Spending more on your coffee than your intangible assets?


This news update comes to you from Seattle, home of Starbucks, Microsoft, Boeing, Amazon and other incredible US success stories. As I deplaned yesterday the first thing I saw was (of course) a StarBucks. Starbucks is one of the world’s most successful franchises: it opened an average of 2 new stores a day from 1997 to 2007. Franchise companies are all about intangible assets: they are a brand and a system, multiplied accurately many times over.

Yet despite examples like Starbucks and Amazon who have become phenomenal successes leveraging intangible assets (reinforced by the fact that intangible assets now account for 80% of corporate value), many companies today still spend more on coffee than they do on intangible asset strategy. Unless you’re Starbucks that’s a problem, as failing to understand intangible assets and their impact on company performance is going to be a rate-limiter on future growth.

As the economy becomes ever more focused on technology and innovation, intangible assets are becoming fundamental to commercial success for all businesses. As Amazon’s founder, Jeff Bezos, said recently “every company is a technology company today” and being a technology company is all about intangibles.

It’s important to note that when I say “intangible assets” I mean more than just the “hard” registered rights such as patents and trademarks, but also the “soft” unregistered rights such as copyright, trade secrets, unregistered trademarks and know how. This is what forms the bulk of the IP inside most businesses. An effective strong intangible asset strategy needs to consider both aspects of the intangible asset spectrum, registered and unregistered. Strategies which focus only on patents and trademarks and ignore the soft rights are ineffective at best and at worst outright damaging.

So why are intangible assets so important?

First, regardless of how great your product or service is, if your competitor can copy it (because your idea is not adequately protected) they will. In fact, the better your product the more likely it will be copied. Copying erodes market share and margins until you are left as just one player among many in a commodity-style price play. The “alternative” to intangible asset protection, constantly out-running competitors with an endless first to market strategy isn’t viable either: you can’t out-run everyone, it’s very costly, and sooner or later you’ll be first to market with a clanger that doesn’t work or the market doesn’t really want. An expensive mistake that destroys margin on all the other successes.

Second, if you are working on a great idea, the chances are someone else is working on that idea too, and the better the idea, the more likely this is the case. Unfortunately, with that comes an increased risk you are infringing someone else’s patent. This problem is greatly amplified in large markets such as the US. The consequences of intellectual property infringement can be extremely serious, including injunctions, product recalls, damages awards and litigation costs.

Sum total - an effective intangible asset strategy is critical to commercial success. If that’s the case why do most companies spend money on coffee rather than intangible asset strategy? Well, first successful companies tend not to: companies like Microsoft, Amazon and Boeing have clearly defined intangible asset strategies they have clearly invested into for the simple reason that it intangible assets are the most important assets they have and good strategy pays off.

However for those who aren’t taking intangible asset strategy seriously why not?

For a start, in many instances intangible asset strategy is not budgeted for – the budget will have a line for the coffee machine beans, but nothing for developing clear goals for the business’ intangible assets.

Second, for many businesses intangible asset strategy is important, but there is always something else which is urgent, so it never happens. Too often companies end up needing expensive legal procedures at the bottom of the cliff, when a good intangible asset strategy would have prevented them running off the road in the first place.

The results of some poor intangible asset strategies we have come across include:

* An agri-tech company spending $930,000 on a patent which didn’t protect them or provide any value.

* A software company making an incorrect IP disclosure which essentially gave away their IP and created their competitor, costing them hundreds of millions.

* An electronics company that ended up being sold for 1/3 their real value, costing shareholder’s tens of millions of dollars because they infringed key patents.

* A hardware company that committed 15 engineers for 3 years to a technology (costing over $8M in R&D) that someone else had patented six years earlier.

* A growing pharma company which undertook a flawed trademark strategy based upon legal advice which meant they had to spend further 100’s of thousands to rebrand.

Each of these situations could have been remedied by having a clear intangible asset strategy in place. An intangible asset strategy enables Boards and senior managers to:

* Invest in technologies which are commercially viable and which they can hold a strong position over.

* Appropriately protect their intangible asset (not necessarily with a patent or trademark) to facilitate commercialisation.

* Target markets in which they have freedom-to-operate and avoid intellectual property infringement issues.

* Reduce costs by strategically filing registered forms of intellectual property only when needed.

* Convert intangible asset into a profit centre by identifying additional revenue streams (such as licensing) that can be generated from the business’ intangible assets.

Unfortunately, not all intangible asset Strategies are created equal. Some firms give a “free” “IP Strategy” which is really just a plan to file patents and trademarks. Like most things in life you get what you pay for. Your intangible asset strategy should be independent and objective and not set by a firm who files your patents and trademarks.

The end result of poor or “free” intangible asset strategy is often reduced sales, misallocated R&D resources, increased costs and risk and missed opportunities. Yet an effective intangible asset strategy is one of the most important factors in successfully converting innovation into value, growth and wealth.

What’s the takeaway? Look at your annual coffee bill, consider the impact it has on your businesses growth and then reassess the budget allocated for developing intangible asset strategy. It might be time to cut back on the coffee.