Case Study: Visualizing and Communicating Corporate Value Through Intangibles Management

Last week, I helped lead a full afternoon workshop organized by the Intangible Asset Finance Society at the Think Tank and Auction hosted last week by ICAP Ocean Tomo in San Francisco. (The auction was fun to watch–here are a few Tweets about the auction).

My co-presenters for the afternoon were Nir Kossovsky of Steel City Re and Andy Gibbs of CXO IP Advisory. We opened up by each making some comments about our perspectives on intangibles management and emerging intangibles markets. My slides are here–I will add links to Nir and Andy’s presentations if they are posted online.

Then we moved to a case study discussion. The discussion was very robust. Since we usually cannot share the contents of client work when we engage in this kind of exercise, it is a great opportunity to share with you how this kind of approach works in practice.

Here’s a summary of the case we gave the participants.

Situation / Challenge

CelTel is a company in the wireless technology and telecommunications industry. Having amassed a large portfolio of pending and issued patents through self- and SBIR- funded research, the company sought to increase its licensing revenues by hiring professional management.

Currently led by a CEO who is formerly a patent attorney, the majority of CelTel ‘s licensing agreements are amicable; however, the company infrequently must defend its portfolio through (often high-profile) litigation, and in some cases with significant financial benefit as a result.  CelTel does not have a product (in R&D or the market). The combination of these characteristics is resulting in the company being perceived as a patent troll. The Company has tried to improve its image by actively participating in wireless standards bodies, emphasizing its internal research & development efforts, and publicizing its technology roadmap (lead by the office of the founder/CTO).

Despite some nice litigation wins, CelTel’s stock price has, over the past 24 months, witnessed a precipitous decline that exceeds the S&P decline during this tough economic cycle.
It also appears that the company has also lost some of the media spotlight it enjoyed in the past, and rarely appears on the media radar.

Though not confirmed, one of CelTel’s most prolific inventors is considering leaving CelTel for an early stage high tech company that is offering an equity position. Management believes its reputation as a patent troll is adversely impacting its ability to fully monetize its assets.

Overarching objective

Understand what drives NPE reputation v. High-End Research reputations; determine its impact on enterprise value; Illustrate / define appropriate management strategy and tactics that can improve CelTel’s reputation and sustainable shareholder value, considering CelTel’s operations, risk, and reputation management strategies.

This was a fun case. To folks in the IP world, the issue of “patent trolls” is a hot one. These are companies seen as buying up IP just to sue operating companies for patent violations. This case essentially asked the question, “where do you draw the line between a troll and a research company?” A broader view of this case asks the question, “how do we help our stakeholders understand what really goes on in our organization?”

To answer the questions, we guided the group through a discussion. First we developed an inventory:

Note: The photos below are simplified versions of the work done in the group. You can click on an image to view it in a larger size.

Note that some resources, such as inventors, are included in both human and relationship capital. This is to represent internal and external resources. It is very important in the examination of IC to understand the trade-offs that you make for lowering costs by accessing external resources–you are still responsible for the quality of your network’s work but you have less control over it.

We also differentiated between the patents and licenses controlled by the company and the processes used to produce them. Process is an important part of every company’s story today–one that most managers aren’t trained to think about.

The next step was to create a visualization of Cel-Tel’s business model. The group did that by creating a drawing that showed how all the intangibles are linked together:

The licensing process in the center is highlighted because that is the way that the company makes money. It’s important to do that because there is a tendency today for businesspeople to think of intangibles as “soft”, unmeasurable and not related to financial results. In fact, in most companies today, the intangibles (especially processes) are the primary way that a company creates value.

But a successful business model is never about just one thing. That’s the reason that it makes sense to create a drawing of your intangible capital: to show all the elements of the inter-related system that your company uses to create value for your customers. The system will not work if you take away one of its key pieces. And every business model/intangible capital system needs a combination of human, relationship and structural capital.

We recommend using a visualization like this as a learning process for your internal team. It can also help guide how you communicate with external stakeholders. For both internal and external communications, it is helpful to identify metrics for the system.

The group then turned to creating a sample scorecard of how Cel-Tel could measure the performance and success of its intangible capital system or factory. This is just a sample of the kind of metrics the group identified.

You can see that there are huge possibilities for measurement of intangibles. Note that there are three basic kinds of measurements: financial ($), quantitative and qualitative.

When they first hear “qualitative,” most businesspeople react negatively. They say that they need hard data. But the truth is that we all make qualitative decisions all the time. So it makes sense to create assessment systems that get outside opinions and use a consistent methodology or approach. In this case, assessments would be advisable to judge patent quality, creating a rating system of high, medium or low value, for example.

Another thing we discussed is the current hot topic: key performance indicators (KPI’s). This is the practice of picking a small number of key quantitative metrics as a way of tracking business performance. Looking at this case, we discussed how dangerous it would be to just track a couple numbers. For example, if you looked at numbers of patents produced without pairing it with a measure of patent quality, you could create incentives for the wrong kind of behavior.

The next step was to come up with a strategy for this company. There were two camps of thought:

1. Become the best troll out there – This strategy would mean more aggressively building and defending its portfolio of patents. Here the story could be told through information about its litigation and licensing activities.
2. Sharpen its image as a research organization. Using this better information set, make the case to the market that the company has a well-managed research process. Some felt that it would be necessary to change or re-position the CEO (a lawyer isn’t the logical leader of a research organization). The kind of data that should be shared in the strength of its technology and strategic marketing processes, the quality of its inventors and the overall logic of its technology portfolio.

The participants walked away with a much better understanding of the intangible side of business. Since intangibles make up 70% of the value of the average business today (not just in technology and service businesses)–it make sense to improve your own skillset for visualizing, measuring and managing intangibles.

This was so successful, that we were all thinking that we would love to run similar programs in the future. If you have a venue or a case that would make sense, let us know!