The High Cost of Executives’ Intellectual Property Blind Spots
Strategic business decisions often involve intellectual property, but senior managers’ understanding of salient issues is often limited.
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Business leaders know that the unique value propositions a business can offer its customers are the fruits of its investments in innovation. Those leaders ensure that their companies take steps to protect that intellectual property (IP) by filing patent applications, registering trademarks, and guarding the company’s rights under copyright law or keeping its know-how secret. But our research shows that in practice, leaders’ understanding of the nuances of managing IP falls far short of what their own IP experts believe is needed to support sound strategic decisions.
IP rights are tightly connected to business strategy because they don’t just protect innovating companies from copycat competitors; they also enable controlled collaboration and trade of intellectual assets and are critical components of merger-and-acquisition (M&A) discussions. Among top management’s key responsibilities is ensuring that their organization is maximizing the returns on its investments in innovation and IP — and, likewise, understanding IP rights sufficiently to guard against poor decisions.
We set out to gauge the depth of this understanding by surveying senior IP experts and received responses from 47 such individuals with long-term experience in working with and observing executives as they made strategic decisions. What we found is a substantial gap between what these experts believe executives should know and what they judge to be those senior leaders’ actual competence levels based on real-world cases.
Three problems in particular stood out. First, about 40% of the IP experts said executives tend to lack the essential IP knowledge that is relevant for some strategic decisions. More than a third said executives lack knowledge about the role of IP in relationships their company has with other organizations, including corporate transactions like M&As, R&D collaborations, licensing agreements, and contracts more broadly. And more than one-fourth of IP experts said that executives lack the capabilities needed to strategize with IP. Furthermore, our results indicate that senior leaders tend to not only lack important IP knowledge themselves but also seem to neglect seeking IP advice, occasionally even not consulting their own IP teams in a timely way. Given all of those factors, executives seem to underestimate or ignore the value of their IP, and the cost of uninformed decisions.
Below, we discuss the three IP knowledge gaps many executives face, along with critical issues they need to consider and potential ways to address them.
Gap 1: Executives Tend to Miss the Basics — Especially National Differences
Executives often fail to adequately prioritize IP when performing due diligence for corporate transactions.
While unfamiliarity with any of those essentials can lead to bad or poorly timed decisions that result in a loss of business value, misunderstanding how IP is — or is not — protected by IP rights across national borders can be particularly risky, according to the experts in our study. Generally speaking, IP rights are a collection of various national and/or regional rights assigned in each jurisdiction where their protection is sought. Our study found that executives often have an insufficient grasp of this fact, and of how rights granted may differ depending on the country. This is crucial to understand when introducing new products.
In one case we learned of, the CEO of a global retailer publicly announced a new product — which was news to the IP team responsible for trademark protection. The trademark in question had been secured in only a few countries, leaving the IP team with a host of problems, such as fighting off “name-nappers” who attempted to trademark the name and register related web domains first.
An IP expert who contributed to our study described another situation, in which a client acquired a U.S. company that held only U.S. patents. The acquirer intended to sell the U.S. company’s products in other countries, but the CEO was unaware that U.S. patent protection can be extended to other countries only within 12 months of the original patent filing date (the “priority window” established by multilateral international agreement). In this case, the opportunity to secure international IP protection for the U.S. company’s inventions had already been lost — leaving the door open for competitors in key foreign markets.
Yet another example concerns a company that had plans to extend its business to Germany but was unaware that it needed to register its name and associated trademarks there. Nor had it understood that it should have first searched for any conflicting, prior IP rights in that market. In fact, another party owned related rights, and the company in question was sued for IP infringement and subsequently had to change its name and pay damages to the IP holder.
This kind of ignorance can lead to mismanagement that may weaken a leader’s bargaining position with investors and result in a lower company valuation. Our study surfaced the case of a fashion company CEO who mismanaged IP priorities and filed trademarks in markets where its business was growing — but failed to file defensively in markets known for infringement activities. When the company later took on venture capital funding, investors discounted its value because of these major portfolio gaps.
Gap 2: Executives Neglect the Role of IP in Strategic Relationships
The second problem our study identified is an executive knowledge gap about the important role of IP when a company engages in corporate transactions such as M&As, or when it sets up open innovation projects, technological partnerships, or R&D collaborations. They also miss important IP aspects of contractual agreements, such as licensing and purchasing contracts.
Experts in our study told us that many executives see IP protection primarily as a competitive tool to protect brand equity or technological advantage. However, executives who do not understand the important role of IP protection in partnerships as opposed to competitive scenarios risk making costly IP-related mistakes. Three particular aspects that emerged from our study are critical for executives to consider.
Who will own IP resulting from collaboration. In partnerships, ownership of the different types of IP involved — both what partners bring to a collaboration and/or what they develop together — needs to be specified to safeguard company interests. This applies whether a business is working with universities, research labs, or corporate partners. In our study, one expert referred to an R&D collaboration where the CEO had entered into an agreement with a well-regarded consultancy with substantial experience in the technical domain. But the CEO had not considered IP ownership issues, and there was no clear agreement in place regarding who would own the resulting IP. As our source described it, this was “a very tricky situation to untangle, and not something a company should be spending their time doing.”
How IP can impact future bargaining power. A company’s IP portfolio and sector-specific IP culture may affect negotiations with collaboration partners. One expert in our study described a case in which their client, a leader in the financial services sector, formed a joint venture (JV) with a partner that was active in a different segment of that same sector. The two segments’ approaches to IP were quite different, though: In the client’s segment, obtaining patents was rare, while the partner’s segment was characterized by a rather mature, if not aggressive, patenting culture. Consequently, the two firms had very different patent portfolios related to the technology for which they had agreed to form a JV, with the client’s portfolio no match for its partner’s in size and strength. When the JV agreement came up for renegotiation after a few years, it became obvious that the client’s laissez-faire approach to IP gave it less bargaining power. As the expert explained, the partner’s tactics shifted during the negotiations as it realized its patents gave it leverage. Ultimately, the partner steered toward a breakup of the JV, which dissolved, and the partner essentially got the business that the client had largely built.
Attention paid to IP during due diligence processes. Our study found that executives often fail to adequately prioritize IP when performing due diligence for corporate transactions. When considering acquisitions, ensuring that the target owns all of the relevant IP can be critical.
The CEO of a medium-sized Swiss firm decided to buy a company that had developed a new technology relevant to its business and had good potential to enhance its product line in the future. No due diligence concerning IP was done before the Swiss firm made the acquisition. Only afterward did it learn that the IP was actually not owned by the acquired business but by the owner personally. The Swiss firm had no rights to use the technology that had been the primary reason for the acquisition. Thorough due diligence would have revealed this early on, and then the deal could have included the requirement that the IP rights be assigned to the acquirer.
Gap 3: Executives Fail to Leverage IP Strategically
Our study also found that executives often don’t understand how IP can be leveraged strategically, and consequently they don’t manage it as well as they could have. They do not know how much to protect, nor where, when, and why IP should be protected (or not). They pay little attention to sectoral norms and common practices of the business environment in which they operate, and they do not know how to use a dynamic life-cycle management approach, such as obtaining follow-on protections to sustain competitive advantage.
Our study’s IP experts indicated that executives should pay attention to the following three considerations to cultivate the strategic use of IP across their organization:
Balance the level of IP protection appropriate for their business. Experts who participated in our study said that executives tend to either undervalue or overvalue the need for and importance of IP protection. Both situations can result in less-desirable outcomes for their businesses.
For example, executives who overvalue IP protection often ignore industry norms and end up wasting money by overprotecting IP when they could have achieved comparable competitive benefits with less protection. One expert described a software company that had built a large patent portfolio despite operating in an environment with very few patent disputes. A smaller portfolio would have been sufficient to achieve the desired outcome.
On the other hand, executives who undervalue IP protection may not adequately protect even those core intangible assets that form the basis of their business — and thus lose opportunities. Their companies may lack exclusive rights that could help build their competitive advantage, struggle to obtain investments and retain key inventors, suffer weakened innovation capabilities, and even miss out on M&A deals.
Taking a portfolio approach can help executives develop an IP strategy for their businesses.
“The company we advised had previously filed a patent that covered their current product,” the counsel explained. “We advised that they file additional patents to cover possible alternative versions and improved versions, even though a final design and functionality were not yet chosen. The client decided he had better things to do with his money. So did his competitor, who, meanwhile, filed patents on his ideas for a similar product serving the same market. The situation now is that our client has some earlier dates for some features, but so does the competitor. What could have been an IP monopoly is now an IP fight.”
Align IP strategy with business strategy. Executives frequently make decisions based on their own assumptions and opinions about IP rather than considering how to align IP with the business strategy. When companies file patents, they must decide which markets they want protection in and allocate the right resources for developing strong patent claims; otherwise, the consequences can be substantial.
Take the case of a CEO at a small technology company who sought help protecting a promising innovation. Unfortunately, the initial patent application had already been filed with vague claims. Because it had not been drafted with the company’s international ambitions in mind, it could not be extended to global markets. The result: no international protection, no strategic advantage, and a wasted investment.
Had the CEO involved the IP team earlier and aligned patenting efforts with the company’s expansion plans, the outcome could have been very different. Stronger claims could have been crafted from the start — claims tailored to the business model and future markets — enabling a stronger competitive position abroad.
Consult with IP experts and listen to their advice. Clearly, executives do not need to be — in fact, cannot be — experts in all IP-related considerations for decision-making. Rather, they need to have a sufficient understanding of IP to be able to seek expert advice by asking the right questions, of the right people, at the right time.
While it seems intuitive and pragmatic for executives to involve experts — either in-house or external consultants — the experts participating in our study indicated that this is often not the case. They provided numerous examples of situations in which executives failed to involve them or simply ignored their advice. In one case, this resulted in unfortunate consequences following a merger — an outcome that had been foreseen by the IP staff. The IP experts had advised the company that competition regulators would be disinclined to approve the merger, in particular because the IP rights held by the merged entity would make it effectively impossible for a third party to enter the market. The board proceeded anyway because the executives did not believe that they would be compelled to sell off several highly profitable daughter companies. But ultimately, regulators forced those sales, just as the IP staff had predicted.
Our study points to numerous ways that executives can make better business decisions if they gain a better understanding of IP. They could reduce costly mistakes, such as being dragged into expensive litigation, losing revenue, and squandering competitive advantage. Getting a grip on how IP can be used strategically could help executives better capitalize on their business’s value.
In part, this enhanced understanding requires better communication between IP experts and executives — perhaps drawing on in-house counsel to translate. But IP experts themselves, whether external or in-house, must also find better ways to get their message across in the executive suite. In an interview we conducted before our study, Raymond Millien, whose roles have included CEO, general counsel, and IP executive, told us, “Being the chief IP officer is an educational job. Think of it as in-company sales: It is all about marketing and education.”
Unfortunately, many executives learn the hard way that understanding IP is a key part of their job. “Awareness only comes after a big failure,” one expert said. We hope that the IP knowledge gaps highlighted by our study and the recommendations we’ve offered will inspire executives to avoid setting themselves up for big failures and to knowledgeably use IP for their business success.
The Research
- To understand the intellectual property knowledge that executives need and may be missing, the authors fielded a survey to an upper-echelon sample of 407 senior IP managers: 321 from the IAM 300 list, and a convenience sample of 86 senior IP strategists from the researchers’ networks.
- Data was collected from April to July 2021. The researchers received 47 complete responses; 70% of respondents had more than 20 years of experience, and 9% had less than five years.
- The survey consisted of two open questions about a specific situation in which an executive would have made a better decision if they had understood the full implications of IP and what specific IP-related knowledge would have helped with that decision.
- Data was coded by IP asset and topic using a standard content-analysis approach in two stages using the Gioia approach.i The data was first coded independently by three experts and then checked and synthesized by a fourth, independent expert.
References (1)
i. P. Mayring, “Qualitative Content Analysis: Theoretical Background and Procedures,” in “Approaches to Qualitative Research in Mathematics Education,” eds. A. Bikner-Ahsbahs, C. Knipping, and N. Presmeg (Dordrecht, Netherlands: Springer, 2014), https://doi.org/10.1007/978-94-017-9181-6_13; and D.A. Gioia, K.G. Corley, and A.L. Hamilton, “Seeking Qualitative Rigor in Inductive Research: Notes on the Gioia Methodology,” Organizational Research Methods 16, no. 1 (January 2013): 15-31, https://doi.org/10.1177/1094428112452151.
