Leadership Lab: Intellectual Property Series
This series of essays can help the IT manager learn how to identify and protect intellectual property and intangible assets.
Other Related Articles in Leadership Lab: Intellectual Property Series
The Value of IP
By Stephen Northcutt
Computing the value of Intellectual Property
This step is important for several reasons:
- Everyone's favorite is when you sell the company or when you are heading for your Initial Public Offering. The primary value of many organizations is the IP
- If you contact a law enforcement agency or an attorney when an incident occurs, such as someone misusing your IP, one of the first questions you will be asked is "How much is it worth?" or "How much was the damage?"1. There are many companies and excellent publications on IP that can guide you in your effort to determine this value. Also, I recently had to notify the FBI regarding a copyright incident. The Special Agent stated that they usually do not get involved unless the damages are at least $2500. I have heard other security professionals state that they were told $5000 dollars worth of damages was the minimum for which the FBI would be able to get the district attorney to pursue a case. However, one thing is certain; the greater the provable loss, the more likely the FBI will help.
- Knowing the value of your IP helps you determine how much money is rational to spend protecting the information. Without establishing the value, the investment in the security program is closer to gambling than management. We do a bit of this intuitively. When we ask ourselves what would happen if this or that information was corrupted, the answer can range from "so what" to "we are going out of business".2
Determining the value of IP is very dependent on business and legal factors. Proper valuation will include numerous variables such as current and future development parameters, market strength and design, and the market projection over the life of the IP. Statistics and probability models are important aspects of the mathematical formulas used. We base our work on the book The Valuation of Intellectual Property and Intangible Assets, Wiley Professional Press, but it is out of print. Every so often a copy shows up in the used book market on Amazon; try to get 4th edition.
The value of an organization is based on:
- Monetary assets, cash, short term investments, receivables less reserves, prepayments, negative monetary assets include accounts payable, debt, taxes
- Tangible assets, land, buildings, improvements to leased property (with time remaining in the lease), tools, drawings, office equipment, IT, vehicles
- Intangible assets, assembled trained workforce, trademarks, contracts, patents, copyrights, designs, customer lists, accounting and operations related records, supplier/distributor relationships
We know where rich sources of intellectual property are commonly found in organizations and we know the process of asking questions and listening in meeting to identify proprietary process. Then, we create a catalog often called an Intellectual Property Rights Portfolio (IPR).3
How to assign a value
There are a number of great resources. WIPO4 has a website with links to a number of papers, many written by Gordon Smith, a true authority in this field. Most authorities agree there are three basic approaches:5,6
- Market Approach: Based on the market (economy) "being the best indicator of the value of intellectual property".
- Cost Approach: Based on economic factors such as supply and demand, functional and technological obsolescence. What it would cost to build the IP today.
- Income Approach: Based on an organization's factors such as "Gross or net revenues; Gross profits; Net operating income; Pretax income; Net income; ... Cost savings."
Not Less Than
If you have no idea what your overall portfolio of intellectual property is worth:
- Determine the salary and benefits paid to knowledge workers ( workers that pound on keyboards for a living)8 over three years
- Add the cost of locally developed software and databases
- Add the cost of commercial knowledge management software and the expense to configure it
- Add the value of receiving and providing contracts
- Add the market value of patents, trademarks and copyrights