Intellectual Property at the core of your business strategy: why the CFO should care

This blog was written by David Vissers , Raynor van Eijck & Maaike Van Velzen .

Intellectual property (IP) has emerged as a critical strategic asset. It is vital to align IP strategy with the core business strategy as it provides a roadmap for maximizing value, fueling innovation, and enabling competitiveness. Moreover, in today’s digital-driven world, data and digital assets have become an increasingly more important part of business- and IP strategies. By managing IP portfolios and intangibles in the broader sense (including digital and data assets) effectively, not just for risk aversion but primarily for value creation, companies can unlock significant potential value. Generally, we advocate that it is paramount for an IP function within a company to align closely with other relevant functions, such as R&D, marketing, and legal.

The CFO's engagement is equally crucial. As the company's financial steward, the CFO's understanding of IP strategy and management can significantly influence the company's financial health and market position.

Given that IP strategies directly impact the company's financial performance and market competitiveness, it's imperative for the CFO to be actively involved in decision-making regarding IP and intangible-related activities such as licensing, patent and intangible portfolio management, and managing IP risk. Furthermore, although not the main focus of this post, it is worth noting that IP often significantly contributes to a company's value in M&A transactions and adds substantial value to a brand's equity. Therefore, the CFO's understanding and strategic oversight of these intangibles are also critical for accurate financial reporting, successful M&A execution, and strategic brand value enhancement.

In this blog, we will delve into a selection of IP-related strategic dialogues in which the CFO should be involved. Firstly, we will elaborate on different ways a company can license IP to create value. Secondly, we will explore the CFO's role in guiding financially smart patent portfolio management decisions. Thirdly, we will discuss why ensuring IP risk mitigation should also be on the CFO’s agenda.

Licensing

Licensing of IP (or intangibles more broadly) involves granting permissions to others to use, produce, sell, or perform other activities with a company's IP. Licensing can be useful for creating partnerships as well as for generating cashflow.

License fees are the payments made by the licensee to the licensor in exchange for the rights granted in relation to the IP rights. The method of fee calculation can vary. Sometimes, a flat ?fee is paid. Another common fee structure in licensing is royalties, a percentage of sales, or a combination of both. These fees represent direct value created for the licensor, resulting in an additional revenue stream without the need to incur high costs to enter a new market.

Cross-licensing is a form of licensing where two or more companies agree to grant each other the right to use certain parts of their respective IP rights. This can support risk mitigation as it has the potential to reduce the likelihood of costly IP infringement lawsuits. It can also create value, as cross-licensing can foster innovation and enable companies to access new technological capabilities without having to develop them in-house. From an ESG perspective, cross licensing enables longer-term innovation sharing and is an excellent way to promote sustainable technology to other companies, thus broadening consumer access to sustainable products.

In a grant-back licensing agreement, the licensee agrees to grant the licensor specific rights to any improvements or innovations developed based on the initially licensed IP. This approach facilitates value creation by ensuring that the original IP holder can also benefit from later innovations made by the licensee. This can enhance a company’s innovation potential significantly and can provide access to next generation technology in a cost-effective manner.

The CFO's financial proficiency, along with an understanding of IP, data and licensing, can be a critical aid in structuring licensing agreements that make financial sense and ensure steady revenue streams from licensing fees, aligning with the company’s financial objectives. By understanding the value of IP and data assets, the CFO can also engage in more strategic dialogues on return on investment (ROI) for innovation and how to structure third party engagements and partnerships. Therefore, close alignment between the IP function and the CFO is essential for the company to capture all potential value. For that reason it is also recommended for CFO’s to familiarize themselves with the complexities surrounding the company’s valuable data and potential uses thereof, both for potential value creation and risk mitigation purposes.

In conclusion, IP licensing strategies can serve dual roles as risk mitigation tools and opportunities for value creation, for example in context of sustainable tech development. The adoption of a particular structure should align with, and reinforce, the company's business strategy. CFO engagement plays a pivotal role in this process.

Patent Portfolio Strategy and Brand Management

There are many disputes that illustrate, among others, how effective patent portfolio strategies can protect desirable features in the market and can impact entire product or service lines. When considering such possibilities strategically (rather than merely protecting all R&D results without strategical consideration), this can significantly bolster competitive positioning and increase IP ROI. There are numerous examples in which companies are unable to sell (or are stopped from selling) products or services that contain specific desirable features due to IP of others. In a more recent example, a global computer and consumer electronics company was offering products with specific functionalities in one of the major markets but is now, as a result of (alleged) infringement of another companies’ patent rights, offering the products in that jurisdiction without the respective functionality being active.

It is not just patent rights that persuade corporations to have strategic meetings about their IP. Many other cases are known concerning aspects relating to other types of IP rights, including copyrights, trademark rights, design rights, and often combinations thereof. By obtaining and maintaining exclusive rights to elements that set them apart from competitors, companies can control and safeguard use of those elements and avert unauthorized potentially detrimental usage.

Several strategic considerations should play a role in building and managing your patent portfolio. For example, you should be aware of various levels of exclusivity achievable through patenting, and that exclusivity should be sought strategically in the market. Moreover, consider whether you intend to use your patent portfolio defensively or offensively.

Usually, granted patents are well defined in scope and precise. While it is possible to gain exclusive rights to an entire product, patent protection often provides feature exclusivity. This type of exclusivity grants a company the sole control over a particular feature in their product or service, enabling either controlled access through licensing or preventing competitors from using the same invention in their offerings. However, not every feature is created equal. While some discoveries from your R&D department might seem more innovative than others, patents are most valuable when the protected features are not just innovative, but also desirable for competitors or applicable for third parties in other commercial domains. Understanding the value of patents beyond their innovative aspects relevant to your own company is essential for the company and the CFO in financial management, strategic planning, and risk mitigation. As such, it is incredibly valuable for the CFO to be part of the conversation on the value and strategic focus of the patent portfolio, and its alignment with the business strategy and long-term goals of the company. Determining the value realized by the IP portfolio and the potential future value, will give the CFO insights in value growth potential and value at risk.

Defensive patenting (or defensive patent aggregation) refers to the strategic generation or acquisition of patents primarily to mitigate legal attacks from competitors, creating a protective barrier against expensive settlements by holding rights to technology that is of interest to the competitors, which creates an interesting interdependency. In contrast, offensive patenting involves generating and acquiring patents with the intention of enforcing them against potential infringers, often to gain a competitive edge, create negotiation power, or generate revenue through licensing or litigation. It is a proactive strategy, directly aimed at competitors, potential infringers or others interested in using the protected technology. Where defensive patenting focuses on protection and risk mitigation, offensive patenting concentrates on competitive advantage and proactive value creation.

The CFO’s perspective can influence the company's patent portfolio direction. By helping assess the value created by IP, potential revenues, risks and costs associated with IP, the CFO can and should help drive decisions that protect the company’s financial interests while leveraging IP for competitive advantage. The CFO’s proficiency in financial management is key in evaluating the costs and potential financial risks associated with litigation in defensive patenting strategies. In offensive patenting strategies, the CFO’s insight is crucial in assessing potential costs and revenues tied to the acquisition of patents and how acquired IP appears on the balance sheet.

A good question to raise for the CFO is to get clarity on the ROI for the patent portfolio. Although not always optimal, is not unusual to come across companies where a small portion of the IP assets (sometimes as little as 10% or less) contributes tremendously to the total IP portfolio value (constituting for example 90% of the value or more). The other (major) part of the patents might create value in the future but do you know when and how? To avoid making unnecessary cost for IP it is important for a CFO to have a good insight in potential future value and the right balance in cost and value creation through IP. Where some companies spend too little on IP, many either spend too much or have the wrong focus in their portfolio. Financial modeling of value realized and value potential for the future for the IP portfolio, creates powerful quantified data for decision making on investment in the IP portfolio (whether through organic growth or inorganic acquisition of IP) and potential value at risk through expiry of IP rights or invalidation of critical IP.

IP risk mitigation

The fact that a company holds a patent does not automatically guarantee freedom to operate (FTO). For example, a company might hold a patent on a specific feature of a product but might require integrating other patented technologies to create and commercialize the final product. If the company does not secure the necessary permissions or licenses, it could risk infringing patents, even though it holds a patent on part of the product.

In essence, while patent exclusivity protects a company's innovation from being used by others, an IP risk assessment ensures that a company's product does not violate IP held by others. Both are crucial components of an effective IP strategy, serving different purposes and addressing different risks.

IP risk assessment is relevant for a CFO for various reasons. It mitigates infringement risks, saving on potentially high litigation costs, and helps protect the company reputation that could be harmed by infringement accusations. Assessing the IP risk level creates input for the right mitigation measures e.g. by identifying potential patent or trademark infringement issues, enabling preemptive action such as setting aside provisions for potential legal disputes, designing around third party IP, or reallocating resources to avoid such risk. Moreover, IP risk assessments guides business strategy and investment decisions, and may influence company valuation and investment, especially in IP-intensive industries. It provides insights into operational costs and can reduce expenditure on product alteration or licensing fees. Therefore, managing third party IP risk is important for a CFO for financial management, strategic planning, and risk mitigation.

Conclusion

IP is an indispensable strategic asset in today's business landscape. It is vital that IP strategies align with a company's core business strategy. This does not only aid in risk mitigation but also uncovers various opportunities for value creation. The CFO's role in this process is important.?

Understanding licensing, patent portfolio management, IP risk mitigation, and other IP-related matters is crucial for CFOs, especially for companies that want their IP function to be a value driver or revenue generator, rather than a mere cost center. The increased reliance on data and software leads to a change in IP risk profile that also requires the CFO’s attention.

Active and strategic engagement of CFO's in IP strategy and management can serve as a powerful catalyst for business innovation and competitiveness, and lead to enhanced M&A potential and brand value.

A call to action for all CFOs: make the most of your IP assets in this data driven age. Reach out to our team at Deloitte for expert guidance and support.?