Imperial College professor outlines key considerations when outsourcing IP management
I had the pleasure of interviewing Ian Harvey, Chairman of the IP Centre Advisory Board of Tsinghua University x-lab and adjunct professor in intellectual property (IP) at Imperial College Business School. Ian has a wealth of experience in IP and and was the former CEO of BTG, where IP management was at the core of their business. IP matters were handled in-house however, in this interview, he tells us what to consider when outsourcing IP.
- The complexities of outsourcing IP
- Why senior managers should have an understanding of IP
- Who should be the key facilitator between a business and external firm
- The dangers of being blind to IP matters
IP is complex and so is outsourcing it
It is important to have someone within the business who understands the basic aspects of IP. It’s not so much about being an IP expert, it’s about being “IP-intelligent” because you can ask the right questions at the right time. According to research by Fisher, William and Oberholzer-Gee, managers often underestimate the way in which IP must be integrated into a fully fledged IP market and technology strategy.
“For most businesses today, IP underpins probably 70% to 80% of their revenues. So, in my view, IP is absolutely fundamental to the majority of companies today. The management of it [IP], whether you do that in-house or out-of-house, depends on the complexity and the breadth of it.
“I think there are two [main difficulties]. The first is how do you find good people with experience and who really know what they're doing? The second is how do you integrate them into the business of the company?
“Outsourcing IP is not like saying ‘I want to buy this car’ or ‘I want to buy this house’, and I can give that to my lawyer and he or she will buy the house for me. IP is complex and uncertain, and it should be fully integrated into the business of the company, because there are a lot of uncertainties in IP. Is this bit of IP going to protect my business? Is it going to stand up in court? Is there going to be a bit of new IP coming in which dominates it?
“Outsourcing it [IP] blindly, thinking it's just acquiring this bit of IP or selling this bit of IP, really doesn't show an understanding of the complexity that IP creates within the business. The important thing is to have people in the business who, even if you outsource it, understand IP so they know the right questions to be asking, and they can understand the answers which are coming back, and can question them.”
Senior managers must understand IP to ask the right questions
Ian explains that even if you aren’t directly involved with IP, having a basic understanding can help you ask the right questions when something doesn’t seem right.
“I had to learn accounting, not because I was going to become an accountant, but because if you're going to be a senior management person, you have to understand finance. You have to understand what accounts mean, what accounting authorities need and the uncertainties in finance. Understanding finance and being able to question your accountants and people with financial questions is a fundamental part of being a manager.
“I view IP in a similar way. I think that the business people should really understand the basics of IP so you can understand what the issues are. You can outsource it as you do finance to your accountants or to an external accounting firm. But if something doesn't sound quite right, you need to be able to hear that and say, ‘Oh, that doesn't sound quite right to me, could you explain it?’ Or, ‘Why isn't this true rather than that?’ And so, I think being IP-intelligent within the business is actually extremely important in using outsourced IP effectively.”
The motivations of external firms differ from those of in-house counsel
According to research by Chayes and Chayes, the very existence of a properly established in-house counsel pushes the involvement of lawyers to an earlier phase of a transaction and shifts the mode from reactive to proactive. Furthermore, other research reveals that with in-house counsel, avoiding having to be educated about the client’s regulation and organisational structure can be an advantage over external counsel. When managing IP externally, it can be difficult to understand the client’s organisational structure and as a result, IP management can be reactive.
Ian explains that some external firms handle transactions mechanically. However, it’s important for them to understand the business’s needs. I wanted to understand how the motivations of an external IP counsel might differ from those of an in-house counsel.
“It's hard to generalise. A lot of people who claim to be outsourced IP managers just do it mechanically, ‘This is what you asked me to do, I'll go and do it.’ I was doing some consulting for a company a couple of years ago and I was asked to take a view about the strength of their IP. I went to visit the company and they had outsourced their IP. They had developed a new technology and had a process patent. The business model they had developed was to sell a machine that incorporated the features of that patent. But they weren't going to make their money from selling the machines—the process used a consumable, which itself was not patented. They were going to make their money selling that consumable to people who bought their machine. What they hadn't realised was that anyone could supply that consumable and once they had sold the machine, they had sold the right to that patent because the machine embodied that patent. In fact, their business model was deficient.
“They had to change their business model. It cost them a year and quite a lot of money. They had to raise more money so they leased the machines, and as part of the lease, they provided the material, so the whole thing was kept as a coherent whole. But their external patent management people hadn't said, ‘Look, you've got a process patent but the business model you're developing isn't covered by this patent.’ It's a very simple question.
“Within half an hour after going to the company, I asked their marketing director, ‘This is a process patent and you're selling the machine.’ And he said, ‘Don't ask the next question.’ He understood perfectly what I meant. Their external patent management people could have asked exactly the same question and it would have saved them £25 million and a year in lost business. That was an externally-sourced IP management that had just done something mechanical. They had done what the company asked for, which is to get them a patent in this particular area, but they hadn't thought an inch beyond that to, ‘How are we going to commercially use this patent?’"
Someone who understands the business and basics of IP should be the key facilitator between the business and external firm
According to Harvard Business Review, company executives are less patient with lawyers than they used to be. It’s not just the size of the bill that irks executives, it’s that they feel they have little influence over what they spend and what they get for it and accountability seems much less than what other business services provide.
Ian explains that the key facilitator must be someone who understands the business and the basics of IP so they can also manage the people who will be managing the IP for them.
According to Ian, “It should be someone who understands IP—whether that's a financial person, a marketing person or a purely management person, someone who knows the difference between patents, copyright and trademarks. You'd be surprised how many business people don't. For example, people who still think, ‘I bought a patent, therefore, I can sell whatever I want to because I bought a patent on it,’ without understanding that a patent actually can stop someone else from selling, but it doesn't give them the right to sell. The very basic things are not understood by many people. I think to find the person in the company, who understands the business but also understands the basics of IP so that they can be a good interlocutor for the people who are going to be managing their IP for them.”
Being blind to IP matters can cost your business
One of the concerns with managing and analysing IP internally is being accused of wilful infringement and liability for treble damages. According to a study by nature, concerns about wilful infringement were highest for industry researchers in electronics and software, of whom 37% reported having been instructed not to read patents. Furthermore, legal scholars have stated that wilful infringement rules prevent researchers from reading patents because they’re instructed not to read patents by lawyers. Ian explains that this shouldn’t be the case and expresses the dangers of being blind to IP matters.
“I think that's a sad state of affairs. I don't see any reason in the U.S. why people would be saying that. If you have an in-house counsel who says, ‘Stay clear of this,’ then you need to be aware of that. There was a case 10 years ago with BTG, where we were suing a company for patent infringement and they had outsourced the management part of their IP. We had already licensed 60% of the industry and had a patent which was very strong.
“When we tried to contact the company saying, ‘This is a very substantial part of your business, if this goes ahead, this part of your business is going to be closed down,’ we could never speak with the company because the external patent advisors had said, ‘Because this is commercially and legally sensitive, the company must not get involved. We want you to come straight to us.’ And actually, these IP managers were [in] a law firm based 1,000 miles away from the company itself. Just after I retired, I was talking with BTG and they were telling me about this problem of how do we get through to these people?
“Eventually, I realised that my former accounting professor at Harvard was on the board of this company. I tried to contact her and I was put off to this law firm. Then I got through personal message to her and said, ‘Please, do you understand?’ Within a week, the suit was settled. The people in the company did not know the implications of our patent suit against them because they had been shielded from it by the external firm who were raking in millions in fees. That is one of the most egregious cases I've seen of bad external patent management.
“The question you were just asking of people in the company not wanting to become involved because it was legally sensitive, that's very dangerous, particularly when you're talking about external IP managers. It's dangerous for companies to blindly outsource IP management. You have to have people who understand IP so that they can manage and control those who are doing it for them. They can ask the right questions and integrate it into the overall business of the company.”
About Ian Harvey
Ian Harvey was CEO of BTG plc from 1985 until his retirement in 2004. During that time he oversaw the privatisation of BTG in 1992, its public flotation in 1995, a demerger of part of its business and three Rights Issues totalling £250 million to raise business expansion capital from its shareholders.
He is currently the Chairman of the IP Center Advisory Board at Tsinghua University x-lab, Adjunct Professor at Imperial College Business School and member of its IP Centre Advisory Board.
Ian has written many articles and book chapters and lectures widely on global intellectual property and technology issues. He is currently involved with the development of intellectual property in China and pressing for the teaching of intellectual property as part of strategy in business school programmes worldwide.