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Articles - Discovering New Value in Intellectual Property

Discovering New Value in Intellectual Property
By Kevin G. Rivette and David Kline
Harvard Business Review January–February 2000

Richard Thoman is not your typical chief executive officer. Most Fortune 500 CEOs, when asked how they intend to increase share-holder value, will talk about increasing sales, creating new leading-edge product lines, or pursuing mergers and acquisitions. But Thoman, who was appointed CEO of the $20 billion Xerox Corporation last summer, isn’t content with such conventional strategies. He believes one of the strategic keys to Xerox’s future is something so intangible, so invisible to traditional bottom-line thinking and corporate practice, that it doesn’t even show up on the balance sheet. 

“My focus is intellectual property,” he declares. “I’m convinced that the management of intellectual property is how value added is going to be created at Xerox. And not just here, either. Increasingly, companies that are good at managing IP will win. The ones that aren’t will lose.”

Intellectual property? Five years ago, that phrase wasn’t even in the vocabularies of many CEOs, let alone a part of their business strategies. Indeed, many chief executives still regard patents, trademarks, copyrights, and other forms of intellectual property as legal matters best left to the corporate attorneys to fuss over while the CEOs concentrate on the truly strategic stuff of competitive warfare.

Not Thoman. Where others see mere legal instruments, he sees business tools. And where others see obscure pieces of paper gathering dust in the corporate legal office, he sees “Rembrandts in the attic” waiting to be exploited for profit and competitive advantage.

To understand why Thoman thinks that way, you have to go back to his days as chief financial officer at IBM. There, he saw firsthand how an aggressive intellectual-property effort boosted annual patent-licensing royalties a phenomenal 3,300% – from $30 million in 1990 to nearly $1 billion today. This $1 billion per year, it should be noted, is largely free cash flow – a recurring net revenue stream that represents one-ninth of IBM’s annual pretax profits. That money goes straight to the bottom line. To match that sort of net revenue stream, IBM would have to sell roughly $20 billion worth of additional products each year, or an amount equal to one-fourth its worldwide sales.

Thoman is taking a similar approach to IP management at Xerox. He plans to boost the copier and document management company’s patent royalties from just under $10 million to more than $200 million annually within two years. And that’s not all. Just as IBM now leverages its patents for strategic and economic gain – Big Blue used them as the currency for $30 billion worth of new component sales in 1999 – Thoman also believes that Xerox’s rich portfolio of patents could become passports to lucrative new market opportunities. He believes patents could help the company regain its leadership role in the global technology industry.

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