Risk management: priceless possessions

Underestimating the value of intangible assets is a costly route to irreversible reputational damage, warns Jackie Maguire

On average, some 80% of the value of companies now arises directly from intangible assets, including intellectual property (IP). As with any asset, when intangible assets are not effectively and consistently safeguarded and their risks not managed, they become vulnerable to competitive threats and so much less valuable.

Interest in intellectual property management and securing value from intangible assets has grown considerably over the past decade with the recognition of their contribution to company value and of the growing threat from counterfeiting.

With economic uncertainty and regulation increasing in the financial services industry, organisations in this sector need to use every tool at their disposal. Leading financial services firms are aware that IP can be helpful in differentiating themselves and that intangible assets are invaluable in raising funds and finance.

According to the United States Patent and Trademark Office, the number of patent applications in the financial services sector increased to 17,213 in 2010. The number of insurance patents has increased from around 25 per year between 2000 and 2005 to about 275 per year in 2010 and 2011. Those in finance have increased by around 20 times during the same period.

Any company keen to protect its intangible assets needs to consider what these are, what they are not, and how they can be developed to create contributory value, sources of revenue and competitive advantage. All directors should understand the increasingly sophisticated threats to intangible assets, the various ways they can materialise and what tools are effective to protect the assets.

However, the challenges of establishing effective IP management within a business, financial reporting constraints and working out where responsibilities lie between functions mean that intangible assets are often misunderstood and consequently undervalued. Research from The Intellectual Property Crime Group has revealed that 40% of businesses surveyed took no practical action such as trademark registration or employee training to protect their IP. Business Action to Stop Counterfeiting and Piracy claims that the total global economic value of counterfeit and pirated products is as much as $650 billion every year.

Businesses often think that intangible assets are just about ensuring that trademarks are in place. In fact, it is about a lot more than that. IP is an important piece in the intangible asset jigsaw, encompassing the whole way in which a company does business.

Intellectual property means protecting your brand name and your products and services by patents, trademarks, copyright, designs and trade secrets. Intellectual assets are associated with the people-based assets of a company - for example, key skills, know-how and processes: the way your people do business. The wider intellectual capital encompasses the other intangible assets of a company, including relationships, branding, reputation and contracts, which offer a route to commercialisation. All these have a value.

Identifying the intangible assets within the business may not be straightforward. You may need an audit to identify them and assess which may be of significant value.

A question of value

It is only recently that organisations have tried seriously to put a value on intangible assets. Valuing intellectual property accurately and putting a monetary value on it can be contentious, but is possible - and essential. Just like other assets, IP can be valued - and bought, sold or leased.

Anyone involved in selling or acquiring a company or portfolio should establish what intangible assets the target company or portfolio owns, whether they are live and valid, their value, and whether they are fully protected in all jurisdictions.

The financial approaches used in the valuation process are similar to those used to value many tangible assets. Examples include the cost approach, the market approach, the income approach or a combination of these.

However, even if the assets have been included on a balance sheet, IP is often not valued accurately, and the information provided may not be sufficiently detailed to be useful. Valuation needs to rely upon sound data, information and expertise, which are sometimes difficult to obtain.

The Brand Finance Institute says that brand valuation should be looked at in three parts:

> trademark valuation — the logo and associated visual elements, including trade names and symbols;

> brand valuation — a larger bundle of trademark and associated IP rights, such as domain names, product design rights, packaging and copyrights in colour, sound or smell, and advertising visuals;

> branded business valuation — a holistic company or organisational brand that is a combination of the legal rights as well as the culture and people.

IP valuation specialists use a number of ways to evaluate the robustness of IP. This includes assessing the company's unique position relative to existing or potential competitors, while identifying opportunities for exploiting IP further.

The value of assets is subject to how the protection for them has been secured. It is important that it is as robust and watertight as possible.

Protection game

Solid patents filings and registering trademarks and designs are certainly part of this, but a company's value is also contained in its wider intangible assets. Written materials, customer contact lists and bespoke materials can all form part of the intangible assets and need to be fully protected in each significant country where they may be at risk.

It is important to consider whether all relevant trademarks are covered. This can include words, logos, sounds, colours, gestures, brand names and slogans — any distinctive feature that can be represented on paper and distinguish the goods or services of one business from another. They can even consist of the 3D shape of goods or packaging.

Obtaining robust patents for innovative developments provides rights to stop others from making, selling, licensing, distributing or otherwise profiting from that invention. Patents that protect the functionality of new inventions - including processes or devices - can add value. Companies should not forget the important role that copyright, registered designs, database rights and trade secrets can also play.

Use it or lose it

Intellectual property is a powerful business asset, and like other assets it needs to be looked after, protected, reviewed regularly and applied effectively.

Senior managers, including those involved in finance, risk management and, of course, IP, need to combine expertise to ensure that intangible assets are consistently and effectively safeguarded and positioned for competitive advantage. In most situations, loss of intangible assets will undermine value and frequently lead to irreversible reputational damage.