The Patent Renewals Challenge: Balancing Risk and Cost

As economic recession forces companies to cut costs and grow revenue, there is an opportunity to reduce IP overhead without impacting risk. By intelligently abandoning non-essential patents and trademarks and increasing revenue from IP sales, businesses can strengthen their balance sheets and increase competitiveness. The complex process of pruning a patent portfolio and determining what to renew and what to abandon is equal parts art and science. However, successful players in the IP space have learned that their IAM decisions can be made more precise and better grounded in business objectives. Many companies are successfully incorporating systems to help organize their patent portfolios and manage the risks inherent in them.

Economic recessions force businesses to cut costs and identify new and efficient sources of revenue. Yet many companies will pass up millions of dollars of low-hanging fruit annually in the form of reduced patent annuities and increased revenue from sales of unused patents. Reinforcing this, the USPTO 2008 Annual Report states that “the renewal rates for (patent) maintenance fees have been
increasing modestly over the last four years and the trend indicates that this growth pattern will continue.”

It is generally believed that a business can shed 15-20% of its IP through a systematic portfolio review based on contribution to company P&L, strategy, and objectives. This is not surprising, given that as few as 5% of patents contribute to company revenue (Table 1). Despite this, almost 75% of patents are renewed in their first 11 years, as shown in Table 2.

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With more than $850 million paid in annual patent maintenance fees, a 15% pruning would yield more than $125 million in annual savings paid to the USPTO alone! Add in at least another half-dozen countries in which patents are filed, and the savings could easily more than double.

Recessions force businesses to adopt new approaches. Perhaps the current recession will be a catalyst for much-needed change in how companies manage their IP in the era of dwindling budgets. Often new business models include high degrees of uncertainty and risk. This is not the case with two models that emerged from the last two recessions.

Dow Chemical

In 1990, the world economy headed into a recession. Dow Chemical took actions starting in 1992 that reduced IP management costs by $40 million without increasing risk. Bruce Story, at the time the Intellectual Asset Manager for Dow's largest patent portfolio, was involved with this project. He recounts that the IP audit they undertook was targeted at aligning patents to Dow's businesses and to eliminating IP that was not producing sufficient business value. Story counsels that “with 20,000 patents, this was a massive undertaking, but it is just as relevant in smaller companies as they have smaller budgets to work with and need to tightly manage resources to produce and maintain the patents necessary to grow and protect the business.”

Story discusses the hard work involved to profile each patent “including business use classification, cost and revenue, relevance to our offensive or defensive strategy, related licenses and business, technical and legal strength. This, together with alignment of our team around our IP strategy, enabled us to apply a logical, fact-based approach to reducing our patent maintenance fees.”

This project led to establishing a metric that is used to continue the company's focus on filing and maintaining patents that are aligned with the business. Under this metric, the percentage of the company's portfolio not contributing to the business is down from 25% in 1993 to 3% last year.

This metric continued to drive ongoing improvement in Dow's portfolio, and when the 2001 recession hit, the organization rallied to take additional steps. This started with a careful review of invention disclosures to ensure new patent filings were aligned with business strategies. There would be fewer patent applications, but higher quality.

“We identified patent-advantaged sales,” says Story, “helping us provide direction to R&D to ensure they were patenting things needed to protect differentiation and pricing ' Although defining and aligning the business and IP strategy are essential to successfully achieving these results, new processes and supporting software tools are essential to success.”

At a minimum, companies need an IP database that can hold business and technical information about IP assets, not just legal information. Each asset should be tagged in terms of business unit, product lines, area of technology, etc. Is it licensed to one or more third parties? Is it the subject of a conflict? Ideally, the IP team should have the ability to create its own categories at whatever level of detail makes sense for the business. Some companies use up to eight different types of categorization to support portfolio analysis. Procedures are needed to ensure that the appropriate tags are assigned to each asset, and of course it should be easy to change these categories and move assets from one category to another as the business changes.

Capturing Value Judgments

Another critical factor is the ability for the IAM system to capture value judgments by a firm's experts and their reasons for making a decision. How broad are the claims for this patent? How strong is the technology? How aligned is it with the evolving strategy? It is important to see why decisions were made at different stages in the life cycle of an asset. One example of a simple visual approach to capturing multi-dimensional team judgments is shown in Figure 3, Portfolio Evaluation Matrix. A review team can quickly select the appropriate rating on each axis, add a comment (not shown) and store this in the asset record. At the next review, the team will be able to see, for example, that the asset was identified as important for a new business venture that was subsequently shelved, so the asset may no longer be relevant. Of course, patent ratings from such companies as Ocean Tomo, The Patent Research Board, and Innography supply additional perspective on the potential value and quality of a patent that may also assist with this process.

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With this information available via online query or reports at any time, IP audits and other portfolio reviews are dramatically easier and can be done as a routine matter without the need for massive data gathering exercises that are so frustrating to everyone. It changes the level of dialog with internal business clients because everyone can see the context in making asset decisions. The organization will also adopt consistent terminology and processes, increasing efficiency and alignment of the IP management team around common goals.

Story admits surprise that more companies aren't driving unproductive IP out of the business during our new-found recession. He notes that “with the drive for lower costs and higher revenue I would expect to be seeing much more activity in this area.”

We agree, especially with the lifetime cost of a patent now in the $300,000 to $500,000 range. Of course, with Non Practicing Entities (also referred to as “Trolls”) buying tens of thousands of patents and the rapid rise of patent broker and auction activity, this creates a highly favorable climate for reducing unused patents.

Given this, why do so many companies pass up this opportunity? As is so often the case, misalignment of incentives is at least partly to blame. It seems that the USPTO requires a very high rate of renewals to cover new patent filing costs. Patent and trademark maintenance service providers' objectives are not aligned with the goal of reducing renewals. Additionally, many companies lack the IP management infrastructure, data, and tools needed to make informed, fact-based decisions. This gives rise to a fear of making potentially career-limiting IP disposition decisions.

Conclusion

As the global economy spirals downward and the recession deepens, bold new moves will be necessary to regain our footing. This dire situation is catalyzing change and emboldening leaders to take action in new ways. Fortunately, for companies relying on IP, Dow Chemical has already shown how to take action to the benefit of shareholders. Dow set the bar during the last two recessions for cutting IP management costs while increasing patent contribution. It remains to be seen if other companies will follow its lead.

Paul DiGiammarino is CEO of Anaqua, a provider of IP management software and services. In addition to advising executives on IP management matters, he is a frequent speaker and author on this topic.

As economic recession forces companies to cut costs and grow revenue, there is an opportunity to reduce IP overhead without impacting risk. By intelligently abandoning non-essential patents and trademarks and increasing revenue from IP sales, businesses can strengthen their balance sheets and increase competitiveness. The complex process of pruning a patent portfolio and determining what to renew and what to abandon is equal parts art and science. However, successful players in the IP space have learned that their IAM decisions can be made more precise and better grounded in business objectives. Many companies are successfully incorporating systems to help organize their patent portfolios and manage the risks inherent in them.

Economic recessions force businesses to cut costs and identify new and efficient sources of revenue. Yet many companies will pass up millions of dollars of low-hanging fruit annually in the form of reduced patent annuities and increased revenue from sales of unused patents. Reinforcing this, the USPTO 2008 Annual Report states that “the renewal rates for (patent) maintenance fees have been
increasing modestly over the last four years and the trend indicates that this growth pattern will continue.”

It is generally believed that a business can shed 15-20% of its IP through a systematic portfolio review based on contribution to company P&L, strategy, and objectives. This is not surprising, given that as few as 5% of patents contribute to company revenue (Table 1). Despite this, almost 75% of patents are renewed in their first 11 years, as shown in Table 2.

[IMGCAP(1)]

[IMGCAP(2)]

With more than $850 million paid in annual patent maintenance fees, a 15% pruning would yield more than $125 million in annual savings paid to the USPTO alone! Add in at least another half-dozen countries in which patents are filed, and the savings could easily more than double.

Recessions force businesses to adopt new approaches. Perhaps the current recession will be a catalyst for much-needed change in how companies manage their IP in the era of dwindling budgets. Often new business models include high degrees of uncertainty and risk. This is not the case with two models that emerged from the last two recessions.

Dow Chemical

In 1990, the world economy headed into a recession. Dow Chemical took actions starting in 1992 that reduced IP management costs by $40 million without increasing risk. Bruce Story, at the time the Intellectual Asset Manager for Dow's largest patent portfolio, was involved with this project. He recounts that the IP audit they undertook was targeted at aligning patents to Dow's businesses and to eliminating IP that was not producing sufficient business value. Story counsels that “with 20,000 patents, this was a massive undertaking, but it is just as relevant in smaller companies as they have smaller budgets to work with and need to tightly manage resources to produce and maintain the patents necessary to grow and protect the business.”

Story discusses the hard work involved to profile each patent “including business use classification, cost and revenue, relevance to our offensive or defensive strategy, related licenses and business, technical and legal strength. This, together with alignment of our team around our IP strategy, enabled us to apply a logical, fact-based approach to reducing our patent maintenance fees.”

This project led to establishing a metric that is used to continue the company's focus on filing and maintaining patents that are aligned with the business. Under this metric, the percentage of the company's portfolio not contributing to the business is down from 25% in 1993 to 3% last year.

This metric continued to drive ongoing improvement in Dow's portfolio, and when the 2001 recession hit, the organization rallied to take additional steps. This started with a careful review of invention disclosures to ensure new patent filings were aligned with business strategies. There would be fewer patent applications, but higher quality.

“We identified patent-advantaged sales,” says Story, “helping us provide direction to R&D to ensure they were patenting things needed to protect differentiation and pricing ' Although defining and aligning the business and IP strategy are essential to successfully achieving these results, new processes and supporting software tools are essential to success.”

At a minimum, companies need an IP database that can hold business and technical information about IP assets, not just legal information. Each asset should be tagged in terms of business unit, product lines, area of technology, etc. Is it licensed to one or more third parties? Is it the subject of a conflict? Ideally, the IP team should have the ability to create its own categories at whatever level of detail makes sense for the business. Some companies use up to eight different types of categorization to support portfolio analysis. Procedures are needed to ensure that the appropriate tags are assigned to each asset, and of course it should be easy to change these categories and move assets from one category to another as the business changes.

Capturing Value Judgments

Another critical factor is the ability for the IAM system to capture value judgments by a firm's experts and their reasons for making a decision. How broad are the claims for this patent? How strong is the technology? How aligned is it with the evolving strategy? It is important to see why decisions were made at different stages in the life cycle of an asset. One example of a simple visual approach to capturing multi-dimensional team judgments is shown in Figure 3, Portfolio Evaluation Matrix. A review team can quickly select the appropriate rating on each axis, add a comment (not shown) and store this in the asset record. At the next review, the team will be able to see, for example, that the asset was identified as important for a new business venture that was subsequently shelved, so the asset may no longer be relevant. Of course, patent ratings from such companies as Ocean Tomo, The Patent Research Board, and Innography supply additional perspective on the potential value and quality of a patent that may also assist with this process.

[IMGCAP(3)]

With this information available via online query or reports at any time, IP audits and other portfolio reviews are dramatically easier and can be done as a routine matter without the need for massive data gathering exercises that are so frustrating to everyone. It changes the level of dialog with internal business clients because everyone can see the context in making asset decisions. The organization will also adopt consistent terminology and processes, increasing efficiency and alignment of the IP management team around common goals.

Story admits surprise that more companies aren't driving unproductive IP out of the business during our new-found recession. He notes that “with the drive for lower costs and higher revenue I would expect to be seeing much more activity in this area.”

We agree, especially with the lifetime cost of a patent now in the $300,000 to $500,000 range. Of course, with Non Practicing Entities (also referred to as “Trolls”) buying tens of thousands of patents and the rapid rise of patent broker and auction activity, this creates a highly favorable climate for reducing unused patents.

Given this, why do so many companies pass up this opportunity? As is so often the case, misalignment of incentives is at least partly to blame. It seems that the USPTO requires a very high rate of renewals to cover new patent filing costs. Patent and trademark maintenance service providers' objectives are not aligned with the goal of reducing renewals. Additionally, many companies lack the IP management infrastructure, data, and tools needed to make informed, fact-based decisions. This gives rise to a fear of making potentially career-limiting IP disposition decisions.

Conclusion

As the global economy spirals downward and the recession deepens, bold new moves will be necessary to regain our footing. This dire situation is catalyzing change and emboldening leaders to take action in new ways. Fortunately, for companies relying on IP, Dow Chemical has already shown how to take action to the benefit of shareholders. Dow set the bar during the last two recessions for cutting IP management costs while increasing patent contribution. It remains to be seen if other companies will follow its lead.

Paul DiGiammarino is CEO of Anaqua, a provider of IP management software and services. In addition to advising executives on IP management matters, he is a frequent speaker and author on this topic.