R&D is woven into the fabric of our economy, yet it receives very little attention from business magazines, let alone the mainstream press. It might seem like an altogether forgotten part of the American industrial machine, but in 2013, R&D expenditures in the U.S. amounted to a staggering $473 billion – almost 3 percent of the country’s total GDP.
On one hand, the upward drift in R&D as a percentage of GDP reflects an emphasis on knowledge expansion and innovation. On the other hand, in times of recession, some companies hold the line on R&D costs or even reduce their spending. This dichotomy may reflect the challenge executives face in allocating scarce resources in difficult times, especially for an activity where immediate financial benefits are difficult to measure.
Still, with companies committing enormous resources – and time – to developing valuable business processes and commercial goods, it seems natural that the same companies would seek to maximize their investments beyond conventional sales channels. Not so. The truth is that many companies simply don’t see the market opportunities their intellectual property (IP) assets possess and, as such, fail to leverage those assets to create new profit centers or innovative revenue streams.
Generally speaking, IP is developed for a particular use in a specific context or industry. As a result, those who control the assets probably haven’t assessed the true value of exploiting what they own in alternative applications. It doesn’t matter if a company’s IP resources are protected via conventional mechanisms – patents, trademarks, copyrights, etc. – or are closely guarded formulas or trade secrets.
Why You Need a Comprehensive IP Analysis
The important question is: How can a company exploit its IP holdings in new and creative ways?
Short of developing new products, entering additional markets or expanding internationally, there are many ways in which companies can successfully exploit their IP assets.
The first step is to conduct an exhaustive analysis of all its IP assets. In fact, the process of identifying existing, even potential, IP assets is an essential first step in devising an effective strategy for making the best use of those assets. It is extremely important that a company knows exactly what it owns, whether it be for licensing purposes, sale, franchising and transfer – or for its own use.
Equally important, a company should ensure that it has all its IP validation and documents in hand, so should the need ever arise, it can convincingly establish and defend its ownership rights and claims, whether that is bestowed through employee agreements, consultant contracts, joint development and research arrangements, and so forth.
Once these steps have been taken, a company can then consider the best way to leverage its IP assets, which could include these opportunities:
- Licensing software or technology, either exclusively or for general use;
- Transferring IP assets via cooperatives, consortiums or other confederations;
- Entering into joint ventures, strategic partnerships or alliances with other companies;
- Selling new technology or software outright;
- Creating franchises;
- Cobranding and brand-extension licensing.
How to Leverage Your IP Assets
Technology and brand licensing: Technology and brand licensing are popular and well-established ways for companies to leverage their IP assets. In essence, licensing is simply a contract that transfers rights of use to a third party. It is not a transfer of ownership. Licensing may seem like an easy option to leverage existing IP, but even if the third party is reputable and seems dependable, the licensee should carefully monitor the agreement all the same.
Still, licensing has a number of advantages. First, and most obviously, it generates licensing fees and ensures continuing royalty income. But it’s also a useful way to spread the cost and risks associated with the development and distribution of a product. Plus, it’s a very effective way of gaining market penetration quickly – and with minimum outlay. In addition, it can be used to assess the viability of novel applications for new or existing technology, which in turn allows a company to redirect its capital more effectively.
However, there are some disadvantages when opting for the licensing route. The most immediate danger is that a licensee might in some way damage – perhaps even destroy – the reputation of the licensing company. One untoward act or incident and years of work building the status of a company can be wiped out overnight. That’s why the licensing company must do due diligence when evaluating possible licensees – and have the means to impose its quality control standards and specifications. Of course, all of this adds to a company’s administrative burden, which can be costly and time-consuming.
Joint ventures, strategic partnerships, alliances, cross-licensing and cobranding agreements: Entering into joint ventures, strategic partnerships, alliances, cross-licensing and cobranding agreements with other companies are all viable growth strategies that a company might consider. Of course, regardless of the number of companies participating in a partnership arrangement, they must all agree on the specific purpose of the alliance and share common business objectives. These relationships offer a number of advantages. For instance, a company can shift its development costs to one or more partners, as long as it’s prepared to accept that the exchange could make for a more limited upside. Entering into a joint venture is a way for a company to acquire new capital, usually in exchange for IP or distribution rights. However, such ventures can also provide a company with the resources it needs – a kind of capital substitute, if you will – so it can avoid having to turn to the open market for new capital.
Transferring IP assets: Closely related, but not to be confused with straight-up licensing deals, there is also the option of transferring IP assets via cooperatives, consortiums or other confederations. Contrary to popular belief, transfers of these kind are not, nor were they ever intended to be, a permanent handover of properties. A company working with cooperatives, consortiums or confederations is assuredly not selling away the rights to its assets. Implicit in the transaction is the understanding that those assets will be returned to their owners at some point in the future. However, if a contract doesn’t specifically include a reversion clause, the licensing company should immediately engage counsel to ensure that it isn’t permanently assigning away its property.
Selling new technology or software outright is self-explanatory, although the seller should make absolutely sure that they have explored all of the potential uses and applications of their assets to establish a correct value before agreeing to any sale. There may be nothing worse than seeing one’s invention used for a novel application that becomes successful in ways its creators never considered.
Franchising: Franchising is a hugely popular expansion strategy among all sorts of companies, though it may be one of the more complicated and capital-intensive options available. There are a number of factors that any company contemplating a move in franchising must be aware of.
First, a franchised product (or products) must possess a coherent brand identity supported by a well-defined go-to-market value proposition. It is the brand – which includes trademarks, packaging, image and all of those other intangible elements – that will resonate in the marketplace, and it is the brand that will ultimately create consumer demand.
Second, the company behind the franchising effort must have a system in place that allows it to consistently deliver a quality product and positive customer experience. Only by helping the franchisee nurture its customer relationships is the company going to build brand loyalty. Third, the franchiser must have a well-developed, efficient support system in place that will service the needs of the franchisees and help them build market share.
Keep in mind that franchising is generally an unreliable and unpredictable route to quick riches, and it’s certainly not a way to make up for a lack of startup capital. After all, franchising is really a long-term relationship that depends on a high degree of trust and mutual respect between franchiser and franchisee. Each depends on the other for the venture to succeed.
Cobranding and brand-extension licensing: Cobranding and brand-extension licensing are closely related expansion strategies that, like franchising, are widely used growth options for IP asset holders. And they are both fairly straightforward, at least on the surface. Cobranding is a way of bringing together two companies – and their respective products – so that the combined strength of the brands will induce consumers to spend more than they normally might. In some cases, the companies involved might actually create a new product that combines the recognized qualities of the original products.
Brand extension, for its part, is a way of leveraging the brand equity of an established company to launch a new, and usually unfamiliar, product to the marketplace. Sometimes referred to as piggybacking, this strategy has a number of virtues, including the fact that it can greatly reduce the time and financial outlay that usually go with the launch of a new product. Of course, the success of the endeavor depends entirely on the way in which the core brand is viewed by the general public.
It’s worth pointing out that brand extension strategies also have a downside. Pair an inferior or poorly designed new product with a well-established, reputable brand and you stand a good chance of weakening the core brand and dooming the new product. Likewise, inappropriately pairing a new product with a well-known brand can have the same damaging result. In fact, research indicates that there are many more instances of cobranding failures than there are successes.
Unfortunately, there are instances in which companies simply do not leverage their IP assets to the fullest extent possible. This is particularly true of smaller enterprises, whose leadership may have fewer resources to allocate to reaping the rewards they might offer.
But such situations are not exclusively applicable to smaller companies. Larger enterprises, too, can fall into the same trap, as their leaders are preoccupied by core business concerns.
And because intellectual property issues seldom make their way into the strategic planning of such companies, they are often unable to translate their IP equity into new sources of revenue or take advantage of new market opportunities.
Some companies, on the other hand, are under the impression that they have neither the resources nor the operational scale to even think about ways to exploit their IP assets properly. But there is no official financial threshold a company must reach before it can make IP asset management part of its strategic planning. In fact, the sooner the better.
Imagine what would have happened if Steve Jobs or Bill Gates had overlooked or ignored the potential value of their IP assets: no Apple and no Microsoft.
To make sure that you don’t make such mistakes, you should talk with qualified IP and tax advisors, and attorneys skilled in the field. Exercise extreme caution as you carefully consider all of the business, tax and legal implications of your future moves. For the unprepared making these sorts of crucial decisions, failure to consider all the consequences could be a costly mistake.
Published July 4, 2016.