Use of intellectual assets
The usage and application of intellectual assets inside large, midsize, and smaller companies range from being actively exploited to benign neglect and everything in between. Research and development efforts may yield new product and service opportunities that are not critical to the company's core business lines leading technologies to become orphans and lack internal support or resources due to political reasons, changes in leadership, or limited expertise to bring the products or services to the marketplace. In other cases, the underlying technology may have multiple applications and usages, but the company does not have the time or resources to develop the technology beyond its core business. The better managed intellectual capital-driven companies recognize these assets as still having significant value and develop licensing programs.

For example, IBM reported more than U.S.$2 billion in licensing revenues in its 2005 annual report. Much of this revenue represented high-margin cash-flow streams, which also helped to offset its research and development costs. Other industry leaders (such as General Electric Company, Texas Instruments Incorporated, The Dow Chemical Company, and the DuPont Company) are building organizational infrastructure, strategies, and systems to do a better job managing and licensing their intellectual capital assets. Value extraction and harvesting through licensing is a key theme running throughout the boardrooms of corporate America and is not limited to FORTUNE 500 companies – businesses of all sizes with relatively small intellectual-property portfolios can still apply these same strategic principles and approaches to the management of their intellectual capital.

Companies of all sizes are realizing that invention for the sake of the inventor or innovation without revenue streams can be very harmful to shareholder value. In a post-Enron world where boards of directors are governed by the pressures of Sarbanes-Oxley and an unforgiving capital market, no company can afford to allow valuable assets to be ignored. If there is no desire or resources available to directly transform innovation into new products and services, licensing offers an excellent way to indirectly bring these innovations to the marketplace –particularly in rapidly-moving industries where the windows of opportunity may be limited.

Development of policies
It is also critical to develop an overall set of intellectual capital licensing policies, strategies, and objectives. The goals of the licensing program should be aligned with the overall strategic goals and business plans of the company. The licensing process should help determine which technologies or brands will be made available for licensing, which will not be, and why. The process should also define how licenses will be selected, how their performance will be monitored and measured, and under what circumstances will licensees be terminated.

Failure to consider all costs and benefits of licensing could easily result in a regretful strategic decision or an unprofitable license agreement due to an underestimation of the licensee's need for technical assistance and support or an overestimation of the market demand for the licensor's products and services. To avoid such problems, a certain amount of due diligence should be conducted by the licensor prior to any serious negotiations with a prospective licensee. This preliminary investigation generally includes market research; legal steps to fully protect intellectual property; and an internal financial analysis of the technology with respect to pricing, profit margins, costs of production, and distribution. It will also include a more specific analysis of the prospective licensee with respect to its financial strength, research and manufacturing capabilities, and reputation in the industry.

Andrew J. Sherman, a recognized authority on legal and strategic issues facing small and growing businesses, is a partner in the Washington, D.C., office of Dickstein Shapiro LLP. He is an adjunct professor in the MBA program at the University of Maryland and Georgetown University, where he teaches courses on business growth, capital formation, and entrepreneurship. Sherman is also the founder of Grow Fast Grow Right, an education and training company for executives of middle-market companies. He can be reached at 202-420-5000 or ShermanA@dicksteinshapiro.com.

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