How does traditional “Intellectual Property” fit into the modern discussion surrounding the value and practicality of “Intangible Assets,” “Knowledge Assets,” or what has come to be known as “Intellectual Capital?”
During the early 1990s, with the emergence of corporate growth through mergers and acquisitions, the term “Intangible Assets” gained currency to refer to all the “non-physical assets” within an organization, such as its Brand or its Intellectual Property (IP).
This distinction between physical and “Intangible Assets” allowed Brands and IP to be recognized as valuable despite their intangibility, and to receive both dollar valuations in business negotiations and new strategic significance in corporate strategy. Just as physical assets, such as plant, property, and equipment, possess both dollar value and strategic meaning, so the patents, trademarks and copyrights of Intellectual Property possess specifiable value and strategic opportunity.
Actionable Assets
Often the biggest assets an organization holds are its less tangible Intellectual Capital assets. During 2000, the market-to-book ratios of Fortune 500 companies increased to 6.3:1, suggesting that for every $1.00 of physical assets on the balance sheet, the market recognized $6.30 worth of other Intangible Assets. On average, in successful organizations Brands, Intellectual Property, and other Intangible Assets are two to three times the value of physical assets.
While many organizations have become aware of the tremendous dollar value and strategic opportunity resident within their Brands in the form of Brand Equity and Brand Awareness, few enterprises realize or utilize the wealth located within their Intellectual Property holdings per se.
While Intellectual Property is now valued and assigned a specific dollar value, many otherwise savvy corporate executives who know well how to leverage traditional physical assets for marketplace gain, still find themselves unable to grasp how to put their Intellectual Capital Assets to work, not the least of which is their Intellectual Property Portfolios. Such holdings, consisting of patents, trademarks, copyrights, licenses, and trade secrets, are still frequently overlooked in daily practice as sources of net worth, monetary value, financial gain, and as important strategic tools vis-à-vis competitive advantage.
Leveraging Intellectual Property Assets
Intellectual Property, while possessing value in and of itself, can also be leveraged to provide improved financial performance and enhanced competitiveness. Organizations that learn how to manage their Intellectual Property with strategic vision discover new sources of income and competitive advantage in the marketplace.
During the decade from 1990 to 1999, IBM leveraged its patent portfolio through licensing activities, increasing its annual royalty income by an astounding 3,300%, from $30 million in 1990 to nearly $1 billion at the end of 1999!
Additionally, because such income is free of manufacturing expense or significant operating costs, the majority of IBM’s $1 billion per year is free cash flow which falls straight to the bottom line as profit.
To match such a level of net profitability, IBM would have to have sold an additional $20 billion worth of its manufactured products per year. In other words, the company would have had to have grown its worldwide business by 25% – which would have been a rather Herculean and rather unlikely task.
How could an enterprise leverage its patents so dramatically? Through the simple realization that patents are assets, and that just like physical assets, it is the responsibility of management to exploit the Intellectual Asset base of the organization for monetary and strategic gain.
How can this legally protectable Intellectual Capital, known as Intellectual Property, be leveraged? Here are a few of many ways:
- Map patents, and build patent walls (called “clustering”) around successful products, services, and methods to prevent encroachment and ensure competitive advantage.
- Position patents to potential licensees to tap the earnings potential of Intellectual Property Assets and create royalty streams.
- Engage in cross-licensing to obtain income from under-utilized holdings, and to gain needed Intellectual Property in return.
- Obtain patents around a dangerous competitor’s holdings to prevent its further market access (called “bracketing”).
Simply put, protect that which is most vital and adds the greatest value to your enterprise, and then, as with any other business asset, turn around and require these Intellectual Property Assets to generate business-building returns.
The Challenge Today
The new challenge today before our CEOs and executives is to realize that patents, trademarks, and copyrights are no longer merely legal matters. Today, they are the assets of enhanced corporate net worth, and the stuff of strategic thinking and new competitive advantage.
Learning to exploit Intellectual Property Assets for strategic and financial gain is essential in today’s knowledge-driven enterprises. Those who turn this ability into a core competency and a competitive advantage are likely to experience the greatest success.
Copyright © 2002 • KLM, Inc. • All Rights Reserved
