Firmex Harvesting Intangible Assets

@Firmex, #FirmexMC

Harvesting Intangible Assets
Uncover Hidden Revenue in Your Company’s Intellectual Property

Andrew J. Sherman, Esq.
Firmex Webinar Series Jones Day
51 Louisiana Avenue, N.W.
May 22nd, 2012 Washington, D.C. 20001-2113
1:00p.m. to 2:00p.m. 202-879-3686
ajsherman@jonesday.com

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED 1

About Firmex
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Joel
Lessem Who uses Firmex?
CEO
Firmex • Firmex community includes
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to offer educational resources to our expanding community


Andrew J. Sherman
Mr. Sherman is a partner in the Washington, D.C. office of Jones Day with over 2,700 lawyers worldwide.

He is the author of 23 books on business growth, capital formation and the leveraging of intellectual
property. His twenty-second (22rd) book, Harvesting Intangible Assets, Uncover Hidden Revenue in Your
Company’s Intellectual Property, (AMACOM) was published in October of 2011.

Other recent titles include the best-selling Mergers and Acquisitions from A to Z, third edition was
published by AMACOM in 2010. He is also the author of the 2nd edition of the Due Diligence Strategies
and Tactics, which was published in the Spring of 2010. His Twenty-third book Essays on Governance,
will be published June of 2012.

He has appeared as a guest and a commentator on all of the major television networks as well as
CNBC’s “Power Lunch,” CNN’s “Day Watch,” CNNfn’s “For Entrepreneurs Only,” USA Network’s “First
Business,” and Bloomberg’s “Small Business Weekly.” He has appeared on numerous regional and local
television broadcasts as well as national and local radio interviews for National Public Radio (NPR),
Business News Network (BNN), Bloomberg Radio, AP Radio Network, Voice of America, Talk America
Radio Network and the USA Radio Network, as a resource on capital formation, entrepreneurship and
technology development.

He has served as a top-rated Adjunct Professor in the Masters of Business Administration (MBA)
programs at the University of Maryland for 23 years and at Georgetown University for 15 years where he
teaches courses on business growth strategy.

He has served as General Counsel to the Young Entrepreneurs’ Organization (YEO) since 1987. In 2003,
Fortune magazine named him one of the Top Ten Minds in Entrepreneurship and in February of 2006, Inc.
magazine named him one of the all-time champions and supporters of entrepreneurship.


Introduction:
Challenges, Opportunities, Myths
and Call to Action


The Risks and Challenges of the
Intangible Asset Class
• The markets have trouble understanding that which they can’t touch or feel – yet the
paradigm shift continues at a rapid pace driven by technology and social media
• Investors have not figured out yet how to properly value intangibles, banks have not yet
figured out how to lend against intangibles as collateral and the accounting profession
has not yet figured out how to treat these assets properly on financial statements (Lev)
(The Extinction of Goodwill)
• Companies of all sizes and types, universities, governments, NGO’s, trade associations
don’t know how to properly manage these assets nor do they have systems and
strategies in place to drive stakeholder value, new business models, markets and profit
centers (a crisis of strategy, systems, governance and leadership) (AOL)
• So … our economy is increasingly being driven by a vehicle that nobody knows how to
properly drive and which has no clear path forward….


The Opportunities
• The increasing strategic importance of intangible assets in our society as
drivers of shareholders value
• Trillions of dollars worth of intangible assets already exist and are waiting to
be harvested to foster innovation, economic growth, productivity and job
creation on a global basis (but some will rot on the vine or spoil if not harvested
on a timely basis) (the Dangerous Assumptions of Complacency and RITA)
• Even a modest effort can create tangible and measurable results (“P&G’s $3
billion sideline” WSJ March 20, 2012)

©COPYRIGHT 2011. ANDREW J. SHERMAN. ALL RIGHTS RESERVED #FirmexMC 6

The Opportunities (Cont’d)
• Intangible assets are becoming the premier driver of business strategy
and M&A (Google® buys $12.7b of Motorola® patents)
• The capital efficiency of most intangible asset harvesting strategies and
the access to the credit/equity markets for companies of all sizes and types
as the financial markets better understand the value and strategic
importance of this asset class will be a key driver of growth and profitable
margins
• Uptick in patent litigation and trolls (over 2,800 patent infringement
lawsuits in 2010 – doubled in 10+ years)


The Myths
• It’s not just about money (it’s about attitude/culture/passion/ time
management) (The Tao of Steve Jobs)
• It’s not just about patents (brand equity, systems, know-
how, processes, channels, relationships, databases, best
practices, culture, governance, etc. are all critical strategic intangible assets
that drive shareholder value)
• It’s not just about break through innovation (most intangible assets offer
pathways to incremental opportunity)
• It’s not just about the private sector (look at the AUTM ratios and upside
potential, governments, trade associations, etc.)
• It’s not just about economic reward (the advancement of society, culture, even
our ability to co-exist relies on a human race that wants to innovate for psychic
reward, peer recognition, career accomplishment, legacy, etc.)

WebEx CLE Verification Code: 051512


Some Insights From One of the World’s
Greatest Innovators
“Innovation has nothing to do with how many R&D dollars you
have. When Apple came up with the Mac, IBM was spending at
least 100 times more on R&D. It’s not about money. It’s about the
people you have, how you’re led, and how much you get it.”
-- Steve Jobs
RIP – 10/5/11

1. Do What You Love (Passion is everything)
2. Put A Dent In The Universe
(How will you define your legacy?)
3.Kick Start Your Brain
(What is the definition of insanity?)
4. Sell Dreams. Not Products
(Understand what your customers truly want)
5.Say No To 1000 Things
(Discipline. Rigor. Focus. Screens and Filters. Prioritize. VC
Model.)
6.Create Insanely Great Customer Experiences and Master the
Message
(Define and build your brand)
7.Inspire Evangelists
(No man is an island)


Key Economic Trends and
Intangible Assets


The Shift From a Tangible Asset-Driven Economy
to an Intangible-Driven Market is Well Under Way

Intangibles information
gap
Intangible book value
Tangible book value

Source: Ocean Tomo

The Shift Is Taking Place In Multiple Industries
Intangible Value as a % of Total Market Capitalization
by Sector
100%
90%
80%
70%
60%
1975
50%
2005
40%
30%
20%
10%
0%
als s
ner
gy
teri rial ry p le
s ar e ials vices gy ties
E a d ust tion a r Sta lth C in anc er olo U tili
M In cr e me He
a F sS chn
er Dis o ns u a tion n Te
s um
C nic atio
n mu orm
Co co m Inf
T ele


Source: Ocean Tomo


Intangibles +/- 70% in M&A
…another version of
the intangibles
information gap

Tangible, 30%

Goodwill, 47%

Ernst & Young: Acquisition Accounting – What’s Next for You? (global
data from 2007). Intangible, 23%


Here’s What’s Really Happening
Percent of NFB output Intangible capital
.16 • Computerized information
.14 – Software
Tangible – Databases
.12
• Innovative property
.10
– R&D, broadly defined
Intangible
.08
– Copyrights and licenses
.06 Intangible vs. tangible investment rate – Designs
.04
rises over time in the United States • Economic competencies
– Marketing and branding
.02
1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 – Strategic firm practices

Source: Corrado and Hulten (2010). Last point plotted is 2007.
http://www.conference-board.org/data/intangibles

15

This Investment Created a New
(albeit invisible*) Kind of Capital

Total
Corporate
Value

Financial Tangible Intangible
Capital Capital Capital

*not on the balance sheet
16

It’s about
knowledge
assets


Understanding Intangibles


Intangible Assets

• The drivers of shareholder value that we can’t touch or feel
• Assets that transcend the four buckets of intellectual property law
• Assets that transcend the definition of goodwill and traditional
balance sheet accounting
• Assets that all companies of all sizes and all industries have access
to, but rarely fully engage

WebEx CLE Verification Code: 051512


Types of Intangible Assets &
Intellectual Property
Cultural Assets Human Assets

• Leadership and Governance • Investment in the advancement and
• Organizational Norms and Habits interchangeability of workforce
• Trust and Integrity (career advancement)
• Mission, Vision and Values • Skill expertise of workforce
• Communication and Goal-setting (competence and experience)
• Accountability • Special
• Transparency certifications, awards, security
• Reward and Compensation Systems clearances, etc.
• Decision-making Systems • Functionality and performance of
teams
• Commitment, motivation, attitude
and loyalty
• Problem solving skills
• Creativity

Types of Intangible Assets &
Intellectual Property (Cont’d)
Relationship Assets Practices and Routines Assets

• Corporate reputation and external/internal • Know-how and show-how (codified in
brand image perception manuals and informal procedures and
• Status, strength and influence over channel tacit rules on workplans)
partner relationships • Systems and processes
(VAR’s, dealers, distributors, wholesalers, f • Information transmission, flow and
ranchisees) management
• Vendor relationships • Knowledge, management and capture of
• Customer relationships best practices
• Investor/banking relationships • Training systems
• JV and Alliance Partners
• Sales, Marketing and Branding Strategies
• Customer Relationship Management
Systems


Branches of Intellectual
Property Law

IP

Trademarks & Trade
Patents Copyrights
Brands Secrets

Trade
Dress

Evolving Strategic Views Towards
Intellectual Assets (IA)
Traditional Enhance the company’s competitive advantage and strengthen its ability to defend
View its competitive position in the marketplace (IA as a barrier to entry and as a shield
to protect market share) (reactive and passive approach)

Current Should not be used merely for defensive purposes but should also be viewed as an
View important asset and profit center which is capable of being monetized and
generating value through licensing fees and other channels and strategies,
provided that time and resources are devoted to uncovering these opportunities
(especially dormant IA assets which do not currently serve at the heart of the
company's current core competencies or focus) (proactive/systemic approach)

Future Premiere drivers of business strategy within the company and encompass human
View capital, structural/organizational capital and customer/relationship capital. IAM
systems need to be built and continuously improved to ensure that IA assets are
used to protect and defend the company's strategic position in domestic and global
markets and to create new markets, distribution channels and revenue streams in a
capital efficient manner to maximize shareholder value (core focus/strategic
approach)


Why are so many companies typically so
bad at leveraging their intellectual capital?

• Lack the time (too busy)
• Lack the desire (too lazy)
• Lack the skills/expertise/systems (too ignorant or disorganized)
• Lack the vision (too focused on their niche)
• Lack the resources (too capital-constrained)
• Lack the leadership (too thin at the top)
• Lack the market (too focused on technical excellence)
• Lack the demand (clients do not require innovation or value if in the
delivery services)


Intellectual Asset Management (IAM)
(The IP Discovery, Management and
Mining Process)

• IAM systems facilitate collaboration and help break down silos in
communications regarding new product development, the harvesting
of intellectual assets and provides training to employees at all levels
on the importance of the protection and leveraging of intellectual
property.


Reviewing Current IAM Practices

• What is the real commitment to R&D and innovation at all levels
within the company? Are strategies and budgets focused only on “home
runs” or “singles and doubles?”
• What IAM systems, procedures and teams are in place now?
• How and when were these systems developed? Are they obsolete or
no longer consistent with the company’s current strengths, focus or
growth objectives?
• Who is responsible/accountable for managing these systems within
the company? Who is empowered to make decisions as to which
projects will move forward and which will not?


Reviewing Current IAM Practices
(Cont’d)
• What are the ideas/technology harvesting, filters and procedures for
innovation decisional analysis (as to whether to move forward/budget
allocation/timetable, etc.) currently in place? How does information
about creative new ideas flow within your company? Where does it
start? Where does it end?
• Is the strategy and the process for harvesting and leveraging
intellectual assets more reactive or proactive?
• What are the real or perceived internal (politics, red
tape, turfmanship, budgeting processes, organizational structure)
and/or external (market conditions, state of the art moving
quickly, competitor's strategies, etc.) silos, barriers and hurdles that
stand in the way of better IAM practices and procedures?
• What can be done to remove or reduce those barriers?


IAM System Goals
• Catalogue and manage the inventory and status of the company’s
proprietary and intangible assets
• Use of technology (software, intranet, telecommunications, IM, etc.)
to encourage and support communication and data-sharing about
new intra-company and industry-wide innovation and intellectual
property
• Internal processes, filters (including resource allocation) and
decision-making systems for intellectual asset development and
harvesting
• Foster innovation which strengthens customer relationships and
builds shareholder value
• Open-ended brainstorming on new applications and value-added
improvements to existing products, services and technologies


IAM System Goals (Cont’d)
• Roles and accountability for creating, implementing and
enforcing IAM system standards (internally and externally)
• Management of strategic interdependent relationships
• Determining how IP assets will be owned (holding
companies, tax issues, etc.)
• Analysis and implementation of strategies to leverage and
monetize these assets


IAM System Goals (Cont’d)

• Defending what you own via IP litigation and enforcement
(including licensing)
• Defending claims of infringement by others
• Identifying opportunities for “licensing in”
• Periodic “pruning” of dormant IP assets
• Viability/Staleness/Obsolescence
• Too far away from current core focus
• (Sale/Licensing/JV’s/Donation)
• Reducing costs of R&D/Patent maintenance and filing costs


Intellectual Assets Drive Growth
Strategies and Generate Revenues
Protectable Possible Market Opportunities
Intellectual Property and Revenue Sources
• Spin-off new companies
• Patents • Joint ventures, strategic
• Trademarks partnerships & alliances
• Copyrights • Technology & software licensing
• Trade dress & trade secrets • Outright sale of new technology
• Distribution channels • Co-branding
• Show-how & know-how • Franchising
• Databases & customer info. • Enter new markets
• Software & proprietary algorithms • Develop new products
• Customer & partnerships • Brand-extension licensing
• Proprietary processes & systems • Technology transfer
• Knowledge & technical workers • Cooperatives, consortiums,
• Exclusive licenses/access to federations
technology • Training & consulting services
• International expansion
• Government contracts


Questions & Answers


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