Maximizing Revenue through
Contract Compliance and Licensing
Reviews
April 28, 2010
Kim Wiatrak – Director
Chris Ruhl – Di...
Contents
• What is a License Compliance Program?
• Keys to Designing and Implementing an Effective Program
• Contract Lang...
What is a License Compliance Program?
PricewaterhouseCoopers Slide 3PricewaterhouseCoopers
Licensing Compliance Programs
License Compliance Programs aim to:p g
• Maximize and protect the economic impact of intelle...
Contract Compliance Opportunities
Maximizing revenue and/or reducing costs
• General contract compliance
• Most favoured n...
Contract Compliance Analysis - Objectives
Refund Recovery Issues
• Over deployment of software licenses
• Cost sharing - F...
Contract Compliance - Statistics
What have we found?
8 out of 10 licensors do not have a consistent process to monitor the...
Why Have a License Compliance Program?
Tessera Technologies, Inc.esse a ec o og es, c
Tessera Technologies, Inc. announced...
Common Observations
Licensor’s Compliance Environment
L k f t l d li i t dd hi h i k f l k• Lack of controls and policies ...
Common Observations
Licensee’s Compliance Environment
• Lack of internal controls over outbound royalties
• High degree of...
Life Prior to the Program
• Revenue leakage what revenue leakage?• Revenue leakage – what revenue leakage?
• How many lice...
Life Prior to the Program (cont.)
• Can we stratify by region licensee or type of IP?• Can we stratify by region, licensee...
Benefits of a License Compliance Program
• Identification of potential revenue leakage / incremental revenue• Identificati...
Benefits of a License Compliance Program (cont.)
• Corporate governance regarding IP protection• Corporate governance rega...
Keys to Designing and Implementing an Effective
Program
PricewaterhouseCoopers Slide 15PricewaterhouseCoopers
Defining a Successful Program
M b i i i i l• Management buy-in is critical
• Designating ownership with responsibility and...
Keys to Designing and Implementing an
Effective Program
• "Buy in" from the top• Buy in from the top
− Consistent message ...
Keys to Designing and Implementing an
Effective Program (cont.)
• Understand the current licensing situation and key infor...
Keys to Designing and Implementing an
Effective Program (cont.)
• Develop processes and controls over possible revenue lea...
Keys to Designing and Implementing an
Effective Program (cont.)
• Systematic and regular enforcement through compliance re...
Keys to Designing and Implementing an
Effective Program (cont.)
• Types of findings• Types of findings
− Hard - Very littl...
Keys to Designing and Implementing an
Effective Program (cont.)
• Settlement Process• Settlement Process
− Systematic proc...
Contract Compliance Overview – Leading Practices
Compliance Program Continuum:
Mature
• Consistent company culture with
co...
Contract Language and How It Impacts Revenue
PricewaterhouseCoopers Slide 24PricewaterhouseCoopers
Contract Language and How it Impacts Revenue
Leading Practices
• Get the license agreement language right from the start
•...
Contract Language and How it Impacts Revenue
A dit Cl• Audit Clause
• Term Definition
• Royalty Calculations
• Reporting R...
Contract Language and How it Impacts Revenue
Audit Clause
• Right to audit / review / examine
• Audit period
• WHO will be...
Contract Language and How it Impacts Revenue
Term Definition
• Are the key terms of the contract defined?
− Products: Defi...
Contract Language and How it Impacts Revenue
Royalty Calculations
Potential Considerations:
• Initial licensing fees / ann...
Contract Language and How it Impacts Revenue
Royalty Calculations
Other Considerations:
• Rates tiered by quantity or time...
Contract Language and How it Impacts Revenue
Reporting Requirements
• Report format and content
• Frequency of reporting a...
Contract Language and How it Impacts Revenue
Compliance Requirements
• Trademarks
• Patents
• Logos• Logos
• Watermarks
Pr...
Contract Language and How it Impacts Revenue
Sample Contractual Language
Audit ClauseAudit Clause
Limited
Language
… Audit...
Contract Language and How it Impacts Revenue
Audit Clause
Sample Contractual Language
Audit Clause
Broad
Language
Licensee...
Contract Language and How it Impacts Revenue
Royalties
Sample Contractual Language
Royalties
Limited
Language
Licensee sha...
Contract Language and How it Impacts Revenue
Royalties
Sample Contractual Language
Royalties
Broad
Language
Licensee agree...
Contract Language and How it Impacts Revenue
Reporting
Sample Contractual Language
Reporting
Limited
Language
…Licensee wi...
Contract Language and How it Impacts Revenue
Reporting
Sample Contractual Language
Reporting
Broad
Language
Within 30 days...
Potential Issues
• Out-dated agreements in use• Out-dated agreements in use
− The licensor may not have the same rights as...
Global Issues
Si ifi t i l diff• Significant regional differences
• The “You Don’t Trust Me” factor
• Respect for I.P. rig...
Leading Practices
• Consistent language in all agreements
• Audit Rights clause mandatory
• Compliance Program Letter of I...
Risk Assessment, Targeting & Compliance Policy
PricewaterhouseCoopers Slide 42PricewaterhouseCoopers
Licensing Portfolio Risk Assessment – Audit Risk &g
Target (ART) Tool
• Driving value up and keeping compliance costs down...
Risk Assessment Benefits
QuantitativeQualitative
• Higher margin revenue and more predictable
revenue stream
• Lower struc...
Risk Assessment
• Suggestions for approach:
Identify & Rate Risk Factors
• Suggestions for approach:
− Keep it simple
− Ea...
Risk Assessment
Identify & Rate Risk Factors
1st Tier
1) Geography
2) Public vs. Private
3) R ti R ili ti Diff3) Reporting...
Transparency International - Corruption Perceptionp y p p
Index (TI - CPI)
PricewaterhouseCoopers Slide 47
Other Risks to Highlight…
• Grey Market• Grey Market
• FCPA
• OECD
• Local law violationsLocal law violations
Pricewaterho...
Risk Assessment - Tier 1
Risk Factor Items to Consider Risk Rating
1) Geography
( b i k t )
Western Europe, US, Australia,...
Risk Assessment – Tier 2
Risk Factor Items to Consider Risk Rating
4) A/R Aging
0 – 90 days 1
91 – 180 days 2
180+ days 3
...
Risk Assessment Audit Risk Tool output
• Identify and rate risk factors• Identify and rate risk factors
• Stratify the lic...
Risk Assessment
License Compliance Reviews differ in:
Types of Reviews
License Compliance Reviews differ in:
• Scope
− Lic...
Risk Assessment
• Identify IP compliance strategy
Critical Success Factors
Identify IP compliance strategy
• Sales buy-in ...
Establish Compliance Policy
U i th ART P d di i ith l l l d fi l t
Establish Compliance Policy
Risk Assessment to Nominati...
Establish Compliance Policyp y
Risk Assessment to Nominations to Close
• Internal Communication Strategy• Internal Communi...
Contract Compliance Communication LoopContract Compliance Communication Loop
Internal
External Compliance Strengthens
Inte...
Establish Compliance Policyp y
Risk Assessment to Nominations to Close
Data Analysis
Critical work stream to efficient aud...
Establish Compliance Policy
Risk Assessment to Nominations to Close
Technical Analysis
Critical work stream to efficient a...
Contract Compliance – The Licensee’s Perspective
PricewaterhouseCoopers Slide 59PricewaterhouseCoopers
Common Review Challenges Facing Licensees
Some of the common challenges faced by organizations during a License
g g
g y g ...
Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks
License Compliance Reviews ...
Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks
(cont.)
• Assemble a projec...
Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks
(cont.)
• Develop a workpla...
Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks
(cont.)
• Be cooperative
− ...
Closing Comments
PricewaterhouseCoopers Slide 65PricewaterhouseCoopers
Public InformationPublic Information
BROADCOM RECORDS 2ND-
QUARTER PROFIT
Broadcom… reported its first profit in three qua...
Closing Comments
• Compliance programs are now leading practice and generally accepted
by U.S. licensees
• Board of Direct...
QuestionsQuestions
&
Comments
PricewaterhouseCoopers
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04/28/2010 Meeting - Contract Compliance

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04/28/2010 Meeting - Contract Compliance

  1. 1. Maximizing Revenue through Contract Compliance and Licensing Reviews April 28, 2010 Kim Wiatrak – Director Chris Ruhl – Director PricewaterhouseCoopers PwC
  2. 2. Contents • What is a License Compliance Program? • Keys to Designing and Implementing an Effective Program • Contract Language and How It Impacts Revenue • Risk Assessment, Targeting & Compliance Policy • Contract Compliance - the Licensee’s Perspective• Contract Compliance - the Licensee s Perspective • Closing Comments • Questions & Comments PricewaterhouseCoopers Slide 2PricewaterhouseCoopers
  3. 3. What is a License Compliance Program? PricewaterhouseCoopers Slide 3PricewaterhouseCoopers
  4. 4. Licensing Compliance Programs License Compliance Programs aim to:p g • Maximize and protect the economic impact of intellectual property and intangible assets S• Send a message to the channel about taking IP seriously • Ensure compliance with company’s controls & business processes (i.e. SOX) • Address widespread issue of under reported licensing revenues • Drive incremental revenue – bottom line impact − Compliance programs pay for themselves with a 8-12x ROI of audit fees • Enhance ability to forecast future revenue streams • Flush out contractual and use issues PricewaterhouseCoopers • Flush out contractual and use issues Slide 4
  5. 5. Contract Compliance Opportunities Maximizing revenue and/or reducing costs • General contract compliance • Most favoured nation / customer • Joint venture agreements • Research and development• Research and development agreements • Pricing agreementsPricing agreements • Franchise agreements PricewaterhouseCoopers Slide 5
  6. 6. Contract Compliance Analysis - Objectives Refund Recovery Issues • Over deployment of software licenses • Cost sharing - FTE’s Process Review Issues • Safety guidelines / requirements • Insurance / bonding requirementsg • Advances / Burn-down • Sales tax application - VAT • Returns and restocking charges • Discounts / Price protection g q • Subcontractor policies • Financial statement screening • Employee monitoring • Contract structurep • Freight and transportation • Miscellaneous discounts • Entertainment allowances • Marketing & Development Funds • Purchasing/procurement review • Contractor credentials g p • Fixed price and progress billings • Samples • Rebates • Most Favored Nation/Customer terms PricewaterhouseCoopers Slide 6
  7. 7. Contract Compliance - Statistics What have we found? 8 out of 10 licensors do not have a consistent process to monitor their royalty8 out of 10 licensors do not have a consistent process to monitor their royalty arrangements. Unchecked “revenue leakage” can amount to millions of dollars. Mis-reported royalties are identified in over 90% of our royalty inspections, due to: • Accounting mistakes (i e inaccurate system-generated royalty reports)• Accounting mistakes (i.e. inaccurate system-generated royalty reports) • Clerical errors (i.e. new products incorrectly excluded from royalty reports) • Contract interpretation differences (i.e. standard discount) • Lack of defined calculation and reporting process • Staff turnover (i.e. has anyone read the contract? “I wasn’t here then”) F d T t b t V if ! PricewaterhouseCoopers • Fraud – Trust but Verify! Slide 7
  8. 8. Why Have a License Compliance Program? Tessera Technologies, Inc.esse a ec o og es, c Tessera Technologies, Inc. announced that its semiconductor packaging subsidiary, Tessera, Inc., has signed an updated technology licensingy, , , g p gy g agreement with United Test and Assembly Center Ltd (UTAC)… under the terms of the agreement UTAC will pay $15.0 million in cash to address past royalties owed under the initial license… As a result of this initial payment, Tessera is raising its first quarter 2010 total revenue guidance range to be between $63.0 million and $64.0 million. This compares to previous first quarter 2010 total revenue guidance given on January 28, 2010 f b t $58 0 illi d $61 0 illi Th d t d li2010, of between $58.0 million and $61.0 million... The updated license agreement and payment for past royalties resolves all outstanding litigation between the companies. PricewaterhouseCoopers -March 1, 2010 Press Release- Slide 8
  9. 9. Common Observations Licensor’s Compliance Environment L k f t l d li i t dd hi h i k f l k• Lack of controls and policies to address high risk area of revenue leakage • No mechanism or process to capture and analyze license and reporting data • No process to analyze reporting variances from historical or anticipatedNo process to analyze reporting variances from historical or anticipated royalties • Historical license agreements vary significantly • Compliance reviews are nonexistent or infrequent • Sales/Company culture impacts compliance attitude PricewaterhouseCoopers Slide 9PricewaterhouseCoopers
  10. 10. Common Observations Licensee’s Compliance Environment • Lack of internal controls over outbound royalties • High degree of internal miscommunication • Staff turnover high – no consistency• Staff turnover high – no consistency • Contract misinterpretation within the accounting / finance / sales department • Lawyers agree to terms which are hard to implementy g p • Compliance with T’s & C’s low priority • Trying to do the right thing, but… PricewaterhouseCoopers Slide 10PricewaterhouseCoopers
  11. 11. Life Prior to the Program • Revenue leakage what revenue leakage?• Revenue leakage – what revenue leakage? • How many license agreements do we have? • Do we have visibility/transparency into reporting or specific use of our IP? • How do we measure risk or expected variances? PricewaterhouseCoopers Slide 11
  12. 12. Life Prior to the Program (cont.) • Can we stratify by region licensee or type of IP?• Can we stratify by region, licensee or type of IP? • Do we have consistent terms and conditions? • Who is the owner of these issues inside the Company? • Do we ever exercise the audits rights clause? • A compliance program will have a negative customer impact, right? PricewaterhouseCoopers Slide 12
  13. 13. Benefits of a License Compliance Program • Identification of potential revenue leakage / incremental revenue• Identification of potential revenue leakage / incremental revenue • Enhanced client relationships / trust and increased communication • Improves predictability of future payments / enhanced reporting controlsy y g • Improves the drafting of future license / agreements • SOX – enhanced control procedure over revenue cycle PricewaterhouseCoopers Slide 13
  14. 14. Benefits of a License Compliance Program (cont.) • Corporate governance regarding IP protection• Corporate governance regarding IP protection • Customers / Partners / Channel knows you take IP seriously • Flushes out contract language misinterpretations, side letters, etc.g g p , , • Potentially identifies improper sales practices • Provides better understanding of the customer base usage and licompliance PricewaterhouseCoopers Slide 14
  15. 15. Keys to Designing and Implementing an Effective Program PricewaterhouseCoopers Slide 15PricewaterhouseCoopers
  16. 16. Defining a Successful Program M b i i i i l• Management buy-in is critical • Designating ownership with responsibility and authority • Taking stock of the existing situationg g • Internal control processes • Qualitative and quantitative analysis Customer relationships are a top priority• Customer relationships are a top priority • Incremental revenues identified • New and/or better license agreements • Compliance team is NOT a cost center PricewaterhouseCoopers Slide 16
  17. 17. Keys to Designing and Implementing an Effective Program • "Buy in" from the top• Buy in from the top − Consistent message throughout organization − Compliance / Internal Auditp − Legal − Accounting / Finance − Sales • Strong corporate desire / culture to protect IP rights PricewaterhouseCoopers Slide 17PricewaterhouseCoopers
  18. 18. Keys to Designing and Implementing an Effective Program (cont.) • Understand the current licensing situation and key information about• Understand the current licensing situation and key information about agreements − Gather and Validate data − Reconcile to the licensee data − Consider legal / contract language U d t d l ti hi ith t d lt l i− Understand relationships with customers and cultural issues − Legacy agreements PricewaterhouseCoopers Slide 18PricewaterhouseCoopers
  19. 19. Keys to Designing and Implementing an Effective Program (cont.) • Develop processes and controls over possible revenue leakage• Develop processes and controls over possible revenue leakage − Ensure all licensees who should be reporting are reporting and doing so timely − Compare royalty reports to historical/anticipated reporting for trends or errors • Benchmarking / “Desk” auditsBenchmarking / Desk audits • Risk assessment using quantitative/qualitative factors • Follow up, follow up, follow up PricewaterhouseCoopers Slide 19PricewaterhouseCoopers
  20. 20. Keys to Designing and Implementing an Effective Program (cont.) • Systematic and regular enforcement through compliance reviews• Systematic and regular enforcement through compliance reviews − Majority under-report resulting in incremental revenue − Licensees often report underpayments upon notification a compliancep p y p p program is in place or in preparing for a compliance review − Determine appropriate “level” of a program N tifi ti l tt / G l l tt− Notification letters / General letter • Trust, but independent verification • Escalation path• Escalation path PricewaterhouseCoopers Slide 20PricewaterhouseCoopers
  21. 21. Keys to Designing and Implementing an Effective Program (cont.) • Types of findings• Types of findings − Hard - Very little or no dispute and fact based • Unreported royalty bearing products / licenses • Royalty calculation errors • Over deployed software − Soft - Gray area possibly due to contract interpretationSoft - Gray area possibly due to contract interpretation • Replacement or warranty units • Trial units / Free units U l d fi i i f d d i f N S l• Unclear definition of deductions for Net Sales PricewaterhouseCoopers Slide 21PricewaterhouseCoopers
  22. 22. Keys to Designing and Implementing an Effective Program (cont.) • Settlement Process• Settlement Process − Systematic process for immediate follow-up − Late fees or interest as leverage − Opportunity to renegotiate license agreement or resolve problems with agreement language M st ha e an internal o ner• Must have an internal owner • Good programs often enhance the customer relationship • Good programs should return a reasonable ROIGood programs should return a reasonable ROI PricewaterhouseCoopers Slide 22PricewaterhouseCoopers
  23. 23. Contract Compliance Overview – Leading Practices Compliance Program Continuum: Mature • Consistent company culture with compliance tone at the top Developing • No consistent message from the top - Minimum executive level commitment compliance tone at the top • Systematic and sophisticated approach to business intelligence • Zero tolerance for IP non-compliance • Integrated team approach - Minimum executive level commitment • Sales Team is not supportive • Mixed message to the channel • Perceived tolerance of non-compliance • Disparate team interest and approach Integrated team approach • Significant resource allocation and budget • ROI 8-12+ times program costs • Leverages insights of external Business Disparate team interest and approach • Piecemeal approach • Resource/budget constrained • Greater exposure and inconsistent ROI PricewaterhouseCoopers Slide 23 Leverages insights of external Business Partner
  24. 24. Contract Language and How It Impacts Revenue PricewaterhouseCoopers Slide 24PricewaterhouseCoopers
  25. 25. Contract Language and How it Impacts Revenue Leading Practices • Get the license agreement language right from the start • Convert license agreements into a single standard format to simplify managing the license review process is simplerg g p p • Include "right to audit" and 5% clauses in every agreement • Send licensees a letter of introduction notifying them a compliance program i i l th d t f l i l d tis in place so they do not feel singled out • Default or late payment penalties should be included in every agreement • Exercise your audit rights so your customers / partners know your companyExercise your audit rights so your customers / partners know your company is serious about IP compliance PricewaterhouseCoopers Slide 25PricewaterhouseCoopers
  26. 26. Contract Language and How it Impacts Revenue A dit Cl• Audit Clause • Term Definition • Royalty Calculations • Reporting Requirementsp g q • Compliance Requirements • Sample Contractual Language PricewaterhouseCoopers Slide 26
  27. 27. Contract Language and How it Impacts Revenue Audit Clause • Right to audit / review / examine • Audit period • WHO will be performing the compliance reviews?• WHO will be performing the compliance reviews? • WHAT will they be examining? • WHEN will the review take place?p • HOW OFTEN can reviews take place? • WHICH party will bear the costs? PricewaterhouseCoopers Slide 27
  28. 28. Contract Language and How it Impacts Revenue Term Definition • Are the key terms of the contract defined? − Products: Defined as what it is and what it is not License Metrics: Defined unit of measure− License Metrics: Defined unit of measure • Example: Software Terms: CPU, Processor, Processor Value Unit, User, Named User, Concurrent User, Device, Seat, Instance, etc!! − Usage: Defines what the IP can be used for and what it can not • Example: Internal use, sublicensed, resell, embedded, etc. − Others− Others PricewaterhouseCoopers Slide 28
  29. 29. Contract Language and How it Impacts Revenue Royalty Calculations Potential Considerations: • Initial licensing fees / annual minimums • Per unit fixed fee vs percent of revenue• Per unit fixed fee vs. percent of revenue • Sample units and other deductions • Average selling price vs. net revenueg g p • When a product becomes royalty-bearing − e.g., put to use, transferred, shipped, first use by a third party, i i d l d h di linvoiced, leased, or other disposal − Other licensees, affiliates, suppliers vs. manufacturers PricewaterhouseCoopers Slide 29
  30. 30. Contract Language and How it Impacts Revenue Royalty Calculations Other Considerations: • Rates tiered by quantity or time • Full compliance vs non compliance rates• Full compliance vs. non-compliance rates • Local and international IP laws PricewaterhouseCoopers Slide 30
  31. 31. Contract Language and How it Impacts Revenue Reporting Requirements • Report format and content • Frequency of reporting and payment • Currency• Currency • Interest and late fees • Taxes, levies and other duties, PricewaterhouseCoopers Slide 31
  32. 32. Contract Language and How it Impacts Revenue Compliance Requirements • Trademarks • Patents • Logos• Logos • Watermarks PricewaterhouseCoopers Slide 32
  33. 33. Contract Language and How it Impacts Revenue Sample Contractual Language Audit ClauseAudit Clause Limited Language … Auditors will only report to [Licensor] whether the [royalties] paid were correct, and if incorrect, the correct amount. In the event that AuditorsLanguage determine that the [royalties] paid were incorrect, Auditors will deliver to [Licensee] a report of such conclusion. … PricewaterhouseCoopers Slide 33
  34. 34. Contract Language and How it Impacts Revenue Audit Clause Sample Contractual Language Audit Clause Broad Language Licensee shall keep complete and accurate books and records of all sales, leases, uses, returns or other disposals of licensed products for a period of [X] years following the manufacture, sale, or other disposal. Licensor[ ] y g , , p shall have the right, through a public certified auditor appointed by Licensor, to inspect, examine and make abstracts of the said books and records no more than once per calendar year. … The inspection shall be conducted at Licensor’s own expense, unless the Licensee has failed to submitp royalty statements during the period to which the inspection relates or the inspection establishes a discrepancy or error exceeding [X]% of the monies actually due, in which case the cost of the inspection shall be borne by Licensee. …y PricewaterhouseCoopers Slide 34
  35. 35. Contract Language and How it Impacts Revenue Royalties Sample Contractual Language Royalties Limited Language Licensee shall pay [Licensor] the royalties set forth in the applicable [Appendix]. Royalties … PricewaterhouseCoopers Slide 35
  36. 36. Contract Language and How it Impacts Revenue Royalties Sample Contractual Language Royalties Broad Language Licensee agrees to pay to [Licensor] a royalty on each [licensed product] manufactured by or for Licensee and incorporated into [licensed products] used, sold, leased, or otherwise disposed of by Licensee in which any one or more of the [licensed patents] …. This royalty shall be due irrespective of whether such [licensed patents] are used in the country of manufacture, sale or other disposal… PricewaterhouseCoopers Slide 36
  37. 37. Contract Language and How it Impacts Revenue Reporting Sample Contractual Language Reporting Limited Language …Licensee will provide Licensor a written list describing the shipped [licensed product] quantity and the customers receiving all such [licensed products… PricewaterhouseCoopers Slide 37
  38. 38. Contract Language and How it Impacts Revenue Reporting Sample Contractual Language Reporting Broad Language Within 30 days …, Licensee shall submit to Licensor a written statement in the form attached hereto as Exhibit C, … Licensed products by type part number brand name model number and/or serialLicensed products by type, part number, brand name, model number, and/or serial number Quantities manufactured, purchased and/or sold or otherwise disposed, … Net revenue Customers Countries in which the licensed product was manufactured and sold… PricewaterhouseCoopers Slide 38
  39. 39. Potential Issues • Out-dated agreements in use• Out-dated agreements in use − The licensor may not have the same rights as in current agreements − All products may not be covered (i.e., royalty bearing) • No standardized procedure to determine the completeness and accuracy of licensee reporting / collection of receipts − Should implement quarterly reporting requirement, rather than only when amounts are determined due. • Soft dollar reconciliations sometimes complex PricewaterhouseCoopers Slide 39
  40. 40. Global Issues Si ifi t i l diff• Significant regional differences • The “You Don’t Trust Me” factor • Respect for I.P. rights is a major issue • Sales into unauthorized territories – Foreign Corrupt Practices Act (FCPA and anti-bribery/anti corruption issues) • Sales to unauthorized parties – Office of Foreign Asset ControlSales to unauthorized parties Office of Foreign Asset Control (OFAC) issues PricewaterhouseCoopers Slide 40
  41. 41. Leading Practices • Consistent language in all agreements • Audit Rights clause mandatory • Compliance Program Letter of IntroductionCompliance Program Letter of Introduction • Default penalties, late fees and interest charges • The “5% clause”, mandatory S t ti ‘ ff’ h t li• Systematic vs. ‘one-off’ approach to compliance PricewaterhouseCoopers Slide 41
  42. 42. Risk Assessment, Targeting & Compliance Policy PricewaterhouseCoopers Slide 42PricewaterhouseCoopers
  43. 43. Licensing Portfolio Risk Assessment – Audit Risk &g Target (ART) Tool • Driving value up and keeping compliance costs down • Quantitative and qualitative analytics Geographies Public company vs. private Sales representative assessment Qualitative Index Factors Business intelligence Sales representative assessmentFactors Product mix Anomalies in entitlement or support data Reconciliation differences Quantitative Index Factors PricewaterhouseCoopers Slide 43 Type of license agreement
  44. 44. Risk Assessment Benefits QuantitativeQualitative • Higher margin revenue and more predictable revenue stream • Lower structural cost and positive EPS impact • Defined corporate strategy - Consistent message throughout organization - Board of Directors and C Suite leadership - Becomes part of the culture • Shorter cycle times • Better maximization and utilization of IP portfolio • Greater appeal to global partners and improved - Becomes part of the culture • Procedural and contractual compliance - Fulfill fiduciary responsibility as a public company • Move consistency for future royalty streams • Forge consistent policies to address IP compliance relationships • Revenue leakage opportunity 5%-10% of revenue • Send a message to the channel that you take IP seriously • Establish corporate policy for non-compliance - Zero tolerance policy • Collaboration with Business Partners to build aCollaboration with Business Partners to build a sustainable model and leverage knowledge PricewaterhouseCoopers Slide 44
  45. 45. Risk Assessment • Suggestions for approach: Identify & Rate Risk Factors • Suggestions for approach: − Keep it simple − Easy to implementy p − Not an exact science Risk Score 1 2 3 Risk Group Low Moderate High PricewaterhouseCoopers Slide 45
  46. 46. Risk Assessment Identify & Rate Risk Factors 1st Tier 1) Geography 2) Public vs. Private 3) R ti R ili ti Diff3) Reporting Reconciliation Differences 2nd Tier 4) A/R Aging) g g 5) Sales Rep Coverage 6) Past Settlements/Compliance Reviews 7) Business Intelligence7) Business Intelligence 8) Strength of Audit Clause 9) Product Mix PricewaterhouseCoopers Slide 46 10) Sales Representative Assessment 11) Contacts with Licensees
  47. 47. Transparency International - Corruption Perceptionp y p p Index (TI - CPI) PricewaterhouseCoopers Slide 47
  48. 48. Other Risks to Highlight… • Grey Market• Grey Market • FCPA • OECD • Local law violationsLocal law violations PricewaterhouseCoopers Slide 48
  49. 49. Risk Assessment - Tier 1 Risk Factor Items to Consider Risk Rating 1) Geography ( b i k t ) Western Europe, US, Australia, Canada 1 Middle East, Central Europe, Japan 2 (map by risk, sectors) Middle East, Central Europe, Japan 2 China, India, South America, Eastern Europe 3 2) Public vs. Private Public 1 Newly Public (<12 months) 2 Private 3 3) Reporting Reconciliation Differences 0 – 250K 1 251K – 500K 2 e e ces 500K+ 3 PricewaterhouseCoopers Slide 49
  50. 50. Risk Assessment – Tier 2 Risk Factor Items to Consider Risk Rating 4) A/R Aging 0 – 90 days 1 91 – 180 days 2 180+ days 3 5) Sales Rep Relationship Excellent 1 Neutral 2 Poor/None 3 6) Past Settlements/Compliance Reviews No findings 1 Successfully negotiated 2 Unable to reach the agreement / complete audit 3 7) Business Intelligence Positive business intelligence 1 No recent events 2 PricewaterhouseCoopers Slide 50 Recent M&A, major event 3
  51. 51. Risk Assessment Audit Risk Tool output • Identify and rate risk factors• Identify and rate risk factors • Stratify the licensee/channel partner portfolio • Calculate an actual risk score for each licensee/channel partner Channel Partner Portfolio Risk Assessment CP 390% 100% CP 3 CP 4 CP 5 CP 6 CP 7 CP 8 CP 9 40% 50% 60% 70% 80% 90% sVolumeIndex CP 1CP 2 CP 10 0% 10% 20% 30% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Sales PricewaterhouseCoopers Slide 51 Controls Index CP 1 CP 2 CP 3 CP 4 CP 5 CP 6 CP 7 CP 8 CP 9 CP 10
  52. 52. Risk Assessment License Compliance Reviews differ in: Types of Reviews License Compliance Reviews differ in: • Scope − License Agreements: All agreements or selection of agreements − Product Portfolio: All products or subset of products − Geography: Global or select territories • Review Approach• Review Approach − Self Reporting: Licensee self-reports units/revenues − Remote Review: Licensor or the licensor’s third-party partner (i.e. independent party) requests information from licensee and verifies the completeness and accuracy of therequests information from licensee and verifies the completeness and accuracy of the provided reports without an onsite visit − Onsite Review: Licensor or third-party partner conducts a full review that includes an onsite visit to the licensee’s premises PricewaterhouseCoopers p • Level of Effort and Time to Completion Slide 52
  53. 53. Risk Assessment • Identify IP compliance strategy Critical Success Factors Identify IP compliance strategy • Sales buy-in and support • Consistent execution • Resources – internal and external • Realistic timeline to implement and evaluate • Change management/cultural shift − Executive sponsorship Communication and education− Communication and education PricewaterhouseCoopers Slide 53
  54. 54. Establish Compliance Policy U i th ART P d di i ith l l l d fi l t Establish Compliance Policy Risk Assessment to Nominations to Close • Using the ART Process and discussions with legal, sales, and finance select companies for compliance reviews • Create escalation procedures and path • No-surprises at close meeting • Transparent process – lends to customer goodwill • Thorough report with audit information & references • Develop a seamless audit negotiation and settlement strategy PricewaterhouseCoopers Slide 54
  55. 55. Establish Compliance Policyp y Risk Assessment to Nominations to Close • Internal Communication Strategy• Internal Communication Strategy − Planning Meetings • External Communication Strategy Design − Compliance Program − Audit Program Communication and Documentation • Biweekly Status MeetingsBiweekly Status Meetings • Knowledge Transfer PricewaterhouseCoopers Slide 55
  56. 56. Contract Compliance Communication LoopContract Compliance Communication Loop Internal External Compliance Strengthens Internal Compliance by: Internal Compliance Strengthens External Compliance bInternal Compliance • Impact future agreement language • Enhance transparency by broadening/redefining reporting Compliance by: • Enhance internal/external communication lines • Incorporate the use of portfolio risk assessment External Compliance templates • Assessing findings from past examinations and identifying other risk Partners which resemble those already portfolio risk assessment • Enhance partner- specific intelligence • Identify partner-specific “red flags” or other risk areasresemble those already examined. • Identify key risk areas that can transcend partners/better prepare for future examinations g • Retain and organize relevant partner-specific documentation PricewaterhouseCoopers Slide 56
  57. 57. Establish Compliance Policyp y Risk Assessment to Nominations to Close Data Analysis Critical work stream to efficient audit process • Agreements Analysis • Licensee Reporting Data Analysis • Third-party or Internal Data Collection PricewaterhouseCoopers Slide 57
  58. 58. Establish Compliance Policy Risk Assessment to Nominations to Close Technical Analysis Critical work stream to efficient audit process • Work directly with Licensor’s engineers and technical employees to understand the technology, verification process, detection process, usage, schematic charts, etc.schematic charts, etc. • Increase efficiencies and perform complex data analytics PricewaterhouseCoopers Slide 58
  59. 59. Contract Compliance – The Licensee’s Perspective PricewaterhouseCoopers Slide 59PricewaterhouseCoopers
  60. 60. Common Review Challenges Facing Licensees Some of the common challenges faced by organizations during a License g g g y g g Compliance Review include: • Lack of resources − Causes delays in completing the Review in an efficient and timely manner− Causes delays in completing the Review in an efficient and timely manner • Lack of transparency in Review scope and process − Leads to potential mis-understandings of the fact-pattern and “surprise” findings • Communication − Undefined communication channels leading to possible disclosure of mis-information • Collection of accurate sales records − Numerous sales/distribution channels make compiling sales records cumbersome • Retail, Distributors, Large Account Resellers − Over reliance on third-party records (i e Distributor Managed Service Provider etc ) PricewaterhouseCoopers Over reliance on third party records (i.e. Distributor, Managed Service Provider, etc.) − Organizational changes resulting in changing responsibilities, data loss, and lack of access to legacy systems Slide 60
  61. 61. Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks License Compliance Reviews can require a significant level of effort from your organization depending on the scope of the Review, but there are steps you can take to prepare and mitigate risks: • Identify appropriate executive sponsorship − Determine who within your organization is an appropriate sponsor toy g pp p p ensure an successful delivery of the review and a thorough analysis of the findings PricewaterhouseCoopers Slide 61
  62. 62. Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks (cont.) • Assemble a project team across the licensing lifecycle (and across geographies) − Executive Sponsor: Provides executive management support for the project in assisting the team gain the necessary resources, approvals, etc. for success − Project Manager: Develops a project plan, coordinates team’s activities, resolves issues and drives project to a successful completion − Contract / Vendor Management: Gathers and reviews license agreements for key terms and conditions regarding licensing and conditions of the Review − Legal: Provides legal advice and support • Understand scope − Organizational entities (and legacy firms and divestures) and business units − Geographies PricewaterhouseCoopers Geographies − Products Slide 62
  63. 63. Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks (cont.) • Develop a workplan − Include key tasks, milestones, responsibilities, assumptions and dependencies − Hold regular status updates with project team and drive towards committed deadlines • Review all license agreements − Gather and review all the license agreements related to the licensorGather and review all the license agreements related to the licensor − Understand obligations regarding any Review PricewaterhouseCoopers Slide 63
  64. 64. Items to Consider to Prepare and Mitigate RisksItems to Consider to Prepare and Mitigate Risks (cont.) • Be cooperative − Ensure concerns regarding scoping, approach, analysis and others are addressed in a cooperative (and professional) mannerp ( p ) − Past relationship history is important context to any review, but don’t recite a detailed history in front of the third-party partner • CommunicateCommunicate − Request that the licensor/third-party to be transparent about approach and be transparent about your process to collect and validate required data − Establish periodic internal team and review team project status updatesEstablish periodic internal team and review team project status updates − Express concerns, risks, issues to get resolution as soon as possible PricewaterhouseCoopers Slide 64
  65. 65. Closing Comments PricewaterhouseCoopers Slide 65PricewaterhouseCoopers
  66. 66. Public InformationPublic Information BROADCOM RECORDS 2ND- QUARTER PROFIT Broadcom… reported its first profit in three quarters on a royalty settlement from Qualcomm… Qualcomm agreed in April to pay Broadcom $891 million over four years to end a global dispute over technology used in mobile phones. -San Jose Mercury News, July 24, 2009 PricewaterhouseCoopers Slide 66
  67. 67. Closing Comments • Compliance programs are now leading practice and generally accepted by U.S. licensees • Board of Director and Audit Committee queries • The concept of a profit center vs. cost center • Tone at the top/culture: Sales or Finance? • Why wouldn’t you have a compliance program?Why wouldn t you have a compliance program? PricewaterhouseCoopers Slide 67
  68. 68. QuestionsQuestions & Comments PricewaterhouseCoopers

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