Leadership Laboratory

Leadership Laboratory

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
How to determine the value of intellectual property
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
The first step is to locate and catalog the intellectual property.

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."
Next, we want to be very clear; we are not disagreeing with the experts that market based is the ideal method. However, there are only so many Gordon Smiths7 to go around. And if you don't have a true expert then you are right back to gambling, that is, taking a wild guess and hoping it is correct. But, we do have an accounting department. We do generally charge our time to the project we are working on, so if we are in a generally successful business, we can use an approach called Not Less Than. Please note that this is something we have created, and we are sure high powered accountants would turn up their noses at it, but take a look and decide for yourself. The advantage of the Not Less Than approach is that average bookkeepers in average organizations can complete the method. It meets two of the three purposes of computing the value of intellectual property. If an incident occurs, accounting will be able to produce valuation documents that have been in place for multiple years which will be impressive; and they will be very helpful for deciding how much security protection in which to invest. Finally, we assert this method has value to support or validate the results of a market approach.

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
And if you are in a generally successful organization, this approach will certainly give you an idea of the cost of developing your Intellectual Property Portfolio, and it is probably on the low side of its market value. You can, of course, do a similar thing for any discrete piece or set of intellectual property.

1 http://www.hccfl.edu/pollock/AUnix1/DisasterRecovery.htm
2 http://www.comptechdoc.org/independent/security/recommendations/secfirst.html
3 http://www.wipo.int/sme/en/documents/valuationdocs/arb_lic_cai_98_4.pdf
4 http://www.wipo.int/sme/en/documents/valuationdocs/index.htm
5 http://www.weknowvalue.com/documents/IP/valuing_ip.pdf
6 http://www.wipo.int/sme/en/documents/value_ip_intangible_assets.htm
7 http://ipmall.info/news_activities/people_ipfaculty/Smith-G.pdf
8 http://searchcrm.techtarget.com/sDefinition/0,,sid11_gci212450,00.html