IP is not just big business: in advanced economies like the US, increasingly it is business. According to the US Patents and Trademarks Office, IP-intensive industries contributed $5.06 trillion to US Gross Domestic Product, accounted for over 60% of merchandise exports, and directly or indirectly supported 40 million jobs. The intellectual property licensing industry alone totals $144 billion of retail sales.
With intellectual property growing in importance, IP rights management is no longer just another back-office function—rights management secures critical revenue streams. That makes any failure to fully monetize IP a serious business concern.
When thinking about lost IP revenue, piracy is probably the first thing that comes to mind. And it is true that IP theft is a significant problem—the Commission on the Theft of American Intellectual Property estimated the annual cost of IP theft and piracy was $300 billion—equivalent to annual US exports to Asia. And those are just the losses from intentional, malicious use of intellectual property—unintentional use of images, brands and other IP costs companies still more.
Piracy will not go away anytime soon, but in the meantime, many businesses’ IP management systems are not adapted to the complex and growing universe of IP assets. The result is that assets go underutilized and revenue is lost, often in ways that are invisible from the outside.
- Failure to properly track inbound royalties
In principle, royalty payments are straightforward. A licensing agreement specifies how royalties are calculated, who should be paid, and when. The calculations are based on sales data which is collected and validated. Invoices are issued and royalties are paid. The reality, however, is often far messier.
KPMG’s royalty compliance division estimates that as much as 70% of self-reporting on licensing contracts is inaccurate. In conducting contract reviews, KPMG’s compliance team found noncompliance or misreporting in 90% of contracts reviewed. While those reviews likely targeted contracts with anomalies, the numbers are staggering.
The problem is not simply unscrupulous licensees. “Inaccurate third-party reporting can stem from highly complex contracts that do not clearly identify key requirements or responsibilities, or from changed circumstances, mistakes, or deliberate misstatements,” KPMG observes.
Complexity is a real problem. Some license terms are easy to understand and record, like an IP asset license being geographically limited to the US. But what happens if the asset can be used in the US for only one year, and then only in print and not online, unless a further royalty is paid? And what happens if the license is renegotiated? These nuances make it easy for licensees managing hundreds or thousands of contracts to violate contracts inadvertently. Some industry experts have estimated that most organizations receiving royalties are underpaid by around 20%.
Reviews into existing contracts can be valuable in recovering lost revenues, but reviews are themselves costly and time-consuming and strain business relationships. And accountants can’t run over every contract with a fine-toothed comb.
- Poor integration with finance
Manual processing of IP royalty hurts companies’ revenue in a number of ways which cumulatively harm the bottom line:
- The time and labor involved in manual processing is a significant cost and a drag on profit margins;
- Manual processing increases the likelihood of costly mistakes;
- When IP rights departments have no visibility into accounts receivable, royalty recovery is delayed. Information from IP rights has to be sent to finance to generate invoices, and the IP rights department cannot easily see whether invoices remain unpaid.
Integration with finance allows the people responsible for IP assets to be monitoring the financial performance of those assets directly, increasing efficiency and reducing the chances of errors and losses.
- Incomplete information for decision-making
The mistakes above might be classed as ‘downside’ mistakes—losses from less-than-best-practices. But the mistakes that can really hurt are the ones where potentially unlimited upside is lost.
Simply put, businesses cannot make strategic decisions about future IP exploitation without the data to support those decisions. And without the means to capture that data, it doesn’t exist. In particular, without the ability to capture data at the sales line level, assign attributes to it, and store it in useful form, companies are left with rolled-up data and limited visibility into precisely what sells, where, and why.
The lack of accurate data also hurts companies in deal negotiations. Companies without a complete and accurate financial history of their IP are at a clear negotiating disadvantage in arranging new agreements.
Further, without being able to break out royalty performance by the number and value of licensing agreements, or by character, category, territory or product, companies miss the insights that show where IP is being underutilized. That means that future sources of revenue growth are lost.
To recap, three key areas where businesses’ IP asset management can fall short are:
- The inability to track inbound royalties or identify violations, and dependence on potentially inaccurate third party data;
- Inefficiencies caused by manual processing and poor integration with finance;
- Incomplete or hard-to-manipulate data causing businesses to miss out on growth opportunities.
FADEL’s Intellectual Property Rights and Royalty Management Software helps to address all these deficiencies, by managing complex contractual arrangements, automating royalty payments and collections, integrating with finance and third party contract management and ERP systems, and enhancing data collection and analytics.