Extracting Value from Intellectual Assets: Research with Industrial Research Institute Member Companies Reveals What It Takes to Make Money from Licensing While Protecting the Core of the Business

By Goldheim, David; Slowinski, Gene et al. | Research-Technology Management, March-April 2005 | Go to article overview

Extracting Value from Intellectual Assets: Research with Industrial Research Institute Member Companies Reveals What It Takes to Make Money from Licensing While Protecting the Core of the Business


Goldheim, David, Slowinski, Gene, Daniele, Joseph, Hummel, Edward, Tao, John, Research-Technology Management


The organization of intellectual asset (IA) management, especially the value-extraction function, is crucial to the success of technology-intensive firms, from the strategic business unit level up to the corporation as a whole. That's why, for example:

* Philips Electronics employs 300 intellectual-asset professionals in 23 offices worldwide to maximize the value of its 100,000 patents.

* IBM generates over $1.5 billion annually (at a 90 percent margin) from out-licensing technology.

* The majority of Fortune 1,000 firms are either actively out-licensing technology or developing programs to do so over the next 12 months.

This level of activity demands that managers understand the pitfalls as well as the opportunities in value extraction in order to maximize the value of their IA portfolios. This second of two articles describes specific challenges managers face as they operationalize the value-extraction function.

To understand how firms successfully extract value from their IA portfolios, discussions and interviews were conducted with over 70 representatives of Industrial Research Institute member companies. Participants represented a cross-section of industry sectors including consumer products, life sciences, oil & gas, chemicals, pulp & paper, control systems, defense/aerospace, computer hardware and software, and electronics. Each participant was selected because of their own and their organization's extensive experience in licensing and technology commercialization.

The results of this study fall into two general areas: how to strategically organize assets, and specific methods for extracting value. The first area was addressed in our previous article (1), while this second paper focuses on specific issues firms face when organizing and executing a licensing program. The issues in this second area are addressed in four major categories:

* Valuation of IP.

* Extracting value.

* Organizing for out-licensing technology.

* Career paths for licensing professionals.

Valuation of Intellectual Property

Developing a reasonable and defensible valuation model is key to the success of any Intellectual Asset Management (IAM) program. A valuation model allows each party to a potential agreement to understand its financial aspects and discuss them rationally. Absent this understanding, managers rely on brute force negotiating techniques, cash-flow models that meet corporate needs but are disconnected from the specific value of the technology, marketplace demands, or simple rules of thumb that fail to account for the challenges of developing a specific technology, a new market, an industry application, or identifying the appropriate fields of use for the agreement. Regrettably, the outcome of these methods is disappointing. Many agreements that should have been profitable to the parties are never realized because they cannot agree upon mutually acceptable terms and conditions.

Valuing intangible assets is difficult and requires the support of experienced and competent financial counsel. The techniques outlined below are intended to provide a constructive framework for discussions among the negotiating parties.

The standard methods for deriving fair value for a potential license agreement or IP donation usually include market reference, cost or income approaches. There are also hybrid and advanced methods that consider additional factors to arrive at a more insightful valuation, e.g., the 25-percent rule, options, relief from royalty, the Black Scholes Model (Option Pricing Method), and Monte Carlo simulations. Each method has its set of operating assumptions and data requirements. For example, when using the income approach (also known as the discounted cash-flow technique), the IA professional needs to estimate the timing of revenues, costs and discount rates. When employing the market reference approach, "comparables" must be identified. …

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