Intellectual Property- A Key Driver of Business Strategy in IT Industry

GLOBAL MACRO TREND IN THE I.T. INDUSTRY

Cost arbitrage has created millions of jobs in low cost destinations like India. Over the last few years, there has been a crowding in the segment and the number of firms offering low value services has increased dramatically. This has put tremendous pricing pressure on the existing  players.  The problem has also been exacerbated by the emergence of Philippines, China and Vietnam and a lot of firms are off-shoring low-value work in the services space to these countries. IT firms in these countries provide services at even lower costs than their Indian counterparts.  This has necessitated a lot of Indian companies to differentiate themselves by offering higher value services and moving up the value chain.

Hence, companies invest increasingly on their research and development to gain comparative advantage. Top-tier IT firms are increasing their research and development spends as they gear up to offer newer services such as cloud computing and platform-based offering as part of their non-linear growth strategy. This trend can be clearly seen in the R&D spending trends of even the IT services firms. Infosys until 2008 consistently spent about 1.3% of their revenues on R&D.  But today it spends close to 2% of its revenues on R&D.  But this falls way short of the global IT industry’s R&D spend which is about 13.6% of its sales on R&D. The only other industry that comes close to it is the healthcare industry. This speaks volumes about the growing importance of R&D in the software space.

Companies such as TCS, Infosys and Wipro can't hope to continue growing their headcount as it would be unmanageable. Besides, the supply of manpower is also a problem. So, an adjustment to the business model is necessitated. We are already seeing attempts to move into higher margin business such as consulting and a push into other high value services such as remote infrastructure management and development of banking productsTo remain globally competitive, Indian IT firms in the coming years will have to focus a lot more on research and this would require a greater institutional support as well. Looking at the patent filings in the last few years of some of the major Asian nations, it is clear that India falls short of its competition – especially Korea and China have clearly see this treasure and Korea Institute of Advanced Science and Technology files for more patents than what many nations do. The biggest opportunity lies in exploiting the non linearity in income growth which comes about in offering high value products as opposed to undifferentiated services. In services, there is a one to one correspondence between the number of people you employ and your revenue. It is not so in case of high value products. The revenue that a single I-pod can generate will be hard to match by offering services like building a simple telephone billing system or airline reservation system

A vast majority of the patents filed in the last 5 years fall under computing and digital communications category. According to a report released by management consulting firm Booz & Co., 67% of R&D spending was concentrated in three industries: computing and electronics (28%), healthcare (23%), and automotive (16%). India was in the 28th position of the top 40 countries that spent the maximum on R&D whereas China was 16th. 

FORMULATION OF A SUCCESSFUL BUSINESS STRATEGY

Framing a successful IP business strategy is a comprehensive task. The strategies may differ depending on the type of innovation.  Generally companies follow a three-step process to determine the business dimension of their IP management.

a. Determine what the company expects to gain from the management of its IP

b. Determine the specific roles IP can play in support of the company’s business.

c. Select and pursue a basic IP strategy to meet these objectives.

As per the study of NASSCOM-Deloitte, the contribution of IT industry to the GDP of the country has soared up to a share of 5% in 2007 from a mere 1.2% in 1998.

Companies integrate intellectual property with business strategy in order to secure business competitive advantage, business flexibility, and business earnings. By taking actions to support technologies as intellectual property, these companies try to differentiate their products and services more effectively from those of their competitors. Furthermore, implementation of intellectual property strategy with standardization strategy helps secure business profitability through licensing and other related activities.

Creating an I.P. strategy begins with identifying goals. A company must identify goals, how those goals can be achieved and the specific processes that must be followed. External and internal analyses will lead the way and ultimately allow the company to determine if a sustainable competitive advantage is within its grasp. In developing an I.P. business strategy, there are some common things to consider such as the needs of the customer, the nature of the competition and the capabilities of the company.

Customer

Eventually, the value of the IP a company hopes to control is derived from the needs of the market. Just as a business strategy must consider the needs of customers in various segments, so too must IP strategy consider the needs of customers. Understanding these needs will drive product requirements, R&D priorities and eventually help prioritize patents to be acquired, licensed, applications to be filed or even trade secrets to be protected.

Competition

In business strategy, a company cannot chart its course without understanding its competition in terms of strengths, weaknesses, distribution strategies, pricing strategies, etc. In the IP realm, companies can look at the profile of their competitors to understand the relative strengths and weaknesses of their IP portfolios, strategies and technological directions. With this information in hand, a company can patent or acquire rights to technologies to strengthen their own competitive position.

Several times the companies apply for defensive publication. This is a preemptive step taken by some of the companies to maintain the market share. Defensive publication prevents other parties from obtaining a patent on the product, device or method. It enables the original inventor to ensure that they have access to their invention by preventing others from later making patent claims on it. It also means that they do not have to shoulder the cost of patent applications.

A strong patent position will usually help shut out competition, but the IP strategy must be aggressive and well thought out. Rarely will one patent on a product enable a company to foreclose competition completely. If an attractive product nets a high gross margins a third party will surely design around the company's patent, or challenge the patent, which may then be held invalid and, therefore, unenforceable. However, what is called a patented position can be established. This involves holding many patents that cover different aspects of one product. A patented position is a stronger position from which to preclude competition.

Intellectual property, especially in the form of patents, is a critical asset for early-stage technology companies. IP can be used for competitive purposes, to block rival companies from offering the same or similar products. It is an extremely potent entry barrier as well. It can also support companies in leveraging existing technologies to expand into new product lines. IP is often the most important asset in obtaining funding from venture capitalist, forging strategic partnerships, attracting a suitable buyer, and generating revenue through licensing.

Product

In business strategy, a company looks at its relative areas of expertise. In IP strategy, a company must consider its portfolio -- what does it have, and what does it need to add? On the business side, a company has to make the build vs. buy decision. In IP, a company looks out across the IP landscape with an understanding of the market requirements, competitive implications, and determines if it should invent (make) or acquire (buy) the necessary components to round out the portfolio.

For instance, a patent portfolio strategy may vary from one I.T. firm to another.

Start-up companies find it expensive to develop and build a comprehensive patent portfolio23. However, with the understanding of some basic principles of patent strategy and early planning a start-up company can device and execute a patent strategy to develop a cost-effective patent portfolio. Other desirable business objectives are to be able to anticipate product obsolescence in order to start developing the second-generation product at an opportune time, to foresee technology shifts that will affect the company, and to track the product development activities of competitors.

Large companies that have significant financial resources often pursue a strategy of procuring and maintaining a large quantity of patents. These companies often use their patent portfolios for offensive purpose –mainly to become monopoly suppliers of products.

THE PYRAMID OF IP BUSINESS STRATEGY:

Companies follow five level of sophistication in their approach towards management of their intellectual property. Depending upon the suitability companies adopt the I.P. strategy. A thorough understanding of what the company at large, as well as its executive management, expects from IP is an important first step toward determining whether, and to what degree, the firm aspires to obtain business value from its IP, Beginning with the bottom of the pyramid and working up:

· Defensive level: A defensive IP is one that is registered not with a view to enforce it to generate royalties, or to exclude competitors, but to provide protection from litigation. Companies at this level use their IP for defensive purposes only. Their goals are to protect their own innovations, to ensure that they don’t infringe the IP of others, and to obtain more IP.

· Cost control level: Companies at this level still have a defensive approach, but now focus on finding ways to obtain protection while simultaneously minimizing the costs of creating and maintaining their IP.

·  Profit center level: Companies reach this level once they begin to license out their IP, or otherwise to use it in support of their company business activity.

· Integrated level: Here the company’s business units have grasped the power of using IP for a range of business roles. IP use for business becomes integrated across all of the company’s business activity. Companies in this level are well established and have captured the market.

· Visionary. At this level of IP management sophistication, companies take a long-term view of the company’s role in business and in its industry. They seek to use the company’s IP to create more strategic value. Companies that are on this level aim to expand their business on a large scale. They usually invest heavily on research and development of their products.

VIRTUES OF HAVING A CLEAR IP STRATEGY

Overall, IPs enable companies to follow these four business strategies in a very effective way. These four strategies can act as a foundation for later refinements. The boundaries within these strategies are fluid and companies can adopt one of these based on the environment they operate in and their phase of growth:

a. Risk Mitigation. Companies following this strategy see IP as a legal asset. Programs to minimize risk are usually grounded in the legal department, and focus on process compliance, processing product clearances and protecting innovations in the marketplace.

b. A key activity for those pursuing this strategy is portfolio building and cross-licensing to avoid litigation.        

c. Cost Reduction. Virtually all companies above the first level of the hierarchy follow a cost reduction strategy. They look to maintain the effectiveness of their IP protection program while cutting the cost of doing so. This involves screening the portfolio to eliminate unnecessary patents, tightening the criteria for protecting innovations with patents, creating a standard country-filing list, minimizing exceptions, tightening internal review processes, and aligning the trademarks and brands with products.

d. Value Creation: Companies following this strategy view their IP as a business asset as well as a legal asset. IP is managed centrally, with the company seeking out business opportunities for its IP (e.g. out-licensing and use in joint ventures). The companies seek to profit from direct use of the IP itself, rather than only through the products and services protected by the IP.

e. Strategic Direction Companies following this strategy see their IP as corporate and business assets which can produce a range of value (both revenue and strategic value) for the organization. The focus is on utilizing IP to change the nature or direction of competition, relying on strategic patenting, refocusing R&D and rethinking partnerships with customers, suppliers, or any other relevant parties.

In this extremely dynamic, competitive and ever changing world of computing, companies that have a well refined strategy are more likely to succeed. Most companies have realized the importance of not only integrating IP into their corporate strategy but are also making it a business driver. IP is now at the forefront for both startups which look to increase their market value (and thus acquisition price) and for mature companies which are locked in a battle for market share.