What’s the Right Definition of Intellectual Property?
September 30, 2009 by Mary Adams
We have been circulating review copies of our book. We make the case that structural capital–knowledge captured in the organization–falls into two main categories: process and intellectual property (IP).
And the most controversial part has been our contention that:
All the knowledge that is captured and recorded in your company is IP…Whether or not it makes sense for you to protect parts of your IP legally, please do not limit your concept of IP to just a few isolated assets. Captured knowledge is one of the essential raw materials of your organization. Inventory it, understand it, make it more tangible where applicable. The better you understand this raw material, the better you will be able to leverage it.
I have received very thoughtful replies from people in the IP community for whom I have a great deal of respect. They disagree with us pretty strongly. They see IP as only knowledge with a specific legal status (patents, trademarks, copyright, trade secrets and confidential information).
I understand that IP is special but I have a problem–what do we call the rest of an organization’s knowledge factory?
And where do we draw the line? What if I have a concept that I believe could be patented but I choose not to seek a patent–is it not IP? Then what is it? Is it less important or valuable without the patent?
What if I have a concept “protected” by both patents and a strong business model (think iPod)? Are the patents more important than the business model? I’m concerned about telling businesspeople who are learning to navigate the knowledge economy that it is legal status that gives knowledge value.
And what do we do about the unstated assumption that IP is superior to other knowledge?
How do we solve this? I spend a lot of time working on measuring knowledge. IP is only one part of the pie. Does it automatically deserve special status? I don’t mean to disrespect the IP community, I just think we need to find a way to talk with each other. We need to find a way to build a bridge….
Please share your thoughts!
[...] This post was mentioned on Twitter by Jeff Gordon. Jeff Gordon said: RT @maryadamsICA: New blog post: What’s the Right Definition of Intellectual Property? http://bit.ly/QKX5r [...]
I tend to agree with the folks who would shy away from calling it Intellectual Property (capital I, capital P). But only because IP is the formal group name for very specific types of property.
Instead, I would call it “intellectual capital” as it has value and usefulness.
But IC and IP aren’t mutually exclusive and one isn’t necessarily more valuable than the other. IP does seem to edge out IC just a little (on average) because there’s a way to quantify the cash value. In other words, you CAN nail down a dollar amount. For example, with copyright, you know how many copies a particular book has sold… and traditional business valuation usually puts value at 2-3x of one-year of sales. So the value of that book is easily determined.
Most IC, on the other hand doesn’t have a fixed monetary value. Since you’re not usually selling IC, it’s harder to evaluate for a dollar amount. This doesn’t mean it’s worthless… just more difficult to value. With difficulty comes risk avoidance. If I (as a buyer) don’t have confidence in the ROI, I avoid buying.
Interestingly enough, trade secrets might be the cross-over point between the two (since by its definition it has to remain secret, it actually fails part of the requirements of what would make it IP). But we know that trade secrets are valuable - the formula to Coca-Cola, the secret herbs and spices to Kentucky Fried Chicken… the filling in a Twinkie
… just to name a few.
For IC that COULD have a patent, the patent will give it at least has the appearance of more value (as it’s had some form of third-party valuation applied to it simply by receiving the USPTO’s approval).
Jeff - If you ask the IC people they will tell you that intellectual capital is all the knowledge assets: human, relationship and structural knowledge (including process and IP). Not all of these are owned or property of the company. Maybe we need to coin a new term, “knowledge property” that would be all the captured knowledge. IP would be the subset that can be or is protected legally. Thanks for a great contribution. Mary
How are “knowledge property” and “intellectual capital” different? And why does it matter. It appears in your response that you’re trying to distinguish between assets “owned” by the company vs assets only temporarily owned (for so long as a particular person is employed). But I’m not sure that this distinction matters.
Capital, from a dictionary definition perspective, means “the wealth, whether in money or property, owned or employed in business by an individual, firm, corporation, etc.” or “any form of wealth employed or capable of being employed in the production of more wealth.” . By these definitions, even an employee’s knowledge qualifies as intellectual capital. It’s temporary (as is any capital, for that matter) but it’s capital nonetheless.
In any event, a company needs to protect all of it’s intellectual capital/property/assets - regardless of the term used to define them. This is a case where it at least appears on the surface that semantics are getting in the way of understanding.
From a strategic point of view, you are right. It’s all knowledge for the company. That is important for businesspeople to understand.
From an accounting point of view, however, ownership does become important. Intangibles do not appear on the balance sheet today unless acquired through M&A. However, I believe that more of the investment in intangibles should be tracked for at least informational purposes (see http://www.i-capitaladvisors.com/2009/08/14/intangibles-measurement-ii-investment/). In the long run, some intangibles, such as process, could be booked at cost on the balance sheet. Ownership would matter here.
But I agree with you. I don’t want to confuse the issue and I hate the semantics too.
Mary, being privileged to having been given the opportunity to read the draft of your book, I too had to think a little bit extra about the IP definition that you are suggesting.
The way you describe IP is the same way I would define Structural Capital as a whole. Yet, you say that structural capital is both IP and Process. If IP is all captured and recorded knowledge – what would be left for Process?
I agree with Jeff that semantics sometimes can become counterproductive, but I think that in the case of understanding the power of intellectual capital we need to get our definitions right. In accounting we define assets as e.g. capital assets and current assets – perhaps distinctions between IP and Process or Customer and Brand will be of equal importance for IC accounting in the future…
Intangibles don’t appear on balance sheets because execs don’t want to have to account for their fluctuating value or their presence/absence at all…. not because they’re not trackable (as you well know).
But there are some bigger issues that you’re scratching the surface on - ones that we, as an American society, have decided aren’t as important to us anymore as, say, flexibility and transiency. Namely, the “ownership” of employees, their knowledge, skills and abilities.
Do you watch Mad Men? Sunday’s episode covered the topic of the Ad Agency wanting it’s key Ad Man to sign a 3-year contract. He didn’t want to… he enjoyed the freedom of not being tied down. But the firm was adamant because their big clients didn’t want the Ad Man to leave in the middle of the relationship. He eventually signed the contract, which, in essence, gives the Agency “ownership” of the Ad Man for that three year term.
Today, that Ad Man’s KSA’s should be added to the books in some way - he clearly has value above and beyond his salary. But since most companies no longer employ by contract, the transient nature of employment makes individual KSA value too hard to track.
Instead, we measure, track and value employee output and we bind these individuals with no-less-restrictive contracts regarding the ownership of their ideas and future work locations (invention disclosure/assignment agreements and non-competes). Regardless of whether the ideas are formally converted to legally-recognized IP, they’re still valuable. The question is whether or not someone will take the time to value the idea and record it in a meaningful way.
I used to work for a patent monetization firm… and we had difficultly convincing patent holders to convert their patents into actual cash… most were too clueless about what they had or how it could be valuable in any way other than a traditional model (ie: used by them in their products). So we actually had a hard time selling our services to them as a result.
What I’m trying to say is that I completely understand where you’re coming from… and letting the accountants, lawyers and anyone else get in the way because of how they want to define something is never a good plan. Sometimes you just need to let the business people run free a little.
(Said by the guy with a JD and a MBA.)
One more comment before bed time here in Sweden. The IP discussion is actually a lot of fun (believe it or not).
Back to the definition. In our company we have always tried to distinguish IP from Process by saying that an IP will have a substantial monetary value as a stand-alone, i.e. someone would be willing to pay for it and put it to use in their own company.
You may argue that corporate processes could also be of interest to outside parties; however we have seen that trying to take a particular process from one company and incorporate it into the operations of another company usually fails. Why? Because it was created to function within the unique structure of the first company. The adjustments necessary are more costly than simply building the process on your own.
There are of course exceptions to this. For example, some corporate processes seem to be similar in many companies within the same business environment. I would argue though, that those processes are commodities which by definition are not creating any competitive advantages. Thus, I would still not consider them to be IP.
In conclusion, to be defined as IP, there needs to be a market for it, but that does not necessarily mean that the IP is legally protected. In my world, a trade secret is definitely an IP.
(E.g. as with IC Rating http://icrating.com/blog/2009/09/30/ip-how-the-heck-should-we-define-it/).
Good night!
[...] I just feel obliged to invite you to comment on the hot topic of IP definition here on Mary’s blog. [...]
Looked up “Intellectual Property” in a web dictionary:
1) The ownership of ideas and control over the tangible or virtual representation of those ideas.
2) intangible property that is the result of creativity.
Judging from that, it seems like Mike’s and Mary’s definition is the most adequate. On the other hand, both definitions leaves a lot of room for interpretation, don’t you think?
At the end of the day I think nomenclature matters little so long as w/in each company its use is consistent. What matters is how disputes with others will be resolved over “the rights” to the information that’s being labeled.
It makes an awful lot of sense to me, therefore, to base a company’s nomenclature structure on the language the law imposes on that information. That language is “goodwill” and the various intellectual properties - patent, trademark, copyright, and trade secret. “Goodwill” having a defined meaning imported from the accounting folks and “property” being a fundamental legal construct embodying the (semi-permeable) right to exclude others from access and the right to transfer whatever it is that’s defined as the property.
The language I use to conceptualize the universe of intangibles associated with a company is “Intangible Assets” and “Intellectual Property” — the latter being a subset of the former. What’s left after subtracting a company’s intellectual property from its intangible assets are the unquantifiable advantages that the company enjoys — a favorable marketplace reputation, a good credit rating, an advantageous lease, a super location to do business, etc. etc. etc. . For better or worse, and with very little consistency, the various intellectual properties can be valued — it happens every day in merger and acquisitions, in bankruptcy proceedings, in licensing negotiations, and by juries when resolving intellectual property disputes.
But the unquantifiable intangible asset advantages have no money equivalents. For my part, I prefer not to even try to label or quantify those advantages which would, I think, remove from business the gut instinct and art that’s needed to compete and succeed.
Dan- Thanks for the perspective. My goal is to shed light on the “unquantifiable advantages” that make up the rest of the intangible capital. We know that three important sources are people, process and relationships. No one is doing a good job identifying and measuring these. But we need to get better at it to be able to grow our economy and innovate our way out of the huge challenges facing us. Not to remove gut instinct but make it more accurate.
Mary
I think it’s dangerous to rely on IP lawyers for definitions about IP. I agree more closely with your original hypothesis and like you, I think the discussion needs a much more business-focussed definition, to the extent one is really needed at all.
The definition should serve the needs of those who will use it practically - the business community, not the lawyers.
Thanks Duncan- This is powerful advice coming from an IP lawyer! I still hold out hope that we can find a way to bridge the business and legal perspectives…
Duncan — I also think that it’s dangerous to let legal folks define business concepts. But at the end of the day when — not if — there’s a dispute over what the business folks think of as their “property” (disputes with each other or with taxing authorities) that dispute will be resolved in a legal forum applying legal definitions. Those definitions establish the very structure within which the dispute will be evaluated and resolved. I have no quarrel with business folks engaging in business using their own intangible asset nomenclature — and thinking about those assets in whatever way makes sense for them — but it is very dangerous, I think, for them to cement those concepts in their business plan as if their particular nomenclature has legal significance. They don’t.
Hi Mary,
As an IP professional, as a consultant and strategist, I totality agree with you.
The controversy is because, lawyers (and I am one) always keep in track with the law. It’s a all formatted mind and thought.
As Duncan said, “it’s dangerous to rely on IP lawyers for definitions about IP”.
IP is no longer just a legal issue. And this change as come to stay.
Best,
Thank you Marco - I agree with you that change has come but now we have to find a vocabulary that can lead to productive conversations with both businesspeople and lawyers. Maybe the conversation needs to shift away from what is IP to the more important question of if/how specific parts of IP should be “protected.”
Thanks Dan - disputes are (and should be) such a small part of value creation that I’m really not sure they should carry the weight you suggest.
Mary: I think you were correct in your universalization of captured knowledge as structural capital, but I would hesitate to migrate the conversation into the realm of “Intellectual Property”. This is a topic that I run into very frequently, the distinguishing terminology of intellectual capital.
With all due respect, Dan, it is imperative that a standard accepted vernacular emerge for the discussion of this concept. Within the knowledge industry, we are plagued by “this is what we call it in our company” and the confusion engendered. The overarching structure of “intellectual capital” being comprised of “human”, “structural” and “relationship” [or "social"] capital that has emerged begins to channel debate and discussion constructively. The composition of each of these three is circling around acceptable, more comprehensive articulation, and the best [but by no means "legal"] definitions I have found are: human = what goes home at night, structural = what stays in the office, relationship = human interactions.
Duncan: IP should be left to the IP community; it has emerged [preceded IC itself] as an independent field, full with its own intricacies and definitions, and in keeping with the survivalist instincts of lawyers, it will continue to evolve and mutate as is driven by the legal profession.
What I feel is under discussion is, IMHO, a “working definition” of the concept, leaving the legalistic ramifications for the lawyers to wrestle [for a fee], but attempting to refine and define the concept to increase its utility to the business community.
IP is a definite subset of structural capital; not all documented knowledge [what I refer to as artifacts] is worth the expense of protection, although the artifacts should ALL have economic merit to warrant codification. There will be artifacts of knowledge outside the space of IP, there will be artifacts that move between the space of IP and non-protected status- it is a very transient body of codified knowledge.
An often more important distinction to be made is not within structural capital, which contains only artifacts of knowledge, but between tacit and explicit knowledge: all structural capital is explicit knowledge, knowledge that has been codified in some format, giving it “structure”; that which is not codified, and often cannot be codified, is tacit knowledge, entirely resident within the person and not [yet] codified.
As to its importance, I always remind my clients of two very important facts: ALL knowledge, and the ONLY knowledge, that makes it to the workplace, to the point of application, is tacit knowledge. That knowledge is entirely the preserve of the individual, and the company has NO access to that tacit knowledge; it is either shared willingly or never seen. The counterpoint is that the ONLY knowledge that CAN be shared [and therefore transferred to another] is explicit knowledge, an artifact which is necessarily a representation and thus a diminishment of the original tacit knowledge. Explicit knowledge is never complete [hence the longevity of attorneys' careers] and always subject to refinement.
I LOVE discussions like this one to try to get to agreement on the true nature of knowledge and the operations of the knowledge economy. In summary, I agree that all captured knowledge is part of structural capital, but I am hesitant to allow this categorization of structural capital to become equated with Intellectual Property, an already defined and heritage-rich field. IP is a significant subset of structural capital, but it is not the superset of all knowledge artifacts. Just my opinion.
Thanks for giving me a chance to share with other thinkers about thought.
[...] A few weeks ago as we were circulating drafts of our book Intangible Capital: Putting Knowledge to Work in the 21st Century Organization, I posted about the dilemma we were facing of what to call structural capital What is the Right Definition of Intellectual Property. [...]
Thanks to everyone who contributed here. I just wrote a follow-up post that explains how we ended up defining IP and other aspects of structural capital. You can read it here: http://www.i-capitaladvisors.com/2009/10/22/defining-intellectual-property-the-rest-of-the-story/