Michael D. Moberly      May 31, 2008

In the Fall of 2006, when preparing to teach a graduate management course for a midwest university I was determined to integrate, throughout the course, the economic fact - business reality that 75+% of most companies’ value, sources of revenue and future wealth creation lie in intangible assets and intellectual property.  In other words, ‘managing and management’ in their most basic sense, should now include recognizing, appreciating, and ultimately managing intangible assets.

I quickly learned that for even seasoned - working graduate students, intangible assets was a challenging concept to grasp and apply in quantifiable - monetary - value contexts.  I sensed then, and still do, that the primary (initial) hurdle with respect to the speed and level of acceptance one gives to intangible assets lies in the word ‘intangible’, i.e., intangible assets lack physicality compared to tangible (physical) assets.  Respectfully, for most, if not all, of these graduate students, this served as their initial introduction to intangibles and intangible assets which, in my view, is not reflective of this university’s graduate students, rather, the business community as a whole.

A significant percentage of the graduate students seemed to (ultimatelly) relent to the role, function, and contribution of intangible assets as a result of being periodically peppered with remarks to and applications of intangibles to the art and science of managing and management during my presentations.  One graduate student though, with a solid career in banking, challenged, and on some occasions resisted, with equal consistency, my view regarding the relevance, importance, and contributions of intangibles today to business operations and value.  This student defended his position in part by describing numerous multi-million dollar loan and acquisition deals which he lead (referencing banking and legal forms) in which there was absolutely no mention - recognition of intangible assets in either value, collateral (securitization) or due diligence contexts.  This student said to me following the last class, in somewhat of a defiant tone, “I understand what you’re saying Mr. Moberly, but I just don’t see it happening in my bank, at least while the current officers remain in place…’!

Of course, the point to all of this being, does the same hold true for today’s business decision-makers?  Again, there is absolutedly no question; it is an economic fact - business reality that less and less of most companies’ value, sources of revenue, and future wealth creation are generated from (their) tangible - physical assets!

Introducing intelligent, seasoned, and already successful business decision-makers to intangible assets and that the time devoted to learning about their intangibles and ways to maximize - extract (protect, preserve, and monitor) value are worthy strategic objectives, remains, unfortunately, no easy sell!

 Michael D. Moberly     May 30, 2008

The Ohio Supreme Court ruled (February, 2008) that the use of protected trade secret information by a former employee who had memorized it during his employment violated the state’s trade secret law.  (Al Minor & Assoc., Inc. v. Martin, Slip Opinion No. 2008-Ohio-292).

The Court held that the use of trade secret information does not lose its character as a trade secret (under USTA) merely because a former employee memorized it rather than writing it down or copying it in some other tangible medium.

For professionals charged with protecting and monitoring trade secrets and other proprietary information and know how, this ruling draws attention to many issues, three of which are:

1. Elevates the necessity for literally unraveling the origins and ownership of ideas and initiatives as part of due diligence, especially mergers and acquisitions, venture capital investments in early stage companies, corporate-university research alliances, etc., in which intangible assets, intellectual property, proprietary know how and competitive advantages are always in play and part of the deal.

2. Elevates the importance of conducting thorough employee exit interviews, especially for employees who have access to and/or hold proprietary - competitive advantage information (trade secrets).

3. Elevates the importance of (credence given to) non-disclosure agreements and non-compete clauses in employment contracts insofar as ensuring those agreements are routinely reviewed and updtated with specific ‘follow-up’ procedures.

In summary, the Ohio Supreme Court said it is the information that is protected by the USTA, regardless of the manner, mode, or form in which it is stored - whether on paper, in a computer, in one’s memory, or in any other medium.

To be sure, this ruling will have significant impact on how we set about to ‘protect, preserve, and monitor the use and value of (valuable) proprietary information.

Michael D. Moberly   May 25, 2008

There are two (and, probably more) parallel trends shaping the future of information asset protection, particularly with respect to companies’ vulnerability to theft, misappropriation, and infringement of (their) proprietary know how, trade secrets, and intellectual property by insiders (primarily employees).

The first trend is that numerous studies consistently find that 75+% of most companies’ value, sources of revenue and future wealth creation lie in knowledge-based intangible assets and intellectual property.  As this economic fact - business reality (trend) becomes more recognized and understood it will likely have significant influence on companies’ re-orienting their strategies, policies, and processes with respect to how they safeguard revenue generating - value creating knowledge-based (information) assets.  This trend will require ‘corporate information suites’ to shift (their) attitudes and some of their resources away from conceiving information protection solely in physical (tangible) asset and IT security contexts. 

Already, Sarbanes-Oxley (302, 404) and FASB (141, 142) mandate publicly traded companies account - report the value and materiality changes of their intangible assets.  This has elevated overall awareness (about intangibles) and prompted some forward looking companies to adjust their information asset protection programs to accommodate and reflect intangibles.

The second trend reflects the additional threats and risks to corporate proprietary information and trade secrets as conveyed in the findings of a study produced by DoD’s Personnel Security Research Center (PERSEREC) in May, 2005:

1. Fewer employees are deterred (from engaging in insider theft of information assets) by a traditional sense of loyalty…

2. Employees are less inclined to view espionage - theft of information assets as morally wrong and (they) may view such as acts as being morally justifiable if they feel that sharing (that) information will benefit the world community or prevent armed conflict…

3. There is an inclination of those engaged in multi-national trade and transactions to regard unauthorized transfer of information assets or technology as a business matter rather than an act of betrayal or treason…

4. There is a growing allegiance to a global community, i.e., increasing acceptance of global as well as national values.  Tendency to view human society as an evolving system of ethnically and ideologically diverse and interdependent persons and groups in which illicit acts (such as theft of trade secrets, etc.) are easier to rationalize…

Framing the above as parallel trends is intended draw attention to the reality that as intangible assets and intellectual property become the overwhelmingly dominant economic - competitive advantage drivers of companies globally, it is essential that fiduciary responsibilities fully encompass the art and science of ’sustaining (protecting, preserving) control, use, ownership, and value of those assets because, if neither is effectively monitored and sustained, value will be diluted, eroded, and circumvented!

Michael D. Moberly     May 25, 2008

What’s the incentive today for company decision makers to devote the time and resources necessary to engage in a thorough examination - analysis of their firm’s intangible assets, intellectual property, competitive advantages and proprietary know how as an important strategic prelude to maximizing and extracting additional - new value?

When I’m presented with such a question, I often respond by pointing out that maximizing - extracting value from a company’s intangible assets should initially focus:

a. less on conventional, near term (immediate) ’return on investment’ analysis of the activity, and

b. more on engaging in activities designed to sustain (protect, preserve) control, use, ownership, and value of those assets into the future, particularly those assets that a company has proprietarily developed, and therefore, rightfully owns and should be able to exclusively reap the economic benefits and competitive advantages.

In my judgment, maximizing and extracting value from a company’s intangibles, IP, know how, and competitive advantages, etc., involves three, somewhat sequential, steps for decision makers:

1st - acquiring a sense - curiosity - motivation to recognize that intangible assets, regardless of the type of company, exist in a range of forms and contexts from which value (can) should be exploited - extracted!

2d - deploying experienced sources of guidance to examine a company’s routine - embedded functions, processes, and procedures to identify centers, clusters, as well as points of origin of valuable intangible assets that are often unrecognized, overlooked, and taken-for-granted, but nevertheless, constitute intangible assets and ultimately, value!

3d - recognizing that maximizing and extracting as much value as possible from those assets, i.e., identification, assessment, valuation, need not necessarily be an activity dramatized by speed.  Rather, the activity should, in my view, be more properly focused on ‘what fits best’ for the company, i.e., a combination of timing, financials, risk, and alignment with core business objectives.  Of course, if the activity is conducted in conjunction with a merger, acquisition, business transaction, and/or new market entry, speed and execution are certainly important considerations.

Unfortunately, in too many instances today, company decision makers learn about the existance and/or value of their firm’s intangible assets, IP, know how, and competitive advantages in ‘reactive and distressed circumstances’ in which it may be too late to fully maximize and extract as much value as possible from those assets!

Michael D. Moberly    May 23, 2008    Part III of Three Part Post

The approach to intangible asset due diligence espoused in this and the previous two posts (May 21, May 22) can deliver necessary target specific analysis to acquisition - due diligence teams by, (a.) revealing and unraveling under-the-radar risks to the targets’ strategic value embeddedd in its intangible assets, IP, proprietary know how, competitive advantages, brand integrity, etc., and (b.) where - when feasible, identify considerations for (value, risk) remediation.

Should significant risks, value fluctuations and/or asset entanglements ‘come to light’ as a product of this approach to due diligence, acquisition teams could propose (design) special ‘monitoring’ covenants be attached to the transaction that reflect (address) the revelations of risks to the key assets. 

Such covenants, developed through the findings of this specialized due diligence, can serve as an additional hedge against a common affliction of acquisitions, i.e., post transaction surprises wherein its found that targeted assets have been significantly compromised, value diluted, and/or there’s been an over/mis-representation of a targeted assets’ origins and/or value which are often preludes to time consuming and costly remediation, disputes, and challenges.

Perhaps Alan Weber described it best, ‘the first rule of life is also the first rule of business…adapt or die’.  Its important that merger and acquisition due diligence, as well as due diligence in most every other business context, adapt, that is, fully recognize that the value of what’s being bought or merged lies increasingly in intangible assets.  Unfortunately, studies have found that companies that engage in mergers and/or acquisitions to try to improve (their) market position (for example) may devote as little as 10% of their due diligence to ‘intellectual capital’ (intangible asset) issues such as retaining sales and marketing.

Again, respecting the fact that today, 75+% of most companies’ value, sources of revenue and future wealth creation lie in intangible assets, it seems only prudent that due diligence should and will be much more reflective of this economic fact - business reality! 

Michael D. Moberly    May 22, 2008    Part II of a Three Part Post

Unlike patents, trademarks, and copyrights, there are no certificates issued by the government that say (a.) these are your intangible assets, proprietary know how and competitive advantages, or trade secrets, and (b.) this is how you should protect, preserve and monitor their value!

When extraordinarily valuable intangible assets (i.e., IP, know how, intellectual capital, competitive advantages, brand, etc.) are in play (targets’ of an acquisition) due diligence should produce - deliver target specific analysis to acquisition teams’.  The purpose is to aid in determining whether the about-to-be-acquired (purchased) assets can sustain the deals’ near term and strategic objectives, i.e., the assets’ (a.) fragility, (b.) stability and sustainability, (c.) defensibility, (d.) remediation and forensics, (e.) control, (f.) origins and development, and (g.) value (functional and economic life cycle).

Fragility - have the assets already been compromised or diluted in ways that adversely affect value, brand integrity and/or business processes, procedures, or practices…

Stability and Sustainability - can the assets produce/deliver the projected revenues, efficiencies, and/or collaborations…

Defensibility - the effectiveness of legal, monitoring, continuity/contingency and awareness measures to aggressively pursue violations, compromises and/or recover from adverse events…

Remediation and Forensics - requirements (costs) to sustain control, use, ownership, and value of the targeted assets and employ measures to counter (mitigate) economic-competitive advantage hemorrhaging that may materialize (pre-post transaction)…

Control - targeted assets subject to gray markets, challenges to brand integrity, compliance with Sarbanes-Oxley and FASB…

Origins and Development - identify, unravel, verify, and assess the targeted assets’ history, contributors, and ownership to ensure the assets are free from encumbrances, challenges, and disputes…

Value - ability of the targeted assets to continue to perform (a.) the intended functions, and (b.) generate (economic) revenue…

Too often, acquisition due diligence has been an exercise focused primarily on verifying a targets’ financials.  Today, acquisition due diligence should provide decision makers and acquisition teams with much more!

Michael D. Moberly  - May 21, 2008        Part I of a Three Part Post

Because 75+% of most targets’ value, sources of revenue and future wealth creation today lie in intangible assets, IP, proprietary know how, and competitive advantages, etc., conventional snap-shot-in-time approaches to due diligence using one-size-fits-all checklists, audits and/or confirmatory reviews can’t provide decision makers (acquisition teams’) with the level of insight and analysis that’s necessary to avoid surprises and miscues!

When extraordinarily valuable intangible assets (IP, know how, intellectual capital, etc.) are in play (target of an acquisition) the primary objective of due diligence is to provide decision makers (acquisition teams’) with objective and strategic insights and analysis relative to the assets (a.) fragility, (b.) stability, (c.) sustainability, (d.) defensibility, (e.) control, (f.) origins and development, and (g.) value (functional and economic life cycle).

In other words, due diligence should produce - deliver target specific analysis to acquisition teams’ to aid in determining whether the about-to-be-acquired intangible assets can sustain the deals’ near term and strategic objectives.

The due diligence product should also reveal and unravel under-the-radar liabilities and risks to those assets and identify remedies (if feasible) to mitigate, shift, and/or leverage the risks to negotiate better deal terms, i.e., special covenants.

This approach to due diligence will also identify circumstances (objectively) known to serve as preludes to costly and time consuming disputes and/or challenges (over control, use, ownership and value of the assets in play) that can undermine (erode) the deals’ projected strategic competitiveness and/or profitability.

Up-front negotiations to ensure sufficient accessibility (to the targets’ assets) to conduct this level of due diligence is necessary.  While this level of accessibility has traditionally not been the norm and restricted to ’sterile war rooms’ under ‘time constraints’, this approach to due diligence is essential today because most targets’ value is directly linked to its intangible assets, IP, and intellectual capital which must be identified, unraveled, and assessed, something which some companies have yet to fully master even through Sarbanes-Oxley and FASB mandates.

May 15, 2008    This is Part II of a two part post.

Michael D. Moberly

Overview

Today, 75+% of company value and sources of revenue lie in intangible assets, intellectual property and proprietary know how.  However, the line between a company achieving profitability and fighting for its financial survival can, and with increasing frequency, lie in its ability to (a.) recognize/identify, (b.) maximize, and (c.) extract value from those assets while sustaining possession and unchallenged exclusive rights.

Security executives should recognize intangible assets take two primary forms…

1. Legal intangible assets generate legal property rights that are defensible in a court of law, i.e., copyrights, trade secrets, patents, trademarks, and goodwill, etc. 

2. Competitive intangibles directly impact-contribute to a company’s effectiveness, efficiency, productivity, customer service, market value and even share price.  Human (intellectual) capital is the primary source of competitive intangible assets. (Wikipedia)

Collectively, these forms of intangible assets increasingly hold the key to a company’s long term performance and sustainability.

Security executives need to know that intangible assets and competitive advantages…

- Are economic benefits anchored in distinctive features, processes, or programs that set a company apart from competitors. (Moberly)

- Often evolve over time within a company or business unit and may not always be the result of a planned action or the product of specific capital allocation decisions.  (Michael D. Moberly adapted from Brookings Institution - Understanding Intangible Sources of Value)

- Can be unique blends (combinations, collections) of activities, assets, relationships, history, and market conditions that an organization exploits in order to differentiate itself from competitors, and thus create value.  (Michael Porter, Harvard Business Review)

- Primary source of value lies in the assets’ unique proprietary knowledge and the special value that comes with understanding and applying that knowledge.  (McKinsey Quarterly, 2004)

Security executives should recognize (examine) the following examples (of intangible assets) relative to the specialized practices - policies that may be necessary to sustain their control, use, ownership, and value throughout the assets’ life cycle…

1. Technology/Software:  Internally developed (proprietary) software and software copyrights, databases, source code, enterprise solutions, and custom applications…

2. Marketing - Lyrics, jingles (music), promotional characters and devices, photographs and video, newsletters, advertising/marketing concepts, results of focus groups…

3. Engineering - New plant-equipment designs, drawings, and technical know how…

4. Customers/Clients - Communication and mailing lists, relationships, data bases, retrieval systems, special distribution channels, 1-800 numbers…

5. Competitor Research - Actionable business intelligence, i.e., plans, intentions, capabilities…

6. Real Estate - Zoning, construction permits, air, water, and mineral exploitation rights, right-of-way, easements, and building (expansion) plans/rights…

7. Personnel Training - Proprietary manuals, operations, processes and/or procedures…

8. Internet - Domain names, website design, e-commerce capabilities, weblinks, customer/client accessibility and use…

9. Products and Services - Warranties, trade dress, i.e., shapes, color schemes, packaging design and graphics, etc., open purchase orders, order and/or product back log…

10. Corporate Identity - Trade name, trademark, logo…

11. Contracts-Agreements - Any contract that has a definable life and some form of exclusivity, i.e., supply, media, performance and pricing agreements, license and/or royalty agreements, advertising, construction, management, and/or service contracts, leases, operating and broadcats rights and licenses, route utilization, franchise agreements, subscription rights, futures contracts, co-branding agreements, endorsements, spokesperson contracts, venue naming rights…

12. Intellectual Property - Patents, copyrights, trademarks, trade secrets, trade name, service marks, mastheads, logo design, prior art search, flanker patents, patent applications, foreign patents, reprints, use/performance rights…

13. R&D - Product research studies, formulas, process and assembly data, negative research, regulatory agency approval process and status…

14. Communication - Cable rights and/or transmission rights, FCC licenses and/or certification, bandwidth…

15. Human Resources - Wage rates, union contracts, non-compete and non-disclosure agreements (if transferrable)…

16. Structural Capital - The structures and processes employees develop and deploy to increase productivity and performance (business process/method patents)…

17.  Human Capital - Sum total of employees’ specialties, skills, attitudes, abilities, competencies, technical know how documentation, i.e., lab notebooks, manuals, formulas, processes, and recipes…

The above examples evolved from Mr. Moberly’s professional and business experiences, and from (1.) ‘The Intangible Asset Handbook: Maximizing Value From Intangible Assets’ Weston Anson, and (2.) ‘Untangling Intangibles’ Tamara Plakalo.

May 14, 2008    This is Part I of a two part post.

Michael D. Moberly

Overview

Today, 75+% of company value and sources of revenue lie in intangible assets, intellectual property and proprietary know how. However, the line between a company achieving profitability and fighting for its financial survival can lie in its ability to (a.) recognize/identify, (b.) maximize, and (c.) extract value from its intangible assets and intellectual property while sustaining possession and unchallenged exclusive rights. 

Security executives’ can make substantive contributions to sustaining control, use, ownership, value and defensibility of those assets!

Why It’s Important

1.  There is no other time in business governance history when (a.) larger percentages of value, sources of revenue and future earnings potential are more deeply rooted in intangible assets, IP, and proprietary know how, and (b.) effective stewardship, oversight, management, and defense of those assets is more essential to maximizing and extracting value from those assets and sustaining a company’s competitive position.

2. Intangible assets often fall under the radar.  All too frequently, the contributions intangible assets make to a companies’ value, sustainability, competitive position, and profitability go unrecognized and undervalued because they (a.) lack physicality, and (b.) require managing a company’s future value.

3. The time frames (windows) when the most value can be extracted (realized) from intangible assets and IP is shrinking (Weston Anson) in part, because of (a.) the ease which competitors can enter markets, (b.) the rapid profits achieved from infringed - counterfeited products, and (c.) asset value is perishable and often times non-renewable, i.e., once an asset has been compromised, economic hemorrhaging can commence immediately, globally, and seldom ‘can the genie be put back in it’s bottle’.

4. Patents, trademarks and copyrights (a.) no longer serve as (stand alone) deterrents or safe harbors from global networks of infringers and counterfeiters, (b.) are no longer consistent indicators of company or project value or assurances of transaction success or profitability, and (c.) can advance a company only so long as they’re converged with other information asset protection measures to sustain their control, use, ownership, and value.

5. Global networks of data mining and predatorial business intelligence operations can rapidly undermine competitive advantages and strategic planning and also erode asset value.

6. The growing universality of regulatory mandates, i.e., international equivalents to the Sarbanes-Oxley Act and Financial Accounting Standards Board statements which require accounting and reporting value, materiality, and financial performance of intangible assets.

What’s Necessary

1. Treat intangibles in business - revenue conversion contexts to maximize the value.  It’s important to treat those assets’ control, use, ownership, value and sustainability as business and financial decisions not dominated by legal processes.

2. Develop a proactive model (framework) for security teams to contribute by mitigating challenges and risks that adversely affect control, use, ownership, value, and brand integrity.

3. Clarify and extend the range of options - strategies for security teams to contribute to the stewardship, oversight, and management (fiduciary responsibilities) to better position companies and business units to (a.) maximize and extract as much value as possible from those assets, (b.) sustain the necessary control, use, ownership, value, and brand integrity of those assets, and (c.) better reflect Sarbanes-Oxley and FASB reporting/accounting mandates.

Part II of this paper will be posted on Thursday, May 15th by Michael D. Moberly. 

Michael D. Moberly    May 12, 2008

The findings of this study produced by the Defense Personnel Security Research Center (PERSEREC) has, in my judgement, strong implications to the U.S. private sector insofar as contemplating - executing more effective and proper strategies (methods, policies, practices) for protecting a company’s information assets, i.e., its intellectual property, trade secrets, proprietary information, intangibles, and competitive advantages!

On two occasions (November, 2007, April, 2008) I met with PERSEREC researchers to discuss their ‘ahead of the curve’ work related to ‘insiders’; more specifically, the findings of their May, 2005 study titled ‘Technological, Social, and Economic Trends That Are Increasing U.S. Vulnerabiliy to Insider Espionage’.  The principle investigators for this study were Lisa A. Kramer, Richard J. Heuer, Jr., and Kent S. Crawford.

The thrust of our discussions - my questions to PERSEREC researchers focused on, what I believe to be is the immediate relevance of this study’s findings to U.S. companies.  The findings convey a series of strong indicators (below) that insider problems - challenges are not likely to diminish for the foreseeable future because…

1. The Internet has created a large and efficient marketplace for bringing sellers, seekers, and buyers of information together to exchange information in relative immunity…

2. Employee awareness about the value of protected information assets has elevated insofar as recognizing it can be sold for a profit…

3. There is an expanded global marketplace for protected-proprietary (U.S.) information assets…

4. Fewer employees are deterred by a traditional sense of loyalty…

5. There is a growing number of employees who retain emotional, ethnic, and financial ties to other countries coupled with less inclination to seek U.S. citizenship which is fostered by technologies that allow global communication)…

6. Employees are less inclined to view espionage - theft of information assets to be morally wrong and (they) may view such acts as being morally justifiable if they feel that sharing information will benefit the world community or prevent armed conflict…

7. Internationalization of science and commerce is placing more employees in positions to establish and maintain contact with foreigners interested in exploiting their knowledge…

8. There is an inclination of those engaged in multinational trade/transactions to regard unauthorized transfer of information assets or technology as a business matter rather than an act of betrayal or treason…

9. There is a growing allegiance to a global community, i.e., increasing acceptace of global as well as national values.  Tendency to view human society as an evolving system of ethnically and ideologically diverse and interdependent persons and groups which make illicit acts easier to rationalize…

These findings, in my judgement, prompt many additional questions about ‘insider threats’ specifically applicable to the private sector.  For example, there is an imminent need to identify and assess the following factors especially…

1. Employee reactions to the elevated intensity and frequency which external entities are targeting (soliciting) their company and their knowledge…

2. Employee propensity - proclivity to (a.) convey receptivity to external solicitors - buyers of a companies’ information assets, and/or (b.) actively seek prospective buyers on their own.

3.  Also, if such proclivities - propensities exist do they coincide with or become exacerbated by the conventional precursors - motivators (of insider theft), i.e., disgruntlement, unmet expectations, personnal predispositions, financial stress, etc.

Ultimately, the challenges presented by these findings to U.S. companies have, and in all likelihood, will become more acute, requiring specialized familiarity, experiences, and skill sets to effectively address.  This is especially critical given the economic - business reality that today, 75+% of most companies’ value, sources of revenue and future wealth creation lie directly in intangible assets and intellectual property!