Why IP Lawyers Should Be Thinking About Reputation

Changes in the business environment for law, and IP law in particular, have prompted many IP-based practitioners and executives to seek opportunities that leverage their deep understanding of IP, the process of innovation, and the value of intangible assets. It is therefore both fitting and proper that Patent Strategy & Management feature an article that addresses this search.

This is why IP creates enterprise value through two operational pathways. The first pathway, well known to most IP practitioners, comprises products and services for which IP protections enable monetization at above-commodity rents. The second pathway, perhaps less well known or appreciated, is through reputation.

Reputation is an expectation held by stakeholders based on past performance and experience. Reputation ' built on business processes (read, intangible asset IP) that create an ethical work environment, drive innovation, assure quality, uphold safety, promote sustainability, and provide security ' creates value through pricing power, reduced operating friction, higher earnings multiples, more stable enterprise values, and lower costs of credit.

According to the Conference Board, second to managing cash, managing corporate reputation is today's primary business concern. The reputation “events” of the past few years affirm that companies may not have yet mapped their IP management strategies to reputation strategies, thus leaving a managerial (and advisory) vacuum/opportunity. Therefore, IP practitioners who are experts at creating, protecting, and monetizing the business processes that drive reputation have a custom-made opportunity.

Reputation Basics

Reputation grows out of the totality of information stakeholders receive about a company ' information that creates the cumulative impression of how the company manages all of its business processes (IP/intangible assets). Today, there are six major business processes for which risk and reputation management can increase, protect, and restore enterprise value. They are ethics, innovation, quality, safety, sustainability, and security.

Below are the meanings of those six drivers of value in operational terms. Ethics are the moral principles by which a company operates; integrity is the act of adhering to those moral principles. Ethics are an integral part of governance that combine with integrity to affect the reputation value of all other intangible assets. I have discussed in this newsletter before the Roman arch concept of intangible assets and how the failure of one can destroy the value of all. Ethics are the keystone intangible asset because they form the basis for trust and confidence.

Innovation is the design, invention, development, and/or implementation of new or altered products, services, processes, systems, organizational structures, or business models for the purpose of creating new value for customers, and financial returns for the firm. Patents are artifacts that provide additional monetization options.

Quality has three definitions:

• The extent to which a product is free from defects or deficiencies.
• The extent to which a service meets or exceeds the expectations of customers or clients.
• The extent to which products and services conform to measurable and verifiable criteria.

Safety is the state of being certain that a set of conditions will not accidentally cause adverse effects on the well-being of people or the environment.

Sustainability means making, using, offering for sale, or selling products and services that meet the needs of the present without compromising the ability of future generations to meet their own needs.

And last, security is the degree of protection a company offers against events undertaken by actors intentionally, criminally, or maliciously, for purposes that adversely affect the firm. Because fear is the great disruptor of life and commerce, it is useful to think of security, the most ethereal of the intangible assets, as “absence of fear.”

Reputation Is the New IP

IP is central to value creation through products, services, and processes and how these embodiments of IP impact stakeholders' willingness to pay a premium, offer superior terms, etc. But as readers of this newsletter will attest, widespread appreciation of IP's centrality ' even a full decade after publication of Rembrandts in the Attic ' is still relatively rare at higher levels of corporate decision making. It is equally unusual to find articles in the general business press that reflect an understanding of IP's role in commerce. Excluding the securitization niche, the financial community's understanding of IP has not been stellar.

The route to broader market understanding of IP's value is through its manifestation as reputation. Here are three examples of how this is happening. First, broad interest in reputation is outstripping interest in IP. Google's Trend service that tracks global searches of terms and phrases and ranks them on a normalized basis, adjusting for the total volume of searches, shows that since 2004, the frequency of searches for “patents” and “intellectual property” has been declining while searches for “reputation” have been rising. In 2009, the ratio was in excess of 2:1.

Second, language used in major newspapers and periodicals targeted to business and professional audiences as captured by Lexis shows a similar trend in which stories on IP Management are being outnumbered by stories on Reputation Management. Extrapolating annual trends, in 2009, there will be more than twice as many stories concerning the latter.

Third, on the premise that patent filings reflect an expectation of emerging sectors of commercial value, the number of U.S. patents filed containing the phrase “reputation management” has increased substantially in the past three years to an extrapolated annual filing in 2009 of nearly 20. There were no filings prior to 2002.

This is why reputation is capturing senior executive attention while IP is slipping. To speak of intangible assets or intellectual property is to limit a conversation to specialists. To speak of reputation, the stakeholder's impression, is to speak to the drivers of revenue, operating costs, earnings multiples, and price volatility. These are financial terms that speak unambiguously to most stakeholders. Not surprisingly, the data continue to affirm that companies that are superior managers of their IP, as reflected in reputation, reward shareholders with superior ROEs.

The words of famed investor, Warren Buffet, when he stepped in as CEO of Salomon Brothers in 1991, cut to the chase. He said, “If you lose money for the firm by bad decisions, I will be very understanding. If you lose reputation for the firm, I will be ruthless.”

The Reputation Road Forward

Reputation management is an enterprise-level business function whose owners might naturally come from the worlds of IP, operations, risk management, or marketing. IP executives who typically operate at the interface of law and innovation, and who have already developed an understanding of how IP creates enterprise value, have a competitive advantage should they desire and actively seek this opportunity.