Intellectual property (IP) is becoming a prerequisite for operating in the knowledge economy, moving well beyond its traditional role as a legal safeguard for protecting ideas. Instead of being managed in isolation as a separate technical function, IP is now treated as a live asset that can be sub-divided, shared, bought and sold.

The days of the research and development lab producing a stream of ideas ready for market are passing. The process of creating and distributing new products and services is becoming too complex for even the largest organisations.

Innovation now runs on an open model with external sourcing of knowledge from many disciplines. IP is the medium through which different ideas come together and are exploited.

IT rights

In IT, the emphasis in IP is switching from copyright, which arises automatically but can be hard to defend, towards patents, which create a more exclusive right.

Copyright is still a critical first line of defence for software, says Hugh Dunlop, a patent lawyer at law firm RGC Jenkins.

‘It is an inherent right of exclusivity and protects the expression of ideas implemented in software, but it does not protect the ideas themselves,’ he says.

‘Copyright is infringed when any substantial part of the code is copied, including copying by transcription between different levels or languages. For infringement of copyright to be proven, there must be actual copying of the protected work, which means the alleged infringer must have at least had access to the original.’

But copyright offers no protection against a developer who arrives at the same idea by an independent route. So, for particularly valuable code, a ‘clean room’ might be set up to produce a functional equivalent without copying the original.

Patents are more absolute. It is no excuse to be unaware of them. Any copy amounts to an infringement. In Europe, patents must be technical in nature, unlike the US, which allows for a broader definition. So if a software program solves a business problem or runs a new game, it has to rely on other forms of IP, such as copyright.

But 15 per cent of patent applications each year relate to IT inventions. To qualify, they must be novel, they must involve a genuinely inventive step and they must have an industrial application. In isolation, 10,000 lines of codes have no use, but if a program has a demonstrable effect, whether guiding a missile or routing calls via a telephone exchange, it can qualify as a patent.

Even though IP often underpins between 50 and 70 per cent of a firm’s value, it is striking how few senior managers really understand the potential benefits, says Ian Harvey, chairman of the IP Institute.

Competitive strategy

Harvey says very few firms integrate IP and corporate strategy properly, although there are exceptions, such as IBM. The IT giant generates some $1.5bn (£855m) a year in royalties from licensing its IP.

‘What is more important is how IBM thinks through its product strategy. Where is the IP going to come from? Do we license rivals? Do we develop and sell the technology ourselves? Or buy it in?’ says Harvey.

As a result, for example, IBM decided to license its LCD technology to a former competitor in Taiwan. ‘Low-cost, high-quality first production, and generating revenue from all of its competitors was a better commercial proposition than producing screens itself,’ says Harvey. ‘Such a strategy depends on understanding what IP you have, finding an edge and deciding whether to invent or buy technology. Most companies are nowhere near this position.’

Licences of right

Nearly one million patent applications are made every year in Europe, the US and Japan. Yet many of these remain unexploited and only one in 10 are ever licensed. Such a lack of use is partly for defensive reasons and partly because companies struggle to find suitable licensing partners.

To unlock the value in patents, IP authorities are offering Licences of Right, where companies pay reduced fees in return for agreeing to all requests to license their patent. Tax relief is also offered on donations of unused patents to non-profit organisations and companies are forming patent pools to license groups of related patents.

On the spreadsheet

If companies are to exploit their IP systematically, then a proper assessment of any rights must be made. It is a tricky area, because IP rights are like Old Masters paintings: their value is hard to estimate and depends heavily on the buyer.

Instead of auctions, an approach based on ‘economic use’ is now usually adopted for IP. The value of any rights are determined in relation to the royalty fee that would be paid for their use by a third party. An estimate of future earnings can be made based on discounted cash flow, although this depends on the segment of the market in which the buyer is operating.

As well as appearing on the balance sheet, these figures can be included in business models, allowing the performance of IP rights to be tracked and reviewed. Any under-performers can be sold.

For smaller companies, licensing IP is a powerful means of gaining size quickly. It was the route originally chosen by ARM, which is now a leading global supplier of processor technology.

Instead of competing directly with Intel and producing microprocessors itself, ARM chose an open licensing model. Using its generic designs, it sells many different versions of its chips, which are adapted for use in various applications. Such an approach depends on managing IP centrally, so that decisions can be made about how IP can best be used as an asset to improve the value for shareholders.

Shared knowledge

IP can become messy when two or more organisations come together and combine their joint knowledge and experience. If the relationship turns sour, then it can be extremely damaging and expensive.

All might seem well when an agreement is reached in the spirit of cooperation, says Alan Fiddes at Urquhart-Dykes & Lord, a leading patent practice, but be clear from the start about how the rights in the results of any collaboration will be divided. You might consider, for instance, setting up a separate company that holds the rights and obligations to protect any rights that are created. All parties’ responsibilities should be explicitly defined.

Once the research is complete, how can the results be used? Even if one organisation has carried out the research for another to exploit, the issue may not be clear cut. Can the results be used as the basis for further research? Can a programmer use code for separate work with a third party?

‘It is surprising how many companies are prepared to start a working relationship with each other without actually understanding their respective rights and obligations,’ says Fiddes.

IP commercialisation

Such ignorance comes as no surprise to Billy Harkin, chief executive at Science Ventures and a former head of technology transfer at Glasgow University, where he was instrumental in spinning out Kymata, a telecoms venture that grew to the value of $1bn (£570m) over two years before being sold to Alcatel.

‘The process of IP commercialisation is fundamentally broken all over the world. There is a lack of systematic methodology through which the correct things are done in the right order, and to the right quality. It is a real hotch-potch. If people say they are creating a spin-out, you will get 10 different answers about how they are going to do it,’ says Harkin.

‘Usually the wrong licence is agreed with the wrong people. Who you license your technology to is more important than the terms. If it is not core to their business, then they could just be using you to add to their capital value without taking your technology to market.

‘Do your homework and find the top three firms in the world for whom the technology is strategically important at this time. IP never succeeds because of the actions of one person alone. It is a team sport,’ he says.

Adam Jolly is the editor of A Handbook of Intellectual Property Management, published by Kogan Page in association with the Patent Office