ORGANIZATIONAL STRUCTURES AND PRACTICES

USED IN THE MANAGEMENT OF INTELLECTUAL PROPERTY

IN SCIENCE-BASED ORGANIZATIONS

WITH GEOGRAPHICALLY SEPARATED RESEARCH CENTRES

Executive Summary

August 21, 2001

Prepared by Thomas E. Clarke, M.Sc., M.B.A.

For

Agriculture and Agri-Food Canada
National Research Council of Canada
Ottawa, Ontario

Clarke-Reavley Consultants

(Formerly Stargate Consultants Limited)

707 - 172 Wentworth Drive
Halifax, N.S.B3M 0P4

Tel: (902) 240-2401

INTRODUCTION

The effective management of intellectual property (IP) is an important aspect of the total technological innovation management process. In order that organizations obtain the maximum benefit from their investment in R&D, they must be diligent in identifying potentially valuable IP when it is developed; evaluating it in order to determine the appropriate form legal protection should take, and, in the case of IP that is to be licensed, identifying suitable licensees and negotiating a mutually acceptable license. The IP originating organization must also be on the alert for other organizations making unauthorized use of their protected IP and be prepared to challenge them, in the courts, if necessary.

The management of IP assets is big business. In 1996, U.S. private and public sector organizations and individuals received $136 billion in revenues from all classes of intellectual property. In the same year, Canada paid U.S. organizations $1.416 billion in license fees and royalty payments, while receiving $192 million in return (Degnan, 1998). Rivette and Kline (2000) report that IBM earns approximately $1 billion per year in license royalties, Lucent earns several hundred million dollars per year and Texas Instruments approximately $800 million per year.

The IP management process is made even more complicated when an organization has many IP generating units across the country or around the world. Does the organization centralize the IP management process in its headquarters, does it leave it to the individual business units, or does it use some managerial process in between total centralization and total decentralization?

The purpose of this study was to determine how a limited number of large public and private sector R&D-based organizations manage the question of centralization vs. decentralization of IP management and the organizational structures and procedures they have established to manage their intellectual property effectively across geographical distances.

METHODOLOGY

Companies and foreign government departments were approached either by telephone or through personal contact during a meeting of the Licensing Executives Society in Kananaskis, Alberta in late June to determine their interest in taking part in this study. If they indicated interest, they were provided with a list of questions that was to form the basis of a one hour telephone interview (See Appendix A). A follow-up phone call was made to determine whether they were still interested in taking part, and if they were, a time was set up for the telephone interview. Of the eleven companies initially approached, four declined to take part. All of the government departments contacted cooperated.

All the companies requested anonymity. All are large multinational science- or technology-based firms, headquartered in either Canada or the U.S., with large IP management operations. The combined annual sales of these seven companies is approximately $240 billion and they employ over 770 thousand people worldwide. Their annual R&D expenditures are estimated to total approximately $19 billion and they have 160 R&D sites around the world. Business lines include consumer and industrial chemicals; household, agricultural, and construction products; computer hardware and software; plastics, office equipment, and telecommunications hardware and software.

The government departments that participated are the National Institutes of Health (NIH), the U.S. Department of Energy (DOE), the U.S. Department of Agriculture (USDA) and the U.K. Department for Environment, Food and Rural Affairs (DEFRA).

LITERATURE REVIEW

["Intellectual property is the "dark matter" of the corporate universe:
unobserved or ignored; undervalued yet full of potential worth" - Bratic, et al, 1998]

While there are numerous articles concerned with best practices in the transfer of technology from government laboratories to industry (Clarke, 1996a, b & 1997), the literature on the patenting and licensing activities of organizations is much more limited. A report by the U.S. General Accounting Office (1999) provides some statistics on the licensing practices of six federal agencies (NIH, Army, Navy, Airforce, DOEnergy and NASA). These indicate that 73% of the licenses issued are non-exclusive, 60% go to small businesses and between 1996 to 1998, IP revenues totalled $107,460,998. million. The National Institutes of Health accounted for 95.1% of the total revenues and for 70% of the licenses granted.

A review of IP management organization in Japanese companies in the early 1990s, describes the following ways in which IP activities can be organized (Granstrand, 2000):

• IP activities centralized in headquarters;
• decentralized to individual business units, or foreign subsidiaries;
• IP activities assigned to one business unit with corporate-wide responsibilities;
• organized as an independent IP business unit in the corporation; and
• contracted out to one or more third party organizations that specialize in IP management.

Granstrand notes that organizing the IP operation as a profit centre or business unit was not common practice.

The patent organizations in the large Japanese firms shared the following common features:

• resources assigned to IP activities were generous compared to their Western counterparts;
• a centralized patent department at the corporate level with corporate-wide responsibilities for patent coordination;
• IP department and IP issues were considered a strategic part of the business planning process;
• IP department was an active clearing house for technical information and conducted IP related competitive intelligence activities;
• patenting department and the R&D department worked at having a good relationship;
• patenting people were brought in early in the R&D process (i.e., at the R&D project selection stage);
• patent management was pro-active rather than passively responding to requests from the business units or R&D; and
• there was a patent culture within the organizations.

Granstrand identified the following management factors as supporting the creation of a patent culture. These were:

• top management involvement;
• patenting made a concern of all technical staff; patent policies and strategies integrated into business plans;
• having clear patent objectives (e.g., 100 strategic patents per year);
• the existence of clear patenting incentives/rewards to R&D personnel (e.g., cash awards to person who files the most patents);
• fostering behaviours that reinforce the importance of IP such as encouraging technical staff to read patent specifications in addition to journal articles, and aligning the report writing on R&D work to the norms and standards used in patent documents;
• having patent liaison personnel distributed throughout the organization; and
• having patent strategy seminars.

He also noted that several firms had quite elaborate training programs for their technical and IP management staff.

In a benchmarking study of 21 U.S. companies, Ransley and Gaffney (1997) identified certain practices that appeared to add value to the IP management process. They would not go as far as calling these "best practices" as they noted that some firms that did not adopt a particular best practice could be as successful at managing their IP as one that did. Among the "value added" practices identified were:

• explicit consideration of IP in the organization's business plan;
• using patenting intermediaries who meet with the scientists to assist them in identifying IP and preparing patent disclosures;
• perform or arrange prior art searches, participate in disclosure evaluation meetings, and train/advise the scientists on IP management issues;
• using patent committees to evaluate and prioritize invention disclosures, and to determine foreign filing and maintenance issues;
• considering IP issues at the R&D project selection stage, and at other stages of the new product development process;
• locating patent agents/attorneys close to the R&D activity;
• reliance on in-house patent attorneys, with outside attorneys being used only as necessary;
• rewarding staff for patent infringement detection;
• existence of a IP reward and/or recognition process; and
• provision of training in IP management to bench level scientific personnel.

They noted that most of the companies interviewed made little use of IP factors in their competitive intelligence activities. This is in contrast to Granstrand's findings in his study of Japanese companies.

Some firms have integrated their strategic planning process with their IP management process and in doing so have tightened the link between R&D program managers and the R&D project selection and evaluation process, and the IP management process. Germeraad and Morrison (1998) describe the way in which Avery Dennison has incorporated the consideration of IP issues into their new product development process.

A review of strategic management of IP, Bratic, Rouse and Vollmar (1998) also argue for IP management to be fully integrated into the business plans of an organization. "To be sustainable and relevant, any IP asset-management system must be integral to all the processes that make up the business".

A recent phenomenon, is the use of the internet to advertise the existence of technology available for licensing. Even large firms that have extensive web-sites of their own are making use of third party licensing exchanges. Some of these web-sites are listed in the short article on technology licensing exchanges, (Bauman, 2000).

In a review of IP management practices of major U.S. companies, Rivette and Kline (2000) note that Xerox has centralized its intellectual property management activities in a "Xerox Intellectual Property Operations" unit which has profit and loss responsibility for managing the company's patent portfolio. They also note that patent decisions are now taken early in the R&D management process to avoid finding out too late, after considerable funds have been spent, that a competitor holds some key patents that are needed to exploit a line of research. Patents at Xerox are no longer considered the property of the originating business unit, but are regarded as assets of the corporation, as a whole. Xerox has also taken a more aggressive stand against infringers. The authors point out that Lucent has also adopted a similar centralized approach to IP asset management. Nortel Networks also has a centralized IP management process which deals with licensing.

Glenn Tautrims and Don Drinkwater of Price Waterhouse Coopers, in their presentation to the Licensing Executives Society meeting in June of 2001, describe the intellectual property management process model developed by DOW Chemical in 1992/93. Based on six competencies, they believe it was the first model to imply collaboration between business/finance, technology and legal areas of a firm. The competencies are:

• strategy;
• competitive assessment;
• classification of IP assets;
• valuation of IP;
• investment; and
• portfolio management.

A book published in late June, 2001 entitled, "Edison in the Boardroom" by J.L. Davis and Suzanne Harrison (Wiley/Anderson Series on Intellectual Property), provides additional information on DOW Chemical's IP operations.

SUMMARY

This study found that it is possible to effectively manage intellectual property assets that have been generated by geographically separated research centres if an appropriate IP management structure and practices are put in place.

This examination of the organizational structures and practices used in the management of intellectual property assets by U.S. and U.K. science-based government departments, and large technology-based multinational private sector corporations identified common approaches to IP management in both types of organization. Some differences in approach were, however, noted.

The major differences between the public and private sector organizations in their IP management practices were the following:

• government departments indicated that they did not conduct competitive intelligence activities;
• many more private sector firms indicated that they were covering their IP management costs;
• government departments relied to a greater degree on outside patent attorneys; and
• government departments shared IP revenues with government inventors.

While most of the private sector organizations had some form of reward and recognition program in place for their inventors, none shared IP revenues with their employees. It should be kept in mind that in contrast to the public sector, the private sector has many more reward tools, other than IP revenue sharing, at its disposal to recognize the contribution of employee inventors. These include the ability to award large salary increases or promotions, salary bonuses (on-going or one-time), paid holidays with family, recognition dinners, cash awards, scholarships in the name of the inventor, increased laboratory resources, etc. [Firms with German affiliates would, in line with German law, have to share IP royalties with their German employee inventors.]

As was the case in the Ransely and Gaffney (1997) study, it is difficult to identify so-called "best practices". However, at least three management practices can be considered as falling into the "best practice" category. These are:

• the use of a "central patent board" or intranet bulletin board to keep IP and senior managers advised on forthcoming IP business decisions/actions so as to avoid inter-unit conflict (public and private sector);
• having on-site patent liaison personnel available to identify potentially valuable IP, and to provide advice and assistance to potential inventors (public and private sector);
• obtaining agreement on the distribution of IP revenues among multiple inventors of an invention, prior to the generation of revenues (possibly as early as the IP disclosure stage) so as to avoid legal conflict in the future (public sector); and
• the continuation of IP royalty payments or awards to the estate of the inventor upon his or her death (public and private sector).

This last practice of continuing the IP revenue payments to the estate is common practice in Canadian and U.S. universities. The Canadian government policy of extinguishing the IP revenue payments on the death of the inventor is indefensible.

The following are some of the IP management practices adopted by both the private and public sector organizations examined in this study that are supportive of the IP management process:

• having a central IP management office to develop corporate IP strategy, facilitate coordination between units, but not to necessarily dictate or make all of the IP management decisions;
• leaving the decisions on what to patent and breadth of the patent to the local business unit/research institute management;
• using patent review teams consisting of people with varying backgrounds (e.g., legal, marketing, licensing, technical) to make patent decisions; having the business unit or research institute, but not necessarily the R&D budget pay the initial patent filing costs, in order to encourage rigour in the disclosure review decision;
• using in-house patent attorneys/agents who become very familiar with the technology and the potential markets, with freedom to hire outsiders when justified;
• having a centralized marketing and licensing group that can either conduct marketing and licensing activities corporate-wide, or provide assistance to the business units if they wish to market and license their IP on their own;
• returning a substantial portion of the IP revenues to the IP generating business unit/research institute to encourage involvement in the IP process;
• having an reward and recognition program in place to recognize the work of employee inventors;
• using an easily accessible IP management data base to keep geographically separated IP managers/patent liaison personnel up-to-date on patent and license status;
• treating the monitoring of licensees as an integral part of the overall licensing activity; and
• ensuring that the scientific and technical personnel are well educated on their role in the IP management process.

It should be noted that having a centralized marketing and licensing group does not necessarily imply that this activity is operated out of headquarters. A group might be located in one branch office that handles all of the technologies developed in the organization; however, if the level of IP marketing/licensing activity justifies it, several groups might be established along technology/market lines and each would be responsible for their area of technology developed anywhere in the organization. If marketing and licensing activities are organized along technology lines, then a group might be located near their major source of corporate technology.

This study has confirmed that IP management must be given the same amount of attention from senior management in regard to structure and practices as any other business activity in the organization. It is neither an "add-on" nor a "ad hoc" activity.

REFERENCES

Bratic, Walter, Rouse, Peter and Vollmar, Ronald G., "Strategic Management of Intellectual Property", Law Governance Review, Winter, 1998, pp. 53-61

Bauman, Norman, "Technology Licensing Exchanges", Research-Technology Mangement, Vol. 43, No. 5, September-October, 2000, pp. 13-15

Clarke, Thomas E. , "Review of Business Development Activities in Government and Private Sector Research Institutes in the U.K. and Holland", Report prepared for the R&D Branch of DND, Ottawa, ONT:Stargate Consultants Limited, September, 1997

Clarke, Thomas E., "Principles and Practices Adopted by Canadian Science-based Government Departments and Agencies to Facilitate Technology Transfer to the Private Sector", Report for Industry Canada, Ottawa, ONT: Stargate Consultants Limited, November, 1996 (a)

Clarke, Thomas E., "Review of R&D Management Literature Concerned with Technology Transfer Between Government Laboratories and Industry", Report for Industry Canada, Ottawa, ONT: Stargate Consultants Limited, August, 1996 (b)

Degnan, Stephen A., "The Licensing Payoff from U.S. R&D", Research-Technology Management, Vol. 42, No. 2, March-April, 1999, pp. 22-25

General Accounting Office, "Technology Transfer: Number and Characteristics of Inventions Licensed by Six Federal Agencies", Report GAO/RCED-99-173, Washington, D.C., June, 1999

Germeraad, Paul B. and Morrison, Lorraine, "How Avery Dennison Manages Its Intellectual Assets", Research-Technology Management, Vol. 41, No. 6, November-December, 1998, pp. 36-43

Granstrand, Ove, "Corporate Management of Intellectual Property in Japan", International Journal of Technology Management, Vol. 19, Nos. 1-2, 2000, pp. 121-148

Ransley, Derek L. and Gaffney, Richard C., "Upgrade Your Patenting Process", Research-Technology Management, Vol. 40, No. 3, May-June, 1997, pp. 41-46 Rivette, Kevin G. and Kline, David, "Rembrandts in the Attic", Boston, MA: Harvard Business School Press, 2000