Archive for 'Due Diligence and Risk Assessments'
Michael D. Moberly April 3, 2012
It’s important that those responsible for the management, stewardship, and oversight of a company’s intangible assets recognize that financial – competitive advantage hemorrhaging of those assets can commence before the ink dries on a transaction agreement.
The kind of (intangible) asset hemorrhaging I’m referring to is that which is attributed to theft, misappropriation, infringement, counterfeiting and piracy, etc., anyone of which can undermine the assets’ contributory value and competitive advantages.
In todays’ globally competitive, predatorial, and winner-take-all business transaction arena, this sort of (intangible) asset hemorrhaging is facilitated by two general attitudes, i.e., an
- unnecessarily high sense of urgency relative attached to deal execution. Urgency and speed often mutate as the dominant driver of a transaction which in turn can constrict – impede the time allotted for and the thoroughness of the due diligence, especially with respect to the intangible assets in play.
- assumption that deals-transactions can be consummated and revenue streams commence before the (intangible) assets in play will fall prey to theft, misappropriation, or simply walk out the front door as intellectual capital (know how) with departing employees.
Thorough (intangible) asset due diligence if obviously crucial to transaction success and profitability today, particularly when 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability evolve directly from intangibles. This is why it’s essential for asset buyers in a transaction ‘get out front’ by (a.) acknowledging, and (b.) preventing and/or mitigating those adverse attitudes.
If, on the other hand, a company’s decision makers and/or counsel conveyed dismissiveness about the potentially adverse outcomes such attitudes would produce, presumably they would have to know precisely:..
- the opportune time when acts of (intangible asset) misappropriation, theft, infringement, misappropriation will occur, and,
- the time required for an adversary to integrate the misappropriated – stolen (intangible) assets into their products and/or services as enhancements, efficiencies, and competitive advantages.
The virtual head start and competitive advantages the victim company presumably had achieved would begin to narrow and/or be undermined quite rapidly, along with its reputation, image, and goodwill Exacerbating such increasingly probable events is the rarity that an (intangible) asset buyer will have the necessary asset) value – competitive advantage safeguards and monitoring capabilities in place to alert would be buyers, in sufficient time to stabilize – recover the compromised assets before substantial and many times irrevocable asset hemorrhaging commences.
An adversary’s (market space, competitive advantage) ‘head start’ following their illicit acquisition – use of the intangible assets remains subjective, but it’s prudent to measure it in hours and days, not weeks, months, or quarters. Unfortunately, there are numerous actual and would-be (intangible) asset buyers that I would characterize as being ‘permissively neglectful’ about managing, safeguarding, and about-to-be purchased intangible assets by erroneously assuming:
- any economic and/or competitive advantages an adversary may glean from the (intangible) assets they compromise – acquire will be short-lived and/or outpaced by rapid changes in consumer – market demands which only the legitimate originator will be able to deliver, and,
- intangible assets are (readily) renewable resources.
Respecting the narrowness of (profit) margins today, I encourage management teams and counsel to re-consider both assumptions!
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry at 314-440-3593 or firstname.lastname@example.org
Michael D. Moberly March 29, 2012
Identifying and distinguishing intangible assets and recognizing their contributory value should be routine components to any transaction due diligence process today. An increasingly critical aspect of intangible asset (transaction) due diligence is assessing the assets’ status to ensure their control, use, ownership, value, defensibility, and materiality is sustainable in both pre and post transaction contexts. Unfortunately, a significant percentage of due diligence teams have yet to include – address a target’s intangible assets.
Including – addressing intangible assets in all (business) transaction due diligence is essential because…
- 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability today evolve directly from intangible assets.
- intangibles are increasing valuable assets and consistently in play as requisites to a transaction’s projected returns and achieving the anticipated competitive advantages, synergies, efficiencies, and enhancing value following deal consummation.
- the value and materiality of intangibles are seldom static, instead they can fluctuate, sometimes very rapidly in today’s globally competitive, aggressive, and predatorial, business transaction environment.
Intangible assets (i.e., intellectual property, proprietary know how, intellectual – relationship capital, brand, reputation, goodwill, etc.) unlike tangible/physical assets, can advance a company economically – competitively only so long as the assets’ control, use, ownership, value, and materiality are sustained and monitored for (value, competitive advantage) erosion, compromise, undermining, etc.
Effective starting points to achieve this is for transaction (due diligence) teams to have codicils in place (upfront) to facilitate/enable…
- verification of the (targeted) assets’ status, stability, defensibility, and mapping their contributory value
- monitoring the (targeted) assets’ value and materiality for a specified period of time after a transaction has been executed relative to the assets’ risk-threat-vulnerability assessment.
In most instances, a company’s portfolio of intangible assets, particularly its proprietary knowhow, IP, and intellectual capital are seldom the product of spontaneous acts or even resource dedicated initiatives rather they evolve over time within a company.
Regardless, transaction due diligence teams must now possess, in their repertoire of competence, the ability to identify, unravel, and preliminarily assess any and all, but particularly, the targeted intangible assets. An informed due diligence team must also be alert to uncovering newly developed or variants of existing intangible assets which can produce valuable competitive advantages. These competencies are also useful for identifying asset risks and developing risk mitigation initiatives in advance of a deal’s closing.
Like most intangible assets, left unidentified, unprotected, and/or unmonitored (pre and post transaction) valuable and competitive advantage delivering features can become compromised, impaired, or entangled in costly and time consuming legal disputes that stifle transaction momentum or even nullify many projected benefits. Under these circumstances the result, all too frequently, is that asset value and competitive advantages can quickly go to zero!
Lastly, when engaging in any business transaction in which intangibles are being bought, sold, transferred, licensed, or shared, it’s essential to recognize
- the production of intangible assets is a dynamic and on-going process within a company
- due diligence must as good on the front end (pre transaction) as it is on the back end (post transaction)
- due diligence must not succumb to a faux sense of urgency, and
- conventional templates or ‘check the box’ types of due diligence are generally insufficient because 65+% of a transactions’ value (success, profitability, etc.) lie in intangible assets, thus the ability of the buyer to sustain control, use, ownership, and value of those assets, through on-site interviews and assessments is essential.
The over-arching objectives for an intangible asset inclusive – focused due diligence process, as conveyed above, is to:
- elevate the probability that the buyer can use the (intangible) assets being purchase with minimal risk, impairments, and/or value – competitive advantage erosion.
- bring greater surety to the buyer they will be able to capture and exploit the assets’ value, functionality, synergies, efficiencies, and competitive advantages uncontested.
In my view, this approach to (business) transaction due diligence is absolutely essential today with virtually no room for negotiation!
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry at 314-440-3593 or email@example.com
Economic – Industrial Espionage: It’s The Intangible Assets They’re After, Not Just The Intellectual Property!
Michael D. Moberly March 21, 2012
I routinely hear presumed experts on various media, C-SPAN in particular, but broadcast and cable news programs as well, describe how intellectual property is being targeted and stolen, via industrial – economic espionage and/or cyber-attacks. These experts usually make compelling cases, further suggesting IP theft is occurring at rates that equates to multiple trillions of dollar losses annually to U.S. held IP.
Many of these experts self identify as current or former employees of agencies within the U.S. intelligence community, federal law enforcement and/or Washington-based ‘think tanks’.
A significant difference I, and I presume many other advocates of protecting IP rights have noticed, is that these experts are more comfortable today, than in years past, in naming the presumed culprits and/or countries where a significant percentage of the attacks – thefts originate. In a growing number of instances, these experts freely cite either state sponsored or independent operators as the origin of the problems, often citing China, Russia, Brazil, India, eastern Europe and various other legacy free player countries as the primary culprits (recipients and/or beneficiaries) of the stolen IP.
Naming the culprit countries in open source carries some potential benefits, i.e., the adverse publicity can, in some instances:
- bring political – diplomatic pressure on some of the named country’s legislative and enforcement bodies to be more aggressive and consistent in their pursuit of infringers.
- prompt holders of valuable intangible (IP) assets to strengthen their business transaction due diligence and reduce asset vulnerability by putting in place practices and procedures to sustain control, use, ownership, and monitor the value and materiality of all of the (intangible) assets in play in both pre and post transaction contexts.
It’s worthy to note that much of this information has been available for many years through the U.S. Trade Representatives’ Section 301 list as well as the Department of States’ Overseas Security Advisory Council.
While I don’t dispute these expert’s positions about the significance of the problem, I do find reason to dispute their consistent characterization of it solely as an ‘IP problem’. Intellectual property is comprised of patents, trademarks, copyrights, and trade secrets. In today’s increasingly competitive, predatorial, and winner-take-all global business transaction environment it’s rapidly becoming a given that company’s intellectual properties are not merely vulnerable, rather the probability that theft, misappropriation, or infringement will occur at some point during the assets’ life-value-functionality cycle is highly likely. Just how likely, remains somewhat subjective and carries many variables, i.e., asset demand, attractivity, effectiveness of safeguards, etc.
I do hold however, a somewhat different view about what most of the economic and competitive advantage adversaries are targeting and it’s not solely a company’s IP. I have worked, studied, and conducted much research on intangible assets and economic espionage over the past 25+ years. A cursory understanding of the adversaries (referenced by the experts) social, political, economic, and legal history suggests most are just now commencing the early stages of a second generation of individuals who possess the capability to create large scale manufacturing facilities to produce the various products and/or services that sometimes emanate from infringed – stolen – misappropriated IP.
What’s missing in my judgment, from the experts’ economic espionage and cyber-attack equation is the adversary’s ability to understand and/or replicate the intangible assets, i.e., the intellectual and structural capital and know how that’s embedded in any (misappropriated – stolen) IP. Intangible assets today comprise 65+% of most company’s value, sources of revenue, and building blocks for growth and sustainability. It’s quite correct then to say intangible assets are absolutely essential in the global economy to building product/service quality, securing supply chains, and creating efficiencies in distribution, etc. Be assured, those engaged in using stolen IP have, in most instances, an equally strong desire to compete globally and in the same market space as the IP’s rightful holder-owner.
Know how (intellectual capital) can, to be sure, be classified as trade secrets (providing the holder consistently meets the six requisites of trade secrecy) or proprietary. Either way, I can confidently report that companies would be well served if they identified and safeguarded the contributory value of the intangible assets that underlie all IP, because that’s what the adversaries need most.
Michael D. Moberly March 9, 2012
Conventional IP Audits Are No Longer Sufficient
In today’s knowledge (intangible asset) based economy, conventional snap-shots-in-time, one-size-fits-all, check-the-box types of IP – intangible asset audits, assessments, and/or due diligence are no longer sufficient to provide company management teams and boards with the necessary strategic information and business insight necessary to meet the needs of the increasingly aggressive, competitive, and predatorial global business transaction environment.
Before proceeding further though, I want to respectfully advise the reader this is certainly not a circumstance in which I am ‘mixing apples and oranges’. Rather, I am suggesting there are indeed commonalities of purpose, overlap, and even duplication whether a task is referred to as an IP audit, assessment, or due diligence. A primary distinguishing factor however is the context or circumstance in which one or the other is being applied, i.e., a merger, acquisition, liquidation, strategic alliance, partnership, etc. For simplicity, I will use the term audit as encompassing assessments and due diligence unless otherwise specified.
Intellectual property (IP) audits were initially designed to ascertain, often through hand-me-down templates or check-lists, the (legal) status and defensibility of a company’s IP. And, if an auditor, usually an attorney, is sufficiently experienced and so inclined, their work may also include looking for evidence of misappropriation, infringement, compromise, de-valuation or undermining-erosion of asset value and competitive advantages.
Most conventional approaches to conducting IP audits tend to be, in my view, snap-shots-in-time descriptions of a specific IP’s status. But, in today’s increasingly competitive, predatorial, legacy free, and ‘winner-take-all’ global business transaction environment, the status (stability, value, defensibility, competitive advantage) of certain IP and its contributory intangible assets can fluctuate or erode often very rapidly.
This means the conventional time bound approaches to IP audits (assessments, due diligence) tend not to reflect or project the assets’ vulnerability and increasingly real possibility they will experience adverse changes in their:
- value, stability, and sustainability at some point during the life, value, and functionality cycle of the asset, and/or
- economic – competitive advantage contributions to other (current, future) projects, R&D, or relevance to a company’s strategic planning, and supply chain, etc.,
It’s important to recognize anyone of the above may occur in either pre or post transaction contexts.
IP Audits – Rationale and Methodology
I frame the rationale and methodology for conducting IP audits through a somewhat different lens, and often with different objectives. I want IP audits (assessments, due diligence) to be relevant, actionable, and bring strategic insights to management teams, boards, and other business decision makers about their intangible (IP) assets. This higher level of insight, that includes risks, value, and due diligence brings absolutely essential information to business decision makers. Information and insight of this caliber should be readily available in board rooms, particularly in companies that are increasingly dominated by intangible (IP) assets.
Key objectives of the information brought to light by an audit, is for companies to be better:
- positioned to utilize their IP (and other intangible assets) as effectively, efficiently, and profitably as possible.
- informed about current and horizonal risks specific to their business environment and types of transactions their company routinely engages in which intangibles and IP are almost in play.
- better informed not just about its registered IP, but the intangible assets that contributed to cultivating the IP.
In short, the conventional snap-shot-in-time and IP only audits (assessments, due diligence) are, in most instances, ill-suited for today’s increasingly hyper business climate.
Too, the notion that one can sustain control, use, ownership, and value of their IP with absolute certainty as if it were a bank ‘certificate of deposit’ may be a business reality, but only for the naïve and high risk takers.
Sustaining Control Of IP Not For The Lifetime Of A Company, Rather For The Value And Functionality Cycle Of The Asset
Some would correctly argue, as I, that trying to sustain control, use, ownership, and value of IP for the lifetime of the company vs. the life (value, functionality) cycle of the asset may actually increase its vulnerability to compromise, infringement, circumvention, becoming ‘boxed in’, being at the mercy of ‘trolls’, or simply becoming irrelevant. Any one of these calamities, should they materialize, can significantly undermine-erode the value, demand, and attractivity of IP, particularly in the eyes of would-be investors, buyers, and/or strategic alliance partners.
Too, it is an extraordinarily costly and lengthy undertaking to initiate legal action to defend one’s IP. IP holders would be well advised to ensure their ‘house is in good order’ with respect to having IP protection practices and procedures firmly in place in advance before initiating legal action. Otherwise, the odds of being on the losing end of any litigation are not favorable.
As a holder of IP, it will always serve a company’s interests to demonstrate that an assets (IP) value and demand in the marketplace remains consistent and sustainable. It’s makes good business sense to re-frame conventional IP audits (assessments, due diligence) to:
- focus more on sustaining control, use, ownership, value and materiality
- identify key intangible assets that underlie the IP
- provide all parties with a more objective and strategic perspective regarding the sustainability of the IP and its contributory (attendant) intangible assets.
A key benefit of this approach is that management teams and boards would achieve a higher level of confidence about the status of the intangible (IP) assets their company produces and possesses which would facilitate better strategic planning and significantly mitigate risk. .
This comprehensive approach to conducting IP – intangible asset audits merged with attributes of assessments and due diligence is necessary. Otherwise, an un-initiated practitioner can literally jeopardize a transaction’s potentially favorable outcome in which IP and intangible assets are in play.
Need For Speed
I respect the need for speed in executing business transactions in which intangible assets and IP are in play. However, the time has come for parties to be less concerned about speed and more concerned with ensuring the IP and contributory intangible assets are intact, have not been compromised, and remain sustainable relative to their value and revenue producing capabilities.
To achieve this, I advocate the inclusion of routine – on-going IP and intangible asset audits (assessments, due diligence). This includes inserting practices/procedures to monitor fluctuations in asset value and materiality. By doing this, prospective investors, buyers, and alliance partners would have available timely insight about the assets being considered for purchase or investment and adjust (leverage) their decisions accordingly, should it become necessary. Such limited transparency would also deliver very favorable goodwill, reputation, and trust, and quite possible higher values of the IP and intangibles.
Too, today’s aggressive, globally competitive, and predatorial business environment should prompt audit (assessment, due diligence) teams to literally re-phrase key questions posed in conventional audit approaches. For example, precede the proverbial ‘is the intellectual property protected’ question with the question ‘has the know how and intellectual capital on which the IP value and use is premised, been adequately safeguarded and managed from its inception’? Not only is the answer subject to verification, the answer will provide the team with sound clues to pursue further insofar as assessing the IP’s real status, value, and usefulness.
To fully appreciate the relevance of re-phrasing some of the key and traditional ’IP audit questions’, it’s important to recognize that holders of patents, trademarks, and copyrights should not assume such protections carry any viable deterrent effect to would-be infringers and/or those inclined to engage in misappropriation. Experience clearly suggests that in most instances today, conventional IP protections are routinely disregarded, outpaced, and/or circumvented by a growing global body of sophisticated entities, some of whom are state sponsored while others are independent and legacy free players which I call economic and competitive advantage adversaries.
Patent Value And Competitive Advantages Are Increasingly About Due Diligence, Asset Monitoring, And Deterrence
Michael D. Moberly March 8, 2012
For starters, management teams, boards, and other business decision makers must recognize the economic fact that 65+% of most company’s value, sources of revenue, and building blocks for growth today evolve directly from intangible assets of which intellectual property is one.
It’s certainly correct to assume then, in most business transactions, e.g., mergers, acquisitions, strategic alliances, and venture capital initiatives, etc., intangible assets and IP will not only be in play, they will be very much a part of any subsequent deal and can have a significant influence on a deals’ outcome.
Transaction due diligence therefore should be ‘laser focused’ on achieving two key objectives:
- identify, unravel, and assess the status, stability, fragility, and defensibility of the targeted IP plus the underlying and contributory intangible assets
- ensure control, use, ownership, and value of those assets is sustainable and equally important, have the capability to monitor any/all fluctuations in asset value and competitive advantages in both pre and post transaction contexts.
Patents can obviously be significant sources of competitive advantage, value, serve as potent (defensive – offensive) weapons, and/or be leveraged in a relevant market space. This makes intangible asset and IP monitoring an essential component to any due diligence process. That’s because the (monitoring) findings can have a bearing, as noted above, on a transactions’ outcome in terms of how it may influence the relevant parties decision, i.e., invest – don’t invest, buy – don’t buy, etc.
Patents are widely presumed, sometimes naively so, to be the strongest form of IP protection because they:
- grant legal standing to exclude all others from making, using, selling, offering for sale, or importing the issued IP for a period of years.
- are assumed to deter bad actors from infringing, stealing, or misappropriating the patented subject matter.
With respect to the latter, there are global business realities that are routinely overlooked or dismissed regarding the real deterrent effect of issued patents. By definition, deterrence means inhibiting the behavior/conduct of others. That said, there are two types (levels) of deterrence.
The first one is referred to as general deterrence which, in the case of an issued patent, means that a vast majority of us, perhaps 95+%, would respect an issued patent and thereby be deterred from engaging in infringement, misappropriation, or theft of that IP.
The second one is referred to as specific deterrence, which again in the case of an issued patent, translates more as a question, i.e., what would deter the growing global cadre of infringers and legacy free players from continuing to engage in IP infringement, misappropriation, theft, product piracy-counterfeiting, etc.?
Unfortunately, seldom are either of these deterrence factors (realities) addressed in conventional, snap-shots-in-time, one-size-fits-all, check-the-box types of IP – intangible asset due diligence. The truth is, all forms of intangible assets (IP) are vulnerable and subject to being compromised, stolen, misappropriated, counterfeited, infringed, or have their competitive advantages illicitly undermined. The culprits, in addition to rising numbers of wily insiders, emanate from highly predatorial, sophisticated, and organized independent and/or state sponsored actors.
Today, it is prudent to assume the risks and vulnerabilities to any company’s intangible assets and IP to global economic – competitive advantage adversaries is persistent, asymmetric, and unfortunately, generally successful.
So, in today’s globally aggressive business (transaction) environment, relying solely on one of the several (common) formulas for calculating patent value must include, in my view, a very big ‘it depends’! If the calculation doesn’t incorporate this important caveat, it’s prudent to seek another, and perhaps more experienced valuator. In other words, correctly arriving at the value of a patent starts by finding competent practitioners well versed in not just IP, but intangible assets and the persistent and asymmetric risks and threats to those assets’ value and usefulness.
Absent the necessary currency of knowledge in not just the array of global risks to intangibles, but a comprehensive understanding how such risks will materialize, how such risks adversely affect (intangible) assets, and what additional safeguards are necessary to combat, counter, and/or mitigate those risks, it can be embarrassingly imprudent to assume asset value and competitive advantages will meet even the most gloomy projections.
Michael D. Moberly January 18, 2012
Intangible assets are increasingly valuable commodities that can be leveraged to allow management teams and boards to pursue a broader range of business transactions and/or alliances. Too, intangibles will almost certainly be integral to negotiating a deal in terms of pricing and the fact they can be bought, sold, transferred, traded, assimilated, or licensed.
Why? Because 65+% of most company’s value, sources of revenue, and building blocks for growth lie in – evolve directly from intangible assets!
Experience tells us that if there was a scale for transferability, replication, and/or imitation of intangible assets they would surely score high on all counts. This is, intangible assets, in most instances are vulnerable to value erosion, undermining and competitive advantage hemorrhaging. In other words, they can become impaired in some manner relative to their ability to produce/- deliver the projected value, competitive advantages, and revenue streams after the deal has been closed.
This makes it all-the-more essential for transaction management teams to be alert to the potential for, if not the probability that, at some level, asset hemorrhaging will (can) occur in either pre or post transaction contexts. In some instances, asset hemorrhaging can literally commence before the ink dries on a transaction contract.
A key starting point to prevent or at least mitigate any such asset hemorrhaging is to avoid permitting an unwarranted sense of urgency and/or speed to affect the thoroughness of the transaction management teams’ responsibilities. When management teams view a transaction primarily through a lens of urgency and speed, a frequent consequence is that critical due diligence, particularly intangible asset assessments, become hurried and follow an ill-conceived or old ‘check the box’ approach that does not consider ways in which the assets can be adversely affected in both pre and post transaction contexts, as they should.
Of course, in today’s hyper-competitive and predatorial global business transaction environment, it is likely there will be multiple and simultaneous suitors or players to a transaction which often drives, unduly in many instances, a sense of urgency and speed to consummating the deal.
Today, transaction management teams are obliged, in my view, to structure their role, particularly how due diligence and intangible asset assessments are conducted in a manner that:
- recognizes the necessity to retain control, use, ownership, and monitor the value and materiality of the assets as being essential to negotiating a profitable and sustainable transaction outcome
- secures approval to integrate intangible asset protection and monitoring commencing at the earliest stage and throughout the transaction negotiation process
- reduces the probability of and be promptly alerted to internal-external acts or materialization of risks that can
– undermine asset value, competitive advantages and the assets’ ability to continue to produce revenue
– trigger costly and time consuming legal disputes and challenges that can disrupt the momentum of and/or jeopardize an otherwise viable transaction.
While the goal of a transaction management team remains the same; to facilitate stronger, more secure, and profitable transactions, it’s now prudent to include an intangible asset specialist on the team, who can, among other things, identify, unravel, and assess the value, risks, defensibility, and sustainability of the intangible assets that are actually in play.
Michael D. Moberly December 22, 2011
It is not uncommon for 75% to 90+% of start-up – early stage firms’ value, projected sources of revenue, and ‘building blocks’ for growth lie in – are directly linked to the invention’s IP and intangible assets.
We’ve come to know that investments in early stage companies and/or university spin-off’s, VC’s will require, quite correctly, putting in place management teams with experienced and strong (intangible asset and intellectual property) oversight, stewardship, and licensing credentials.
Among other essential responsibilities, the management team and the inventor absolutely must ensure that control, use, ownership and value and materiality of the invested IP and intangible assets is being monitored. Unfortunately, many merely rely on patent issuances as being a sufficient stand alone deterrent to infringement.
The path to achieving that essential objective commences with the genuine recognition that a well-designed and thorough (IP, intangible asset) assessment and due diligence process must be conducted to provide investors (VC’s) with current and objective pre/post transaction insights and perspectives about the fragility, stability, defensibility, and marketability of the invested assets. The assessment – due diligence findings will serve as a foundation for facilitating (consummating) a more secure, profitable, and sustainable transaction.
Investors need and want relevant, insightful, objective, and forward looking (over-the-horizon) perspectives that extend well beyond the conventional ’snap-shot-in-time’ assessment – due diligence that does not take into account – address asset volatility or the ever growing possibility that the invested assets have already been compromised in some manner.
Thus, the intangible asset – IP assessment and due diligence must, among other things…
- identify any embedded, under-the-radar risks, vulnerabilities, and operational – usage complexities that can impair and/or entangle the assets and become preludes to costly and time consuming legal disputes or challenges.
- unravel the invention’s development and identify any additional clusters of value and potentially revenue producing (intangible) assets and competitive advantages, aside from the registered IP and beyond what was espoused in the inventor’s initial pitch.
- determine if asset safeguards and (asset) value preservation and monitoring measures were in place and aligned with (a.) the investors’ objective, (b.) the company’s strategic business plan, and (c.) the functional (life, value) cycle of the invested assets, and of course (d.) the all important exit strategy.
If an assessment-due diligence reveals that any of the key assets are suspect, impaired, or may have already been compromised, the investment transaction may warrant reconsideration or inclusion of specific (risk mitigation – transfer) covenants before going forward. Under such circumstances, it’s unlikely that a management team alone, regardless of their experience and skill, can effectively manipulate the assets to overcome or reverse such transgressions without requiring costly, time consuming, and possibly momentum stifling legal action.
While visiting my blog, you are respectfully encouraged to browse other topics/subjects (left column, below photograph) . Should you find particular topics of interest or relevant to your circumstance, I would welcome your inquiry at 314-440-3593 or firstname.lastname@example.org
Michael D. Moberly December 7, 2011
There’s still room to debate just what really constitutes the world’s oldest profession. From where I sit, albeit a biased position of university teaching, research, and consulting in information asset protection matters for 25+ years, it’s certainly not prostitution as many like to euphemistically suggest.
Of course, when I use the word ‘poaching’ as I have in the title of this paper, I’m not referring to poaching in the medieval European context, wherein a ‘poacher’ was one who intentionally, and with stealth, trespassed on another’s property to hunt and kill game.
Today, the word poaching has a slightly different context. It’s about poaching of (for) intangible (information-based) assets during the course of a business transaction, or sometimes more accurately, a faux business (transaction) interest in which one party is trying to get something (information) for nothing, that is, insights, perspective, experienced know how, etc., for perhaps only a cup of coffee at a Starbucks ‘business’ meeting.
The primary target of ’business information poaching’ today takes the form of acquiring intellectual (structural or relationship) capital, ala intangible assets and applying them for their own benefit.
So, what should prompt business management teams and boards to be leery of information poachers? The answer lies, as routinely stated in this book, in the economic fact that 65+% of most company’s value and sources of revenue today evolve directly from knowledge-based intangible assets. In most business transactions today, intangible assets and the intellectual (structural, relationship) capital embodied/embedded in those assets will not only be in play, i.e., an integral part of the transaction and will likely be shared and/or transferred under the parameters of the transaction’s contract. But some of the intangibles will surely morph into one or the other parties business operational coffers outside the boundaries of that contract.
As every business person knows some all too well, there is risk in any transactional relationship, in part, precisely because proprietary and/or competitive advantage information (intangible assets) will be shared among the parties for purposes specified in the contract. The risk materializes though, in many instances, when that information is used by one party for purposes outside or beyond the terms of the contractual relationship. In other words, the information will be used by the receiving party (poacher) to benefit them economically or competitively to the detriment of the other party.
Unfortunately, some will dismiss or relegate ‘information poaching’ as constituting just another inevitable cost of doing business, i.e., a new (additional) transaction cost of conducting business in an increasingly knowledge-based information-driven economy wherein increasing percentages of transaction value and projected sources of revenue evolve directly from information – competitive advantage laden intangible assets.
I’m reminded though of the computer manufacturer whose vice-president of operations announced, upon building multiple manufacturing sites in another country, that an estimated 25+% of the company’s intellectual property would be irrevocably lost (infringed, misappropriated) during the life cycle of these newly established manufacturing sites.
Under these types of circumstances, referring to this phenomena (business information poaching) as merely constituting a transaction cost endemic to the knowledge-based economy is, at best, an understatement!
The consequences (criticality) attendant to business information poaching risks can obviously be significant and long lasting, if not terminal, for company’s today, particularly relative to supplier relations and contractual governance. Insofar as remedies are concerned, the option of a business becoming isolationistic, i.e., not share or transfer business information under any circumstance, is obviously neither feasible nor practical, that is, if a business wants to remain a going concern and be successful and profitable.
However, if entrepreneurs, faculty inventors, start-up or spin-off management teams and boards exercise prudence upfront, during the contract negotiation period, relative to what information assets will – will not be shared or transferred, etc., with transaction partners is, in most instances, critical. The goal of course, is, at the end of the day, control, use, ownership, value, and materiality of information-based (intangible) assets before, during, and after a transaction has concluded, remain intact on behalf of the rightful originator – owner.
(This paper was inspired by the work of Clemons and Hitt in their paper titled ‘Poaching and the Misappropriation of Information: Transaction Risks of Information Exchange.)
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Michael D. Moberly November 30, 2011
Answer: Because 65+% of a research project’s value reside in intangible assets!
1. Proof of IP ownership no longer equates with control, use or the ability to ensure future economic benefits…
Traditional IP enforcement (protections) are routinely outpaced, circumvented and disregarded by a growing worldwide cadre of infringers, misappropriators and commercial intelligence operations. In this environment, hoped for deterrent effects of traditional IP rights protections diminish rapidly.
2. Protection-value preservation should be designed to last for the life-value cycle of the asset, not necessarily for the life time of a company…
Competitive advantages largely evolve from getting an idea to the market first, and for some R&D projects and companies, the source of value is that race to market, not permanent protection of intellectual property. (Peter Likins)
3. Computer/IT security is not synonymous with protecting know how…
Information-based (intangible) assets exist in many formats (other than electronic bits and bytes) which are vulnerable and not protected by computer/IT security, digital rights and authentication management.
4. It’s not just another risk of doing business…
Ultra-sophisticated and predatorial commercial and state sponsored intelligence operations worldwide make every researcher’s and company’s innovation, intangible assets, strategic plans and competitive advantages attractive and vulnerable 24×7. Probabilities (risks) are rapidly becoming inevitabilities relative to loss and/or value shrinkage when not addressed.
5. Know when, what, how, and who…
Far too many researchers and companies lose, inadvertently relinquish and/or become legally entangled in disputes and challenges over the ownership, control, and use of their intangible assets – competitive advantages. The most frequent reasons are not knowing (precisely) what should be protected and preserved, when it should be, and from what and whom.
Michael D. Moberly February 18, 2011
In my view, it’s just rather straightforward. In today’s knowledge (intangible asset) based economy conventional intellectual property (IP) audits – assessments are no longer sufficient to provide company management teams and boards with the necessary depth, type, and level of strategic information and business insight to meet the needs of the current fast-paced, aggressive, and increasingly competitive business (global transaction) environment.
Traditionally, intellectual property (IP) audits and/or assessments endeavor to identify, often through hand-me-down templates and check-lists, the status and (legal) defensibility of a company’s intellectual property. And, if an auditor, usually an attorney, is experienced and so inclined, their work may also include ascertaining whether evidence exists that the IP (subject of the audit) may be hemorrhaging, i.e., in some state (all, or in part) of mis-appropriation, infringement, or compromise, in other words, whether the asset is hemorrhaging value and competitive advantages.
Most traditional approaches to auditing intellectual property tend to be, in my view, time bound descriptions of a specific IP’s status, or, what I often refer to as ’snapshots-in-time’. However, in today’s increasingly competititive, predatorial, legacy free, and ‘winner-take-all’ global business environment, the status (stability, value, defensibility) of IP and its complimentary – supportive intangible assets can change quite rapidly. That is, the assets’ competitive advantages and value can be undermined, entangled in legal challenges, or experience substantial erosion through misappropriation, infringement, or compromise.
Consequently a snap-shot-in-time approach to an IP audit/assessment seldom reflects or projects the very real possibility the asset(s) will experience changes in (a.) value, stability, and sustainability at some point during the life, value, and functionality cycle of the asset, and/or (b.) the assets’ economic-competitive advantage linkages or contributions to other current or future projects, product development or relevance to a company’s strategic planning, stakeholders, and its value – supply chain.
So, I frame the rationale and methodology for conducting IP audits and assessments through a different lens and with different objectives, that is, to bring relevant, actionable, tactical, and strategic insights to management team and boards about their intangible (IP) assets. Such insights constitute essential information that should be readily available to management teams and boards whose companies operate in economies and business environments dominated by intangible assets of which IP is an element.
The end goal of course, is for companies to be (a.) well positioned to utilize their IP (and other intangible assets) as effectively, efficiently, and profitably as possible, (b.) well informed about current and horizonal risks relative to their business environment and types of transactions their company is routinely engaged in which intangibles and IP are almost always in play or part of the deal.
In short, conventional ‘snap-shot-in-time’ IP focused audits/assessments are ill-suited, in my view, to ’bring to light’ assets’ vulnerability to - probability of infringement, compromise, or misappropriation, each of which constitute ever present, yet evolving risks and threats.
Too, from an IP holders’ perspective, the windows and/or time frames to commercialize IP or position (leverage) other such (intangible) assets to begin reaping the economic – competitive advantage benefits due, are narrowing, somewhat analogous to the rapid pace of today’s cable network and on-line news cycles, wherein certain events can literally ’go viral’ in a manner of minutes, but they also can, with equal downward speed, be relegated to inconsequential historial blips on our respective radar screens.
So, a 2011 version of an IP audit and assessment should, again, include objective and strategic insights, not just about a company’s registered IP, but also about - address the complimentary and supportive intangible assets that contributed to bringing that IP to the forefront.
So, in this highly charged, competitive, and evolving global business (consumer) environment, the notion ’that everyone get’s their 15 minutes of fame’ seems quite relevant to today’s IP arena. That is, the best business strategy, insofar as IP is concerned, is to take full advantage of that proverbial ’15 minutes’ but also try to extend that time frame for as long as is feasible. And, that, in my view, is how the 2011 version of IP audits and assessments should be framed and executed, i.e., include an objective determination if sufficient asset management, stewardship, and oversight have been (are) in place to sustain the necessary control, use, ownership, and monitor (the assets’) value and materiality.
So, the notion that one can hold onto their IP, much as if it were a bank ‘certificate of deposit’ in the 1980′s, in which there was, at the time, some certainty CD’s would mature, draw interest, and increase in value over time with virtually little risk, is no longer a reality relevant to today’s business IP – intangible asset dominated environment.
Some would correctly make the case, as I would, that trying to hold onto one’s IP for indeterminate periods actually increases its vulnerability – probability to compromise, infringement, circumvention, becoming ‘boxed in’, being at the mercy of ‘trolls’, or simply becoming irrelevant. Any one of those calamaties, should they materialize, can significantly undermine-erode the IP’s value, demand, and attractivity, particularly in the eyes of would-be investors, buyers, and/or alliance partners.
A harsh reality in those instances, should certain risks materialize, is that a governments’ issuance of a patent may become little more than a handsomely framed document hanging on one’s wall, behind which, there are some ill-fated thoughts of ‘I wish I had done something differently’!
Too, it is a very costly and lengthy undertaking to mount and prosecute a legal defense of one’s IP if misappropriation, infringement, or compromise is suspected. In other words, to do so, requires not only some ‘very deep economic pockets’, but the holder must be sure their IP protection ‘house is in good order’ before seriously contemplating such a strategy, otherwise, the odds of being on the losing end of the litigation and/or losing the rights to one’s IP altogether are poor. And, if the holder is a start-up, early stage firm, or even a mature small or mid-size company, such costs frequently serve to deter them from intitiating such processes and ultimately pursuing what is (was) rightfully theirs.
As a holder of IP, it will always serve a company’s near and longer term interests to be able to demonstrate that the asset (subject of an audit, assessment) retaining its projected value, and that its demand and usefulness, in the marketplace, remain stable and sustainable.
So, re-framing or re-formatting conventional intellectual property audits/assessments to focus more on the value and sustainability of IP and identifying the key intangible assets that support and compliment that IP, its value, and its sustainability, in my view, would provide all parties, be they holders of intellectual property, would be investors, prospective buyers, or stakeholders, with a more objective and strategic perspective regarding the IP’s current and future ’state of affairs’. A key benefit of this latter approach of course, is that management teams and boards would achieve a higher level of confidence (about the IP and intangible assets their company produces and possesses) from which they could engage in more sound strategic planning and significantly less risky business decisions .
Another underlying rationale for this post is that company value has literally shifted from collections of physical (tangible) assets to combinations and collections of intangible (non-physical) assets of which intellectual property is one element. This makes it all-the-more necessary then, that decision makers, would-be investors, buyers and stakeholders of companies with relatively intensive bundles – portfolios of IP and intangible assets should receive far superior insights and guidance about those assets than what is typically reported in conventional template-check list types of audits-assessments.
This level of information, for example, would have more relevance to (a.) buy, don’t buy, or (c.) invest, don’t invest decisions. And, if the assessment (audit) includes not merely the IP’s legal status and defensibility, but also, (a.) information about the assets projected life, value, and functionality cycle, (b.) pre and post transaction contexts, and (c.) criticality assessments (i.e., adverse affects) to prospective buyer’s – investor’s mission should certain risks materialize, all parties stand to benefit. Presented in this context then, the conventional IP audit and assessment would assume many ’due diligence’ characteristics which again, in today’s hyper-competitive and predatorial business transaction environment are not just helpful, they’re necessary and a fiduciary responsibility!
Additional perspective worthy of introducing to the conventional IP audit/assessment equation is a comprehensive (strategic) understanding and appreciation for the ‘demand’ of the IP (intangible) assets, i.e., somewhat synonymous with its commercialization opportunities. In this context, an IP audit – assessment should include a relevant, but exhaustive characterization of a company’s current and projected business and competitive landscape to provide management teams and boards with insightful perspectives about ’demand’ (for that specific IP) emanating from the global business-competitor intelligence industry.
Ultimately, what’s needed is a much more forward looking approach that literally alters the conventional precepts of IP audits-assessments to include much needed due diligence features conducted by experienced practitioners who are well versed in a range of issues that can adversely affect - jeopardize the anticipated (projected) benefits of a transaction in which IP (intangible assets) are key.
So, while I recognize and respect the need for speed and confidentiality in executing business transactions, and by extension, (offensive, defensive) IP audits and assessments, it has come time, in my view, for parties to convey less concern about the speed in which a transaction (deal) can be formulated and more attention towards ensuring the the IP and complimentary-supportive intangible assets that will inevitably be in play remain intact and sustainable relative to their value and revenue producing capabilities, in addition, of course to their legal defensibility in both pre and post transaction contexts. That’s something that a conventional ‘snap-shot-in-time’ audit seldom provides.
So I advocate (practice) the inclusion of virtual and perptetual elements to IP audit and assessment processes. By that I mean, inserting mechanisms to continually monitor and objectively assess (measure) changes in asset value relative to the original (business) objective and/or purpose for conducting the audit/assessment. By doing so, prospective investors, buyers, and alliance partners, and stakeholders can be provided with much needed asset tracking (monitoring) capabilities relative to the (IP, intangible) assets they’re about to purchase and/or make investment and adjust-leverage their decisions accordingly, should it be necessary.
It’s my view and practice then, to, at minimum, re-phrase some of the key questions posed in conventional IP audits and assessments, e.g., ‘is the intellectual property protected’ (presumably by a patent)? Instead, replace such conventional questions with I view as being more important preceeding questions, that literally go to the heart of the matter, such as, ‘has the know how – intellectual capital on which the intellectual property value-use is premised, been adequately safeguarded and managed from its inception’?
Again, to fully appreciate the relevance of re-phrasing those traditional ’IP audit questions’, it’s important to recognize that conventional IP protections/enforcements, i.e., patents, trademarks, copyrights, etc., should not be presumed to have any deterrent effect on would-be infringers and/or misappropriators globally. In many, if not a majority of instances today, conventional IP protections are routinely disregarded, outpaced, and/or circumvented by a growing global body of sophisticated entities that routinely materialize as well organized economic and competitive advantage adversaries.