Putting IA to work

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Introduction

Intellectual assets (IA) have been shown as the most productive assets within any organizational structure in modern times. In 2017, the World Intellectual Property Organization of the UN found that IA produced more value than tangible assets in every sector of the global economy.  This was an important finding since most business planners and economist have traditionally placed all their emphasis on tangible assets as the important capital producing profits for any organization.

What is IA

In earlier articles, we described the broad category of assets that fall into the IA world. They are all those assets that are without physical form in their essence as an asset. For instance, the copyright of a written document or book, a patent of an idea or process, or the recipe for “secret sauce” on a hamburger. While many of these intangible assets have their genesis in an idea by an individual or a collection of individuals, that idea may be represented in a physical artifact that would probably never be produced without the human idea.

Any individual IA asset has a distinct difference in the financial world because it seldom has a definitive value assigned to it. IA is largely hidden from the direct rules of accounting. For this reason, IA is often overlooked from a financial perspective because it has little tax benefit, and is often thought of as a tax liability. Therefore, IAs remain in the shadows of the financial world, even though it is responsible for the majority of profits generated in every modern business organization.

IA is different than physical or Capital Assets in the accounting definition. These assets are primarily physical. In that, they exist as raw materials, equipment, and finished inventory. All of these assets have some easily derived value from an initial financial transaction. They appear on financial balance sheets contributing to the costs and profits while being represented as what they are in the physical world.

Now that we have defined the major difference between the two major asset classes, let’s begin untangling the problems of deploying IA in a way that it comes out of the shadows and takes its rightful place in business value.

IA Deployment is a Strategic Decision

McKinsey Global Institute stated in their 2021 paper "Getting Tangible about Intangibles"¹ “As economists, Jonathan Haskel and Stian Westlake said in their 2017 book, the notion of “‘capitalism without capital’ is now at center stage. Corporates usually count as intangibles IP items including patents, copyrights, customer relationships, brands, and concession rights, as well as goodwill and investment in software. How they account for intangibles depends on a range of factors, including national tax codes, as well as accounting conventions and rules.”²

The MGI paper brings together the information to support the idea that those companies that deploy IA in a manner that plans for and manages the IA grow more than their peers that do not. In some cases up to as much as 10x than their peers who do not pay attention to their IA. The key factors they found in firms that showed significant growth multipliers were 

• The organizations were intentional in their investment in IA
• They used IA in all facets and departments of their organization.
• IA was used to discover new possibilities for products, services, and markets.
• IA was deployed as a tactical and strategic asset from everyday tasks to the highest level of planning.

If you have thought IA is limited to basic research R&D or secret marketing plans, you need to rethink your position. IA is throughout your organization. Any idea that results in getting better outcomes from a process, is something that should be quantified and tracked. Examples may be, reducing the time it takes to get supplies from a dock to their stocking shelves, or the production floor, is reducing cost and increasing potential profit. Every time you benchmark a process, you set the stage for improvement and a documented Intellectual Asset that helps you produce more value for customers and clients, as well as owners and stockholders. When you know how much impact any individual IA has on your business you have a much better idea of where to focus your attention when looking for new improvements. 

IA Deployment as an Intentional Act

But taking the steps from development and testing to deployment of IA can sometimes be tricky. Often new ideas displace older ones. It is part of the nature of change. Change has a way of causing unintended consequences. To avoid many of these possibilities, during the development stage of any new idea, it is important that you test the idea in various possible scenarios and then in the real world to find out what you didn’t consider earlier. Often, those mishaps lead to more changes to achieve the end-state contemplated at the outset. Implementation is often an iterative cycle of trial and error that leads to either final adoption or dismissal of an idea. Once the idea has passed the trial testing, it is time to roll out the new IA and the change it creates.

Adoption often comes down to how difficult changing from the old to the new is. If the change makes the process simpler, it is often easier to get everyone’s acceptance and adoption. After all, most of us are looking for easy and simple, not hard and complex. Don’t be surprised if further refinement of the IA happens as it gets implemented. That is just evidence that more minds are often better than fewer. Embrace the change and move forward by documenting improvements the new changes have over what they replaced. Measuring that difference is a key indicator of where future improvements will produce the most value.  

IA Protection

Once the IA is in place, there is a continued responsibility to protect the IA to maintain its value. Every class of IA has a different requirement for the protection needed to maintain the value of the asset. Some IA assets that contribute critical value to either the creation of a product or service, demand the highest levels of protection. These may be classified as either patents, copyrights, proprietary, or trade secret assets. For these assets, there are varying levels of acceptable access and disclosure or knowledge of their existence. In patents that are published and granted, a significant portion of the patented information remains undisclosed to protect the ongoing use of the patent. This IA is a trade secret. As such, it demands the highest level of protection.

Other IA may be held entirely within the organization and never disclosed to anyone not needing to know of its essence. These assets are most often either proprietary or trade secret. The difference here is proprietary may be disclosed in a way that does not significantly destroy its value, whereas the trade secret’s value is tied directly to how many people know the entire secret, and who holds the information. The most protected trade secrets are tightly controlled by dividing the information between more than one person and needing each person to independently contribute their knowledge to know the entire secret. A good example is the syrup recipe for Coca-Cola. Originally, and still to this day, it takes several people to know the entire recipe and the entire process formula to make the syrup. Even the drivers of delivery trucks are bound to a strict delivery route, schedule, and delivery process to protect every ounce of the syrup from the factory to the bottling points and final distribution to stores.

The courts have described this process of secret protection as EONA or Existence, Ownership, Notice, and Access proofs. For instance, how available is the information? Can the owner show proof they are the originator of the idea? Has the owner notified others this information is theirs and demanded protection through contracts and agreements? Finally, there is the problem of access. Can the owner of the secret show has it adequately protected physically, legally, and digitally? Often this last EONA test is where most organizations lose control through their physical storage and access methods. Just as many digital information breaches are traced back to an internal source, the same structural problem exists for the trade secret.

The UTSA (Uniform Trade Secrets Act) and DTSA (Defend Trade Secrets Act) define rules and requirements for the evidence proofs and defense of any IA you want to protect as a trade secret. Missing even one of the categories of proof can disqualify your IA from the protections of the law. Yet, even with these stringent protection rules, many businesses find trade secret protection offers more effective protection than patents. The patent option has high costs of issuance and low chances for a granted patent. Then there are the potential defense costs of your patent from others who claim you have somehow encroached on their earlier work. Even more egregious are the spurious charges of “trolls,” as they are known, who use the threat of a patent infringement suit to extract a settlement instead of enduring a defense that takes over $100k to defend, even if the claim is false. To add insult to your injury, if you do win, it is almost impossible to recover any damage from the suit.

As you can see, protecting your most valuable IA is a serious business. It takes an intentional attitude, the willingness to act, and the discipline to continue protecting your IA if a business is to survive and thrive. For these reasons, we help you find the right balance of deployment and protection for your situation.

¹McKinsey Global Institute "Getting Tangible about Intangibles" June, 2021

² Jonathan Haskel and Stian Westlake, Capitalism without capital: The rise of the intangible economy, Princeton University Press, 2017.

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This document is a position paper of the Amteah Group. A professional consultancy providing advice and products to help all organizations use and manage intangible assets so those assets can become recognized as unique and identifiable, tradable assets. This document is presented as an educational resource. It does not constitute legal, or financial advice. Consult your legal or financial advisors for your individual situation.  

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