Legal Briefing

Assessing the effectiveness of IP strategy

The In-House Lawyer Logo

Technology, Media and Telecoms | 01 February 2011

Every organisation has its share of naysayers. Far from detracting from the business, these individuals can play an integral part in keeping a company on course, realistic and focused on squeezing value from resources. The field of intellectual property (IP) is no stranger to naysayers – IP counsel are often quick to naysay the feasibility of measuring the value of IP in a meaningful manner. Indeed, many assume that a meaningful set of IP legal benchmarks can only be achieved through an exorbitantly expensive and time-intensive exercise. While it’s no doubt true that any company can expend enormous resources attempting to come up with legal benchmarks, IP can be and often is measured meaningfully by companies without huge expenditure. This article briefly summarises various approaches some companies use in creating legal benchmarks to measure IP. Whether a company chooses to engage in the process at the outset is a separate question, but there’s no question that it can be done, and done well and within reasonable constraints, should a company so desire. As a starting place, when we refer to IP, we generally mean patents, trade marks (registered and unregistered), designs, copyright, and trade secrets or confidential information/know-how. As questions from senior management usually stem from costs or issues surrounding patents and innovation, this is the focus of the particular benchmarks discussed in this article.

There are many approaches to measuring IP, ultimately driven by what a company is trying to accomplish and how it maintains its data. Of course, finance and tax departments assess the monetary value of IP on a routine basis. Likewise, companies seeking to determine the impact their patents have had on their market share, for example in high-stakes patent litigation, often retain a consultant to conduct complex statistical models. These measurements have their place. However, how does a legal department, where the strategic and commercial value is of significant import, assess its legal spend on IP? How does it measure how effective its legal spend on IP is? While there’s no perfect approach, one that might be feasible across a wide spectrum is to assess the value of IP by selecting benchmarks against which future (or current) performance may be compared.

Framing the task (ie what you are trying to measure) specifically enough such that you are not engaging in a project that becomes a black hole, given the scope and size of your IP portfolio, is the first step. In part, the task turns on available data. Critical to the success of any attempt to measure IP value is to assess value using data/metrics that are either already available or relatively straightforward to ascertain and compile. As most companies’ legal departments are already short staffed and stretched to capacity, engaging in an exercise of measuring value that requires as a prerequisite an entirely new set of data parameters that are laborious to compile is impractical and counterproductive.

To have a set of meaningful benchmarks you must have a baseline measurement or context, irrespective of how perfect (or imperfect for that matter) the baseline measurement is. That is, you create an objective measurement from relative or subjective data. For example, the ‘objective’ measurement may be the trend over a particular period of time; the contrasts between or among different product lines or geographical regions (or both); and measurements against a competitors’ corresponding data sets. In so doing, how perfect the original measurement is becomes less important – what is more important is consistency in using the same data set such that the trend or contrast being measured is reasonably accurate. This then provides decision makers with some information – not perfect and not exhaustively complete information – but information that can form a reasonable snapshot of the effectiveness of the company’s IP strategy. This can then be used to inform decision makers as to whether a company’s IP strategy is aligned with the company’s values and long-term objectives.

While no one measurement is perfect, if you are seeking data on the effectiveness of your IP strategy with the goal of creating a benchmark for measuring future performance (and the success of the company’s IP program), some combination of these metrics might be useful. Some companies measure their patent portfolios against internal goals as simple as the percentage increase in the number of patent applications filed in year two over year one, or number of patent applications filed compared to research and development investment. Others use external indices, such as correlations against competitors. In that simple internal measurements can be misleading (eg a greater quantity of patent applications is not in itself better value than fewer applications of greater impact in the marketplace), and external indices can be limited by what information is publicly available, the most meaningful snapshot of a company’s IP is derived from some combination of internal and external data.

COMPARISONS TO COMPETITORS

A great deal of patent information is, in fact, publicly available and patents are classified according to categories of technology. These are easily searchable in available databases. Moreover, various analytical tools are available that companies use to plot images of patent landscapes against specified parameters. Contrasting your portfolio with your competitors’ patents, by classification (possibly with the addition of keywords), filing date, issue date, and geography might be useful. Similarly, creating a snapshot of the lifespan of your current portfolio and contrasting this with your competitors’ portfolios might also be useful. The classification of your company’s patents could also be likely to also correlate against research and development or IP spending by business group or product line, depending on your internal accounting structures. Notwithstanding the birds-eye view and certain limitations with respect to the period of time during which patent applications are confidential, these correlations can provide one reasonably useful set of metrics.

PRODUCTS SUPPORTED BY PATENTS

Another useful correlation might be looking at the extent to which newly introduced products are supported by recent product patent applications or, more broadly, the extent to which inventions embodied in your company’s patents are found in current products. While it is conceivable that certain patents may not be readily identifiable as tied to a particular product line, in many cases products will be marked with patent numbers, providing a line of demarcation to assist in this task. Alternatively, technologies could be correlated to the divisions or business units representing product lines, based on identification of the employee inventor on the patent applications. In that patent law requires accurate identification of the inventor on the application, this information also provides a useful set of metrics. Essentially, the idea is to tie the technologies in the patents and applications against the products they support. This information could likewise be correlated against research and development investment and sales revenues. Notably, however, the value of certain patents may relate to future product plans or as part of a risk management strategy (relating more to the business of other parties). Though these patents are not tied to any particular product, they might nonetheless have significant value – which is just one reason why no one metric should be used per se.

MEASURING THE VALUE OF INVENTIONS

All patents are not created equal. Moreover, some research suggests that as many as 50% of litigated patents in the US are ultimately deemed invalid (not that surprising given the millions of dollars sometimes expended in patent litigation and the relatively few cases that make it to final adjudication). There are various metrics that can be quantified here, though it necessarily involves some subjectivity. The goal is to measure the magnitude of the innovation embodied in the patent, namely the degree to which the invention will change markets and the difficulty of design-around alternatives. Some advocate looking at criteria such as how frequently the patents are cited by other patents; the breadth of the patent classes identified in a business unit’s portfolio; or some combination thereof. Combining the breadth and prior art citations of patents with interviews of key technical people within the company as to their opinions might also be helpful. However, this can be more subjective and arbitrary (and misleading) than some of the other approaches.

INVENTOR/ORGANISATIONAL IP METRICS

As discussed above, patent law requires accurate identification of individual inventors. Accordingly, it is possible for a company to track the number of key employee inventors (‘key’ being defined by x number of applications/patents) in various business units, across geographical regions. Likewise this may be correlated against research and development investment, and IP or other spending, in corresponding categories.

EFFECTIVENESS OF INTERNAL PROCESSES TO CAPTURE IP

Before inventions may be protected (via a patent) or exploited in the marketplace, they must be identified. Accordingly, some companies attempt to measure their effectiveness in identifying and capturing inventions rather than in filing patent applications. The reasons for this are straightforward. There may well be a strategic (and financial) rationale for filing patent applications in various countries, including the country’s laws, competitors’ positions, enforcement opportunities and budget. What might be even more important, however, is that the company’s decision makers – often a patent committee – have the opportunity to consider whether to file for patents in the first place, not necessarily whether, and how many applications, the company ultimately decides to file. In this context, what is important is that the company identifies and has an opportunity to assess an invention. This may in turn highlight resource allocation issues within a company – again by looking at differences between and among product lines, geographical regions, and research and development facilities.

RELIEF FROM ROYALTIES

Measurements involving relief from royalties essentially attempt to track the cost of developing technologies internally versus the cost of purchasing or licensing them in available markets. This presupposes, however, that the technologies are available for purchase or license in the marketplace and that the company places no premium on internal innovation.

The above are only some of the metrics used to benchmark IP. There are many variations, including, for example, risk management (litigation oriented) metrics, profit generation models, the market price of a portfolio (measured by what others would be prepared to pay for it, but disregarding worth to the company that owns it); correlations of patent filings to overall budget on a particular project, patent spend as a proportion of overall research and development budget (published by some industry groups), depending on several factors.

Ultimately, every organisation is different. How your particular company might choose to measure the effectiveness of its IP spend can be delineated as you frame your objectives and look at available data, time and budget constraints. What’s important is that it can be done, and done well, with a bit of perseverance and relatively little expenditure, and the benefits in so doing can be substantial – resources can be reallocated as appropriate, research and development facilities needing additional support or education can be identified, employee inventor incentives can be reviewed, and possible revenue streams from underutilised IP explored.