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7 Things Every CEO Should Know About Their Patents

by Erik Reeves, CTO of Anaqua

Erik ReevesWe are awash in data – beyond our capacity to absorb and integrate intelligently. Even in the most extreme cases where there is a perfect intersection of data, analytics, valuable metrics, and huge incentives to utilize and optimize, we see both surprising catastrophic failures, and stunning opportunites in markets. To give two stark examples, we turn to the market crash of 2008 – caused by a cascading failure in financial markets that devastated our economy and destroyed market capitalization – in 18 months, the Dow lost over 50 percent of its value.

And secondly, looking to baseball, the quintessential analytics dream sport, with a century of meticulous and massive data to use to drive competitive advantage – and it wasn’t until the late 90’s and early 2000’s that the standard metrics and value interpretation were challenged, giving teams that were more innovative and savvy in analytics an important statistical advantage.

Turning to R&D, innovation, and IP data and analytics, we are nowhere near that maturity in terms of depth, resources, or evolution in metrics and analytics – and this should give us all an important reminder that there is “gold in them hills” – we are nowhere near diminishing returns and hubris here is fatal. Those that are creative in utilizing existing data, combining internal and external data analytics, and innovate in ways to improve aligning R&D and IP with business objectives, will find opportunities for competitive advantage.

Despite the fact that estimates suggest intangibles now make up over 80% of the average business value today, many companies fail to measure the value of their IP – and then don’t communicate it to investors. This concrete example from May 2012, when Google acquired Motorola, illustrates the challenge in the communicated value of “intangible assets” (where patents and trademarks reside in the Balance Sheet):

Google Balance Sheet, intangible assets (in millions): End of 2013 $6,066 End of 2012 $7,473 End of 2011 $1,578 Motorola Balance Sheet, intangible assets (in millions): End of 2012 $109 End of 2011 $48 (net of accumulated amortization of $1,114)

On May 22, 2012, Google completed the acquisition of Motorola for a total purchase price of approximately $12.4 billion ($2.9 billion cash, $5.5 billion to patents and developed technology, $2.5 billion to goodwill, $0.7 billion to customer relationships, and $0.8 billion to other net assets acquired).

It is pretty obvious what happened to Google’s balance sheet from the above, although not so clear the implications for Motorola. Does one really believe that Google’s total “intangible assets” were increased by 400% through the acquisition of Motorola? The vast majority of Google’s intangible assets prior to the transaction simply do not appear on their balance sheet at all! Likewise, it doesn’t take a mathematician to see the disconnect between the balance sheet intangible value of Motorola and the change in Google’s balance sheet.

In fact, on standard balance sheets by rule of GAAP (generally accepted accounting principles), IP is not even reflected well in the balance sheet and is largely left off unless it is acquired in a transaction. In other words, internally generated intangible assets have absolutely zero value from a balance sheet perspective. This is in perfect accordance with international standards, so this isn’t really something that the company can do anything about.

However, there is still a responsibility at the Board and CEO level to understand these assets – and communicate them effectively. To maintain a grasp on your company’s IP, here are the top 7 questions that all CEOs should be able to answer:

  1. Are we investing enough in R&D and intellectual property development to compete now and into the future?
    Firms should be investing sufficiently in R&D to grow by developing new products and maximizing ROI on those investments through IP protection. With the pace of innovation increasing every day, senior executives and Boards need to be mindful of potential risks, including catastrophic disruption; as well as emergent opportunities.
  2. Do we understand the value of our IP and how it drives our Profit and Loss Statement (P&L)?
    The management of your IP should be seen as an ongoing discipline that is aligned with, and an integral part of, your business planning and strategy. The closer it is tied to key financial statements and other standard metrics, the better the alignment is likely to be.
  3. Do we have a strong IP strategy to compete globally and can we articulate this to our shareholders and the market-at-large to realize increased value?
    Having an organized IP strategy in place will ensure that there is a streamlined process on identifying, protecting, and managing your IP. Equally importantly is unlocking the latent value for shareholders.
  4. Given that these critical assets are not captured in balance sheet, are investors expected to factor them into stock price or assume they are already accounted for in the P&L?
    Because intellectual assets represent such a significant portion of a company’s worth it is important that a company communicate the importance and value of IP to analysts, shareholders and potential investors. If innovation and IP excellence are not baked into valuation, senior leaders are failing their shareholders.
  5. Are we prepared to deal with the increasingly complex world of IP risk and opportunity and react (and communicate our plan) quickly to changes?
    IP tools and technology evolve constantly and require re-visiting your IP plan and priorities every year. There needs to be a proactive plan in place to monitor and stay on top of a company’s product and IP ecosystem real-time.
  6. How do we value IP when looking at our own acquisition strategy?
    Having a systemic approach and methodology to align IP value and business strategy extends to how a company directs their acquisition strategy.
  7. Does our product roadmap include an IP roadmap and implications for financial projections?
    Just as a product roadmap and pipeline is the lifeblood of any company, the IP “roadmap” associated with these products needs to drive competitive advantage. A bad product won’t sell, but a great product will – and the sustainability and profitability will be driven by the product advantages, including IP protection.

As CTO, Erik Reeves leads Anaqua’s technology strategy and long-term plan for integrated IP software and services platform. He oversees the development of the Anaqua, IdeaPoint, and AcclaimIP innovation platforms and their integration, including infusing data intelligence through all software solutions and services. Prior to joining Anaqua, Erik had over a decade of experience in the IP and Innovation field, and he is a recognized thought leader on Patent Search & Patent Landscaping, IP Ecosystem Modeling and Big Data Strategy.