Maximize Your Global IP: Strategic Planning Helps Multinational Companies Enhance Profits and Avoid Pitfalls
Hardgrove, Michael W., Voloshko, Alex, Journal of Accountancy
As companies seek earnings growth and sources of investment capital, it becomes critical for them to manage resources more productively. In today's global economy, many enterprises rely extensively on developing and effectively exploiting their intellectual property (IP) to enhance the bottom line. For companies with customers, suppliers or business activities in multiple countries, managing such intangible assets can be extremely complicated. CPAs, as financial managers or advisers, can help their employers or clients develop a strategy that tackles many complex international business issues, including cash management, resource allocation, administrative simplification and cost containment. This article discusses how CPAs can help their clients treat IP as the economic cornerstone of a sound business strategy while avoiding some all-too-common pitfalls along the way.
WATCH OUT FOR PITFALLS
CPAs can identify IP activities that create financial value as well as develop strategies to use, value and report on intangibles. Companies that do not have such strategies run the risk of either mismanaging their IP investments or not fully capitalizing on them. For example, a company might be legally or contractually prohibited from transferring an important technology to a foreign business unit that could otherwise benefit from it. Furthermore, if management does not identify internally developed or enhanced IP, such as processes, unpatented know-how or marketing intangibles, it could jeopardize the legal protection of such assets. This can be especially true in foreign countries where local laws may not protect unregistered rights as they do in the United States. As a result, operating expenses, taxes, cash flows and profits of a company's global business units could be adversely affected.
Consider a hypothetical company, AB-Tech, which develops and distributes technology solutions to clients worldwide. Its business model combines services, hardware and software in comprehensive solution packages. In its early stages AB-Tech had a relatively simple business structure. Its U.S. operations served as headquarters and performed all distribution, research and development and marketing. AB-Tech's structure became increasingly complex as it expanded into markets in other countries. For example, AB-Tech established a subsidiary for technology development and marketing in France. The French operation not only generated enhancements to the technology but also created a substantial customer base throughout Europe. In focusing on rapid market expansion in the United States, company management had little time for strategic planning for its European operations, let alone the potential growth in IP value.
As a result AB-Tech managers treated U.S. R&D as the company's only source of IP and did not consider that the contracts and activities of the French subsidiary also contributed to the corporate IP portfolio. This misunderstanding caused several problems. First, AB-Tech did not register the technology enhancements it had developed in France, nor did it take measures to protect the subsidiary's marketing rights and customer lists. Consequently these assets were at risk of "theft" from competitors or its own enterprising employees. Second, U.S. operations managers did not internalize any of the French unit's processes (for example, systems improvements and marketing knowledge) that could have benefited the entire organization. Because AB-Tech's U.S. managers didn't know about or use these intangible assets, the company couldn't effectively leverage them or report their value to banks, investors or customers. The company's poor handling of its IP created problems that could have been avoided--such as lost efficiencies resulting in a higher cost of products delivered to customers and the replication of certain R&D activities by the parent, as well as exposure to French income taxes on profits attributable to the IP the subsidiary developed. …