IP: Shifting from Legal Rights to Strategic Business Assets
Intellectual property (IP) is a valuable intangible asset that gives companies a competitive advantage, serves as a revenue source, and drives future growth. And yet, IP is viewed only in terms of legal rights and is often considered a cost rather than a strategic business asset.
Organizations should strive to extract value from their IP assets through tangible benefits, such as revenue, cost savings, and licensing. They should also measure the value of their intellectual assets to help in their decision-making.
Recognizing the Value of Intellectual Property Assets
IP assets generate direct and indirect economic value for companies. Direct value includes revenue and cost savings directly attributed to intellectual property. Indirect value includes a higher market share or source of future growth, which is harder to measure.
There are direct and immediate financial benefits derived from intellectual assets, such as:
- Revenue from sales and licensing. IP assets can produce direct revenue through their sale or recurring royalties from a licensing contract.
- Revenue from uncollected royalties. Companies can extract more value by auditing royalty payments from their licensees to ensure they collect the correct amount indicated in their licensing agreements.
- Cost savings from donations. Businesses can donate unused intellectual assets to research centers and universities, leading to tax benefits.
The value of intellectual property is not only captured in the market’s price for its sale, licensing, or donation. A more long-term, strategic view of the value of IP is its indirect benefits to organizations.
- Stronger competitive advantage. IP protects organizations from competitors and copycats, increasing revenues and market share. Patents, copyrights, and trademarks allow companies to gain market share, charge a higher premium, and increase brand loyalty.
- Source of future growth. New inventions, innovations, and acquisitions can provide companies with a pipeline of future products to drive their expansion into new markets or strengthen their market position.
- Higher return on R&D investments. Companies pour money into research and development to drive innovation. However, there’s a substantial cost to R&D, which companies can justify by commercializing and protecting intellectual assets.
Understanding ROI From an IP Perspective
Knowing that IP assets have value, organizations should measure that value. Just tracking the number of patents and other intellectual assets doesn’t provide helpful insight. As with all assets and investments, the most common metric is return on investment (ROI). ROI is simply the benefit (return) of a particular asset relative to its cost (investment). The formula is as follows:
Another way of looking at it is:
For example, suppose the benefits or value of IP assets are estimated to be $100 million, and the cost of creating, maintaining, and protecting these assets is $20 million. In that case, the ROI computes as follows:
- ROI = ($100 million – $20 million) / $20 million
- ROI = 4 or 400%
This means every dollar investment in your IP assets returns four times in value. Another way of expressing this is that the ROI of all your IP assets is 400%.
ROI is easy to calculate and understand and provides a standard way of comparing investments, whether among IP assets or across the other assets or investments of the business.
From an IP perspective, the two components of ROI are as follows:
Benefits of IP Assets
- Direct benefits, such as revenue from the sale, licensing, or donation of IP assets
- Indirect benefits, including estimated incremental revenue and estimated future revenue.
Cost of IP Assets
- Costs of developing IP assets, such as R&D investments
- Costs of acquiring IP assets from another company
- Filing fees for the initial application
- Fees for renewals and maintenance
- Legal fees for prosecuting IP violators
- Overhead costs
- Translation costs of patent filing, prosecution, multilingual litigation, and global e-discovery.
Organizations can improve the ROI of their intellectual assets by maximizing their commercial use. That could include launching new products, expanding into markets, and licensing or selling IP assets.
Another way of boosting ROI is cutting down the related costs. By reviewing and managing their IP portfolio, companies can decide to sell, donate, or abandon particular IP assets that are not producing value. That lowers the cost of maintaining trademarks, patents, and copyrights.
The costs of patent translation and multilingual litigation for global brands operating in multiple territories can be managed better by working with a language service provider (LSP) that specializes in patent filing, prosecution, multilingual litigation, and global e-discovery.
Applying ROI to IP Decisions
ROI enables companies to evaluate historical and prospective decisions. Some ways they can use ROI in their IP decisions include:
- Evaluating how much IP protection is needed for a product or intellectual asset. The benefit of incremental revenue, for example, may not be enough to justify the costs of securing and maintaining patent protection.
- Determining if IP protection is needed in the first place. Companies can decide if an IP asset is worth protecting by comparing its ROI to other business assets.
- Assessing where to allocate resources. Companies can apply ROI in deciding if they should file for or maintain IP protection or invest the money in additional R&D or a higher marketing budget.
- Deciding on maintaining IP protection. Patents and copyrights need to be renewed, and ROI can be used as a basis for deciding to maintain renewal payments.
- Purchasing, selling, and licensing IP assets. ROI requires companies to estimate the valuation of intellectual assets. This helps determine the price for buying or selling stand-alone IP assets, negotiating licensing contracts, and doing M&A deals.
Challenges in Calculating ROI of IP Assets
While ROI is a popular and practical measure of value, determining an exact amount is impossible. What is challenging is estimating the value of the benefits.
Direct value, such as royalty revenues and sales of IP assets, is straightforward. However, indirect value, such as higher market share and competitive advantage, is harder to measure.
For example, if a company launches a new product, competitors can later come in and sell something similar, thus reducing that company’s market share and revenue. However, if that same company protects its new product through a patent or copyright, it can maintain or increase both its market share and revenue.
That incremental revenue derived from IP represents the benefit or return numerator in the ROI formula. The issue, of course, is that this is based on assumptions and estimates.
Companies value IP assets using three main methods: income, market, and cost method.
- The income method estimates the value of IP assets based on the amount of economic income expected to be generated, adjusted to its present-day value.
- The market method compares the price paid for transferring rights to a similar IP asset under similar circumstances.
- The cost method determines the value of an IP asset by calculating the cost of a similar or the same IP asset.
Still, despite the inherent limitations of applying ROI on IP assets, it’s better to have an estimated value rather than none at all. It helps companies make strategic decisions and communicate their intellectual assets’ value proposition.
Work With Park IP
Global IP requires translations for filing patents in multiple languages. Park IP Translations provides expert language and translation solutions for global IP services and corporate matters, enabling our clients to overcome foreign language barriers in a complex, fast-paced global marketplace. We are part of Welocalize with over 2,100 team members across offices in North America, Europe, and Asia.
Contact us to learn more.