Caring for the Fruits of the Harvest: Intellectual Asset Management (IAM)

“Knowledge idle in a database is like food in a freezer.

Nothing ever came out in better shape than it went in.”

—Frances Cairncross, author of The Company of the Future

Ask any farmer managing his crops or any CEO making her widgets whether he or she has a system in place to manage inventories and the person will look at you as if you are insane.  Of course, either will respond, “How could we not have systems, processes, and protocols in place to protect, manage, track, and distribute our tangible assets?”  To not have systems in place would be gross mismanagement and a travesty with respect to a manager’s fiduciary obligations to shareholders.  So why then, in a society driven by knowledge, brands, know-how, and intangible assets, do we not have the same disciplines and duties in place regarding assets that we can’t necessarily touch and feel but that are clearly driving the lion’s share of the market value for Apple®, Google®, IBM®, 3M®, Amazon®, Netflix®, and Priceline®?  Why, at a time and place in our evolution when intangible assets are the key premiere drivers of revenue, opportunity, and profits, can leaders of companies not manage them like any other asset? 

Cash is an asset, and we have CFOs, comptrollers, financial analysts, accountants, and clerks on hand to manage it.  People are an asset, and we have chief administrative officers, HR managers, personnel specialists, and administrators to manage them.  But, for the crops of knowledge, brands, systems, protocols, processes, know-how, show-how, channels, relationships, protocols, and best practices, we have no parallel positions on most organizational charts and no parallel systems to properly manage and extract value from these assets.

A few “enlightened” companies may have chief knowledge officers, but these are often glorified IT executives who apply principles of knowledge management (KM) to better manage and organize databases and perhaps gather internal best practices.  Some truly progressive companies have chief innovation officers who are responsible for driving R&D and stimulating a creative culture, but these are often glorified HR executives or engineers who may understand either technology development or human performance and team work but rarely have cross-functional knowledge of both areas and who may be lacking experience in developing harvesting strategies.  We build organizational charts and allocate resources to departments as if we were still doing business in 1975 instead of leaning into the future and building a team and a business model that is ready for 2015 and beyond. 

When I speak at business conferences around the world to companies of all sizes and in all industries and ask them whether they have an intellectual asset management (IAM) system in place, I am typically greeted with blank stares.  When a few feeble hands go up, I then ask whether their IAM systems have been effective and yielded profitable opportunities, and even fewer hands rise.  When I ask whether their organizational chart has been retooled to reflect the transformational shift toward an intangible asset–driven economy, they look at me as if I just arrived from Mars.  And, finally, when I ask them to name the person in the company who serves as the “CHIPPLE” (Chief Intellectual Property Protection and Leveraging Executive), they look at me as if I were from Venus.  I am not aware of any extraterrestrial roots of my parents or grandparents, so I am pretty sure that I am not the one in the room at that point who is clueless and helpless.  How can we as leaders of companies and as fiduciary guardians of the entity’s assets on behalf of our stakeholders continue to completely ignore the management and leveraging of our most important strategic assets?  How long will it take for lawsuits to be filed against the boards and leaders of companies for the “gross under management and under leveraging” of the company’s most important assets before we finally make this a top priority?

The time is now for companies of all sizes and in all industries around the globe to commit time and resources for the deployment of an effective multidisciplinary IAM system to properly cultivate, manage, and harvest intellectual assets.  As stewards, guardians, and fiduciaries of the assets of the company, managers have a basic duty and obligation to maximize the value of these assets, especially in a post-Sarbanes-Oxley regulatory environment.  IAM systems will help drive shareholder value and can be a key component of the due diligence focus of M&A and investment transaction.

What Is Intellectual Asset Management?

Intellectual asset management (IAM) is a system for creating, organizing, prioritizing, and extracting value from a company’s various sets of intellectual property assets.  The intellectual capital and technical know-how of a company are among its most valuable assets, provide its greatest competitive advantages, and are the principal drivers of shareholder value, yet rarely do companies have adequate personnel, resources, and systems in place to properly manage and leverage these assets.  IAM, as a matter of strategy and competitive intelligence gathering, also involves monitoring certain developments in the company's marketplace, such as:

• Gathering intelligence on direct, indirect, and potential competitors
• Monitoring developments abroad
• Keeping one step ahead of a constantly changing landscape (20,000+ new patents issued per month—and that is just in the United States)
• Maintaining license agreements and streams of royalty payments on both an inbound and outbound basis (e.g., royalty audits to ensure against underreporting (outbound) and overpayments (inbound).  Are you getting paid?  Is there anyone you are paying that you shouldn't be paying?  Are performance standards being met?  Are you in relationships with the right parties?  What could be done to strengthen existing relationships or distribution channels?

IAM also involves an understanding of how and where intellectual assets sit in the strategic parameters and food chain of the company.  Three strategic views toward the use of intellectual capital have evolved in the boardroom over the past three decades.

1 - Traditional view.  IP assets enhance the company's competitive advantage and strengthen its ability to defend its competitive position in the marketplace; IP is seen as a barrier to entry and as a shield to protect market share (reactive and passive approach).

2 - Current view.  IP assets should not be used merely for defensive purposes but should also be viewed as an important asset and profit center that is capable of being monetized and generating value through licensing fees and other channels and strategies, provided that time and resources are devoted to uncovering these opportunities— especially dormant IP assets that do not currently serve at the heart of the company's current core competencies or focus (proactive/systemic approach).

3 - Future view. IP assets are the premiere drivers of business strategy within the company and encompass human capital, structural/organizational capital, and customer/relationship capital.  IAM systems need to be built and continuously improved to ensure that IP assets are used to protect and defend the company's strategic position in domestic and global markets and to create new markets, distribution channels, and revenue streams in a capital- efficient manner to maximize shareholder value (core focus/strategic approach).

CEOs and business leaders of companies of all sizes are often guilty of committing a serious strategic sin:  failure to properly protect, mine, and harvest the company’s intellectual property.  This is especially true at many technology-driven and consumer-driven companies.  The inversion of the ratio of tangible to intangible assets as a percentage of total company value has been dramatic.  In 1978, tangible assets (e.g., property, plant, equipment, inventory) made up approximately 80 percent of the value of a typical Standard & Poor’s 500 stock index company.  By 2002, this was reduced to 20 percent of the total value, and the numbers continue to drop, especially in a web-centric, virtual world.  Today, for small- to-mid-size enterprises (SMEs), the ratio of intangible to tangible assets can be as high as 8 or 10 to 1.

The harvesting of intellectual capital is a strategic process that must begin with the taking of an inventory by the company's management team and qualified outside advisers in order to get a comprehensive handle on the scope, breadth, and depth of the company's intangible assets.  In these times of distrust and disappointment by shareholders in the management teams and boards of publicly held companies, corporate leaders have an obligation toward these shareholders to uncover hidden value and make the most of the assets that have been developed with corporate resources.  The leadership of the company will never know whether it has a "Picasso in the basement" unless it both takes the time to inventory what's hiding in the basement and has a qualified intellectual capital inventory team capable of distinguishing between a Picasso and your children's art project.  Once these assets are properly identified, an intellectual asset management system should be developed to ensure open communication and strategic management of these assets.  At that point, the company is ready to engage in the strategic planning process to determine how to convert these assets into profitable revenue streams and new opportunities that will enhance and protect shareholder value. IAM helps growing companies ensure that strategic growth opportunities are recognized, captured, and harvested into new revenue streams and markets. 

Building an Effective IAM System

Over the past few years, a wide range of global solution providers have stepped to the plate in an attempt to automate the IAM process.  These software tools facilitate knowledge management, communication, collaboration, progress reports, resource allocation, management of outside advisers, infringement analysis, IP department operations reports, budgeting, business planning, benchmarking and metrics, reward and recognition programs, research and analytics, training and educational tools, and a wide range of related reports.  In selecting a vendor, develop a Request for Proposal (RFP) that is custom tailored to meet your company’s needs and that complements other systems that you may already have in place.  Interview key stakeholders and future users of these software and systems to determine their real day-to-day needs and ensure that you are not paying for a lot of features that are unnecessarily and will be grossly underutilized.

Some vendors offer basic intellectual asset property management (IAPM) packages, which focus on docket management and facilitate updates and communication between the company and its outside counsel on the status of and deadlines for various initial or renewal filings.  As your portfolio of intellectual property grows, you will want to have this type of system in place at a bare minimum.  But basic docket management software is the minimum baseline that a growing or established company  needs to maintain and is limited to reports on the status of your intangible “inventory” at a given place or time. 

Intellectual capital agrarians should put in place systems that are significantly more dynamic, robust, and proactive to drive shareholder value and uncover new opportunities.  These systems are more likely to facilitate the kinds of cross-functional brainstorming, budgeting, collaboration, project awareness, resource allocations, monetization strategies, invention claim management and evaluation, competitive intelligence tools, licensing transaction overpayment (inbound/outbound), infringement analysis, and mapping that will not only ensure that opportunities are maximized but also help you avoid wasteful duplication of effort or misallocation of resources and reduce the risks of costly litigation.

Andrew J. Sherman is a Partner in the Washington, D.C. office of Jones Day, with over 2,500 attorneys worldwide.  Mr. Sherman is a recognized international authority on the legal and strategic issues affecting small and growing companies.  Mr. Sherman is an Adjunct Professor in the Masters of Business Administration (MBA) program at the University of Maryland and Georgetown University where he has taught courses on business growth, capital formation and entrepreneurship for over twenty (23) years.  Mr. Sherman is the author of twenty-three (23) books on the legal and strategic aspects of business growth and capital formation.  His twenty-third (23^rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your Company’s Intellectual Property, (AMACOM) is due out in the Fall of 2011.  Mr. Sherman can be reached at +1 202 879 3686 or e-mail ajsherman@jonesday.com