Patent agencies, a barometer of IP management, are not seeing a fall in business and companies appear to be spending more on managing intellectual property, despite the downturn. Ian Rhodes, John Duncan and Simon Flower of PA Consulting Group discuss the three key emerging trends in IP management.
IP management is driven by business activity and business need. While it is not absolutely synonymous with patent activity, patent volume is a good indicator of levels of PI activity. One might expect patent volumes — filings and approvals or litigations — to be down as a result of the economic downturn and a drop in business activity, but evidence from patent agencies suggests companies seem to be spending more on IP management. In fact The Times (July 22) stated that the World Intellectual Property Organisation received a record number of IP applications last year, and that a survey indicated that 80% of businesses were predicting that their licensing activity was expected to increase or remain steady during recessionary trading.
But the messages are mixed. While the total number of patents continued to increase in 2008, the rate of increase, as noted in April 2009 by Europolitics Information portal, was slowing markedly, especially when compared with the final months of 2007. The European Patent Office was even predicting that the year-to-year increase (+3.6%) in patent applications might slow to a complete halt as companies’ revised spending plans finally hitting patent applications.
The drivers and demographics of IP management and patent activity appear to be changing. While the patent filings from the world’s largest companies appears to have declined sharply, they are increasing their efforts to sue those who infringe their intellectual property rights as the downturn continues, according to new research (The Independent, June 8). At the same time, the nature of the patents that they submit is changing as they seek to compete through new business models. Meanwhile, the overall growth in patents and IP management is coming from small firms and individuals.
We see three important trends that are driving IP management activity:
• Convergence towards product-service as a business imperative.
• Collaboration between organisations operating across broader geographical locations and value chains.
• Competition intensifying and driving new approaches to first-to- market product launches.
Product-service as a business imperative
More and more manufacturers seek to differentiate their products by selling integrated services. This strategy increases a company’s differentiation and value proposition, and can even entail a change to the organisation’s business model.
Examples of “product-service systems” (PPS) vary from sector to sector but include the Apple iPod, in itself a good piece of product IP. In combination with the service of downloading music through iTunes it has become an immensely powerful business innovation.
The same type of product-service system approach is now emerging in some medical applications where the healthcare payer wants to pay a single provider of an overall solution rather than to have to deal separately with several providers.
PPS has obvious implications in terms of IP management. Patents need to cover a combination of product and process IP to clarify the overall commercial value proposition and protect both the technology within products and the commercial delivery of connected services.
Collaboration between organisations operating across geographical locations and value chains
The downturn heightens the need for collaboration due to a greater focus on containing expenditure. This applies during both the creation and exploitation of IP:
• To contain expenditure on new product development companies outplace more development activities to networks of partners or suppliers and gain access to new technologies and additional expertise without taking the full risk (and ongoing cost) associated with their ownership. Advanced IT platforms are available to support such collaboration — e.g. product lifecycle management allows IP to be segmented with access to it appropriately managed and controlled.
• To expand business into new territories companies collaborate with others using their IP to structure licenses or Joint Ventures to gain new channels to market. Such expansion can be achieved without the levels of capital investment needed to set up subsidiaries or to make acquisitions.
In the absence of an agreement, innovations stemming from collaboration will usually be jointly owned. This means that the scope and coverage of relevant patent protection needs to be comprehensive and carefully considered. In doing so, companies need to frame their IP in terms of not only its technology aspects but also any commercial features, for example services, that may be promoted by partners and distributors in different markets. A collaborative approach triggers the need for more and better IP management. In fact IP management is playing a new and more powerful role in the business now that it is being used offensively and to structure today’s relationships – it is not just a defensive, barrier-to-entry as it has been in the past.
Competition driving new approaches to first-to-market product launches
Over recent years the world has seen a huge movement of manufacturing capability to Asia, most especially China, which itself has a poor track record in recognising intellectual property. Manufacturing in the West has had to adapt to survive. As a consequence smaller, high value manufacturing (HVM) companies have emerged.
These firms seek to protect their IP through retention of strategic capabilities in the West and drive first-tomarket products that attract a premium price delivered through local distribution networks.
Strix is a good example of a company that is protecting its IP by keeping its core manufacturing capability out of China. Known as an Embedded Product Enhancer, Strix produces about two thirds of the worlds control switches for electric kettles. While Strix assembles the switches in China with a number of non-critical parts, the key components made from secret materials are stamped out in a factory on the Isle of Man. Strix’s example helps to explain why the upturn in patents is coming from smaller and medium sized companies — despite being a world leader, their sales last year were approximately £85m.
Smaller HVM companies in the West therefore deliver their first-to-market products through local networks at a premium price. By the time Eastern competitors catch up, the product can be shipped to Asia for manufacturing itself, thereby lowering its production cost to remain competitive, while the network is in a position to launch its next new market-making product.
Summary – Open innovation
The three mutually reinforcing trends are driving the realisation that IP management is a necessary and important competitive differentiator, and IP is playing a more central and important role in many (admittedly not all) businesses. IP is no longer just a barrier-toentry devise once others have realised the basis for your success. Fifteen years ago a professor at London Business School told PA Consulting that having the best people and some relevant IP would be the route to sustainable success for many companies in the future, and that every other source of competitive advantage can be rapidly commoditised in an increasingly competitive, fast-moving world.
If there is a unifying theme here perhaps it is that of open innovation. Open innovation assumes firms can and should use external ideas as well as internal ideas (collaboration), and different paths to market (product launches), as they look to advance their value proposition (product-service system).
There is a link here as well to the changing patent demographics with increased patent traffic from small firms as noted above. As the UK IPO Insight magazine (November 2008) puts it in describing the new world of “open relationships”: The tight controls in the old imperial model of research and development are being loosened. The need now is to find clever ideas wherever they may be located.
For entrepreneurs and innovators, this opens new routes to market for their specialist knowledge. For companies, it means learning to accept the blurring of organisational boundaries and working on a more collaborative basis. The result should be a whole series of mechanisms for developing value-added solutions.