unique characteristics. However, the common thread to this approach is that the successful organization will adopt a concrete and reproducible framework for decision-making regarding patent protection, and will hold participants accountable for following the process.

As one example of this disciplined process, the organization can decide that patents will not be obtained unless the NPV of an innovation opportunity meets a pre-determined threshold level. Why spend $30 K to obtain a patent for an innovation that has a useful life of only a few years and a total NPV of $3 MM? The patent might not even issue before the innovation runs its course in the market and, as such, the patent protection would be fairly meaningless anyway. This disciplined approach to patenting would dictate that, regardless of how "cool" the innovation is, the organization will obtain a patent only when the cost of patent protection does not reach a pre-determined threshold of NPV for that product or technology.

A further example of this disciplined approach is for the organization to decide that patent protection need not be ideal in order to adequately protect the business. All too often, organizations invest heavily in patent protection in an attempt to fully protect the upside opportunity of a new product or technology. When the project fails, the organization is left with "gold plated" patent protection for a worthless product or technology. The disciplined approach to patenting can mandate that the organization obtains patent rights that are adequate, but are not so broad as to fully protect the upside opportunity associated with the innovation. The risk to such an approach is that if the innovation is a runaway success, the patent rights may not be broad enough to fully exclude competition. Few product or technology innovations are truly runaway hits, however, so the organization that decided that not all patents must be gold-plated would probably come out significantly ahead in patent legal spends.

These examples are just two of many other ways that exist to permit innovative companies to obtain effective patent protection while at the same time reducing patent legal spends. The key to effectively doing so is to let the business process drive the strategic decision to obtain patent protection. This is undoubtedly a new role for many business leaders, but a critical one in today's economic climate.

CEO's and Corporate Managers: Develop an Engaged Knowledge of Your Company's Intellectual Assets to Stop Leaving Corporate Asset Value on the Table

More than 70 % of corporate value today lies in the form of intangible assets, much of which are in the form of patents, copyrights and trademarks. Notwithstanding this fact, many otherwise sophisticated CEO's and corporate managers essentially leave a significant portion of firm value on the table by failing to develop and execute on a business strategy directed to capturing and maximizing this class of assets.

Of course, few organizations would admit that management fails to fully realize the asset that forms the bulk of today's corporate value. Many managers also may not believe they have the requisite knowlede to determine whether their company's intellectual assets are being properly exploited. Fortunately, it can be fairly easy to discern whether a company's management expends the effort necessary to capture and maximize its intellectual assets. Put simply, if an organization's top business leadership does not possess an engaged knowledge of their company's short and long term intellectual property strategy, one can directly infer that the company is leaving significant intellectual asset value on the table.

What do I mean by "engaged knowledge" of a company's intellectual property? The following quiz should shed light on this critical aspect of strategic business management today.

Assume that as the CEO of a Fortune 1000 company, you are called upon to participate in an interview with a business magazine reporter. The article will be widely read by the investment community for insights as to whether your company is a good long term invesment. The reporter includes your company's intellectual property strategy as a list of topics about which she may inquire. To prepare for these questions regarding your company's intellectual property do you:

• A. Call your intellectual property counsel to give you an overview of the status of your company's intellectual property; or
• B. Nothing. As CEO it is your responsibility to formulate and oversee your company's intellectual property operations at a strategic level. You are therefore capable of and comfortable with discussing your company's intellectual property strategy in the interview.

If you selected choice B, you likely already possess engaged knowledge of your company's intellectual assets. If you selected choice A, your company may have room for improvement to more competently realize its intellectual assets. Moreover, to successfully do so, you need to make changes to the way you interact with your company's intellectual property.

Admittedly, the subject of intellectual property can be rather arcane and difficult for a non-specialist to embrace with earnest. This no doubt results in many corporate managers resisting development of engaged knowledge of their company's intellectual assets. However, failure to develop engagement with their company's intellectual property strategy is self-defeating: continued resistance will result in corporate value left on the table and the company falling further behind in realizing its intellectual asset.

Fortunately, it is not as hard as it may at first seem to develop engaged knowledge of your company's intellectual assets. Just as a business professional need not become an expert in environmental science and policy to participate in his company's sustainability strategy, one does not need to become a legal expert to develop engaged knowledge of their intellectual property strategy. For example, engaged knowledge does not require you to be able to recite with specificity the number of patents pending and what products or technology are covered by your company's patents. Such tactical knowledge properly rests with your organization's intellectual property specialists. Instead, engaged knowledge of your company's intellectual assets requires you to have a strategic understanding of where your company stands today with respect to its intellectual property, as well as the strategic efforts your organization plans to undertake the intellectual property realm.

When you develop such engaged knowledge of your organization's intellectual assets your company will improve the probability that your short and long term business strategies will pay off and your company's financial objectives will be achieved. In short, you will more likely capture your company's intellectual asset value and stop leaving this money on the table.

The First Step to Generating Revenue from "Patent Monetization" is Understanding What the Term Means

Smart corporate leaders continually seek new methods to capture firm asset value and improve cash flow. And, with estimates of more than 70 % of corporate value being in the form of intangible assets, it is not surprising that many organization are searching for ways to generate revenue from this all-to-often untapped asset class. IP monetization has therefore become an increasing focus of corporate managers and even seems to be an emerging "business model du jour" for innovative corporate managers. Moreover, since patents comprise the most "tangible" form of intangible assets at most companies, many corporate leaders view patent monetization as "low hanging fruit" in the search for additional methods to generate cash income.

Indisputably, there is much money to be made from patent monetization. However, in counseling business professionals as an IP Business Strategist (more info here: The Hutter Group), I frequently find that many otherwise sophisticated high-level corporate managers do not possess a fundamental understanding of what the term "patent monetization" really means. That is, they do appreciate that patent monetization can operate as a significant source of firm asset generation. However, they do not also recognize that there are 2 essential models of patent monetization, each of which lead to markedly different results and require vastly different corporate commitment and infrastructure development for successful execution.

These 2 models of patent monetization are:

1. Sale of Non-Core Patent Assets Model: generation of short term revenue gains through the periodic licensing or sale of patent assets that no longer support core business objectives. These patents likely supported core business when the decision was made to pursue patent rights, but are no longer relevant.; and
2. Patent Creation Model: ongoing revenue generation resulting from invention development and protection in the form of patents, followed by licensing or sale. These patent assets likely emanated from inventive activity that did not support core business functions.

A common thread between the 2 models is the need for an organization to develop a patent valuation and licensing infrastructure because each relies on IP transactional expertise for successful revenue generation to occur. The similarities essentially end there. Indeed, successful infrastructure creation is necessary for the Patent Creation Model to achieve success. In short, the Patent Creation Model is not an option for organizations that do not have corporate management who can stomach years-long investment prior to seeing the first influx of cash from their monetization program.

Specifically, the Patent Creation Model requires a substantially more resource commitment to achieve successful revenue generation. As a foundational matter, the organization must develop internal patent expertise that will require bulking-up of internal patent legal expertise, often at high year-over-year headcount cost. Business management will also need to obtain training in patents and patent strategy development because execution on asset generation strategies falls within the rubric of business, regardless of whether patents comprise the revenue source. Execution of the Patent Creation Model also requires training and commitment of the entire organization to develop an IP culture that is focused on value creation-directed invention. Lastly, even assuming flawless execution on all of the elements necessary in the Patent Creation Model, due to the time needed to obtain issuance of a patent, it will likely take many years before success is achieved.

Neither patent monetization model will result in an improvement in corporate cash flow overnight. As such, prior to officially embarking on a patent monetization program, corporate leaders must understand the distinctions between these two models and they must be willing and able to commit the corporate resources and infrastructure development necessary to successfully execute on their plans. Patent monetization is not easy money; rather, it is smart money for an organization that understands and can execute on the model that it selects.