The 5 Drivers of IP Operating Costs

Today’s unforgiving budgetary climate confronts corporate IP departments with a multitude of challenges: from pressures on headcount and outside counsel spend, to the costs of portfolio maintenance fees and software systems. The corporate IP department faces continuous scrutiny of their budgets and spending. While the easy scapegoat is the oft-quoted exorbitant hourly rates of outside counsel, the truth is that IP operations is multi-faceted and complex. While hourly rates have certainly increased, the fact of the matter is that most non-litigation IP work is no longer billed on an hourly fee model. In a recent poll of corporate IP departments we found that only 18% of companies exclusively use hourly billing for their prosecution work. The vast majority of IP departments are either using completely fixed fee (23%) or a mix of fixed and hourly (57%) (EXHIBIT 1).

So what then is driving the high cost of IP operations? When it comes to explaining their IP operating costs, many Chief IP Counsel feel that certain costs are just integral to their IP department operations and can’t be changed. However, our analysis of benchmarking data, combined with insights gained from our work with leading corporate IP departments, suggest that there are five primary drivers of IP operating costs. Understanding these drivers and how they apply to your situation can help identify new and better opportunities for operational performance improvement.

INCREASED WORK VOLUMES, DECREASED RESOURCES

In the last decade patent and trademark volumes have grown by an annual rate of 5-10%. And for many companies in highly innovative and competitive industries the IP portfolio growth rates have double, tripled or even quadrupled. This is not to mention the increased focus on other IP related work such as freedom to operate, clearance, enforcement, and licensing; or the emergence of increasingly critical IP areas such as designs, domains and trade secrets. Add the business imperative to strengthen international IP portfolios, and not only has the work volume increased but the complexity has become orders of magnitude greater.

This growing workload is despite the pressure many IP departments are facing to decrease—or at best just maintain—staff headcount. Often driven by across the company reductions, these reactive losses cause damage to capacity and retained competencies. The situation is exasperated in the context of M&A’s, where post-merger integration requires a substantial increase in portfolio size and related work—but also the rationalization of redundant positions and the loss of critical resources. IP departments are simply expected to do more with less.

The problem is that many IP department face a lack of scalability. Operations management face a myriad of challenges (EXHIBIT 2). The unique subject matter skills, together with the administrative, high-touch nature of IP work creates a disproportionately resource intensive function. Few IP departments have developed the approaches necessary to absorb the increasing workload without adding significantly greater costs.

So what then is driving the high cost of IP operations? When it comes to explaining their IP operating costs, many Chief IP Counsel feel that certain costs are just integral to their IP department operations and can’t be changed. However, our analysis of benchmarking data, combined with insights gained from our work with leading corporate IP departments, suggest that there are four primary cost drivers of IP operations. Understanding these drivers and how they apply to your situation can help identify new and better opportunities for operational performance improvement.

INCREASED WORK VOLUMES, DECREASED RESOURCES

In the last decade patent and trademark volumes have grown by an annual rate of 5-10%. And for many companies in highly innovative and competitive industries the IP portfolio growth rates have double, tripled or even quadrupled. This is not to mention the increased focus on other IP related work such as freedom to operate, clearance, enforcement, and licensing; or the emergence of increasingly critical IP areas such as designs, domains and trade secrets. Add the business imperative to strengthen international IP portfolios, and not only has the work volume increased but the complexity has become orders of magnitude greater.

This growing workload is despite the pressure many IP departments are facing to decrease—or at best just maintain—staff headcount. Often driven by across the company reductions, these reactive losses cause damage to capacity and retained competencies. The situation is exasperated in the context of M&A’s, where post-merger integration requires a substantial increase in portfolio size and related work—but also the rationalization of redundant positions and the loss of critical resources. IP departments are simply expected to do more with less.

The problem is that many IP department face a lack of scalability. Operations management face a myriad of challenges (EXHIBIT 2). The unique subject matter skills, together with the administrative, high-touch nature of IP work creates a disproportionately resource intensive function. Few IP departments have developed the approaches necessary to absorb the increasing workload without adding significantly greater costs.

SHIFTING WORK TO OUTSIDE COUNSEL DOESN’T SIGNIFICANTLY ALLEVIATE PRESSURES

To address these workload and scalability pressures, many IP departments turn to using outside counsel for their prep and prosecution. This approach represents a critical balancing act between the advantages and disadvantages of relying on outside counsel for core aspects of IP development, with important implications for IP operations and costs.

While alleviating certain day to day pressures in drafting and response, it does not completely eliminate all internal prosecution related work. In fact, we find that in-house attorneys and support staff often spend up to 60% of the equivalent time overseeing prosecution strategy, work product review and other case management activities. Adding international IP work further compounds the workload and budget impacts. Foreign associates must either be managed by U.S. counsel, resulting in expensive case review costs, or the IP department must build and maintain their own agent network with substantial resource costs.

The use of outside counsel also has implication for docketing and IP administration. While firms maintain their own docket and actively oversee critical due dates on behalf of their clients, many IP departments continue to insist on keeping their own shadow docket. Despite the redundancy, 47% of companies report that they maintain a full shadow docket, with a further 33% keeping at least a partial shadow docket (EXHIBIT 3). This requires IP departments to support both docketing expertise and sophisticated IT systems for docketing, electronic document management and other tools.

SOFTWARE SYSTEMS HAVE BECOME INCREASINGLY COMPLEX…AND EXPENSIVE

The role of technology in IP operations has increased substantially. In addition to core docketing and prosecution support, systems are being used for workflow automation, electronic document management, collaboration and financial reporting. The positive impact on productivity has been a key enabler of the IP department’s ability to keep up with its rising demands.

However, as technology has become more integral, the cost and support complexity of these systems has also grown substantially. In some instances, software license fees (now charged as annual subscriptions) have doubled or tripled the five year total cost of ownership. In addition, software implementation costs can run 2-4x the initial software license fee. While valuable, the costs of these systems must be closely scrutinized to ensure expected ROIs are achieved.

In addition, meeting the IP department’s need for technical and business expertise to support their IP systems can be a struggle. When asked, “what are the most significant impediments to pursuing IP performance management”, systems related factors are among the top cited challenges (EXHIBIT 4). Without the ability to add headcount, many IP department rely on corporate provided IT support. This lack of a specialized or dedicated resource leaves many IP departments lacking the skills needed to support their operations. As a result users are unable to gain expected productivity gains, and the dissatisfaction contributes to consistently negative attitudes towards systems. Unfortunately there is ample blame to go around as vendors are equally ill equipped to solve these customer challenges.

THE BLACK HOLE OF ANNUITIES, RENEWALS AND OTHER IP SERVICES

Patent maintenance or annuity fees, trademark renewals and other IP service fees represent the largest non-litigation administrative line item for IP budgets. While total costs are in part driven by portfolio growth and official fees, there is also a significant cost component associated with the fees charged by payment services. For companies using these services, many have found that the total fees being charged are more expensive then understood. While fees are quoted in, for example, the range of $10-$30 per payment, the service providers will charge additionally for currency conversion, foreign agents and other fees that are often not specifically identified or disclosed. These additional charges can often add 5%-25% of the total maintenance fee, meaning hundreds or even thousands of extra dollars per payment. Similarly if a company is using their outside counsel to manage foreign patent annuities or trademark renewals, we find that the total cost is significantly greater than using specialist services due to additional review costs.

In addition to higher than expected fees, overseeing these specialty services can also be a significant drain on resources. While service providers have worked to improve their workflows, for most IP departments the process remains manual and labor intensive. Docketing systems are not closely integrated to the instruction or payment processes, requiring technical and support resources to frequently intervene.

As a result of the high cost and significant resource demands, IP departments are beginning to reassess their approaches. While annuity services were typically very “sticky”, companies are opening up to alternative service providers and systems, driving a new wave of innovative solutions.

HOW TO ACHIEVE IMPROVED IP OPERATIONS

Unfortunately there is no panacea for addressing the cost challenges of IP operations. However, IP departments are getting more sophisticated. By taking a structured, focused approach to IP operations, Chief Patent Counsel and operations management can achieve significant improvement to their operational performance:

First, start by taking a comprehensive and holistic look at your overall operating model and the full set of cost drivers. This provides a total picture, and allows you to identify areas where improvements may be synergistic between and across operating components. A sub optimal operating model is the number one root cause of reduced cost effectiveness; and the best source of improvement. You must look for ways to reduce activities that are redundant and do not add value, and rationalize functions in order to free up resources for those activities that add value to the IP department and its clients.

Second, take an objective, open-minded approach to understanding your true core competencies and the IP department’s requirements. While in the past certain IP activities were considered critical, today these sacred cows are being challenged as to whether they are truly required. This includes looking at process and governance structures, and how operational responsibilities are assigned and managed. For example, is shadow docketing still required and to what extent? Should we continue using paper-based processes?

Thirdly, inventory and rationalize your current systems to ensure you are getting the best value. Look at docketing, document management, electronic billing and other systems to understand the full landscape of systems and tools. Importantly, do not merely look at the analysis as whether to increase investment in the latest “enterprise IP management solution”; instead truly understand your operational needs and how systems should support them. Looking at technology much more pragmatically will help your operations team understand and decide what solutions will improve efficiency and productivity. For many, this means taking a step back and streamlining technology to take a more simple approach that is ultimately more valuable to users.

And finally IP departments are looking at how they may shift work to more cost effective and high quality providers. This includes assessing whether work that has typically been done internally should be shifted to an outside providers; as well as looking at how work being done externally could be done more cost effectively by a different type of provider. This will challenge existing provider relationships. Remain open to new models and approaches, as they may address deficiencies found in the more established providers.

CONCLUSION

In our work with leading IP departments we find that achieving an optimal level of IP operations performance requires a focused effort. However, there are substantial opportunities for improvement, particularly for those organizations that are able to challenge current thinking and take a more enlightened, self-aware approach.

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