Judith C. Giordan

Using the Market to Determine Ip's Fair Market Value

OVERVIEW: As a result of recent accounting rule changes and the enforcement implications of the Sarbanes Oxley legislation, fair market value of intellectual property (IP) is now reported in greater detail on corporate ledgers. This additional information is designed to satisfy not only the demands for IP value that are coming from within a corporation, but from the capital markets (investors, analysts and media) as well. This transformation of corporate IP from an internal strategic to a public financial matter gives CTOs an entirely new opportunity to demonstrate their direct contribution to both the bottom line and a companys market value. To help CTOs exploit this opportunity, and because public markets reward those who manage well that which they can measure, this article presents a market-oriented valuation hierarchy, including a new asset-class indexing method that is especially useful for early-stage R&D. It also illustrates a spectrum of financially-oriented asset management opportunities and practices CTOs should consider as the managers of a technology companys most valuable asset—its IP.

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With the number of workforce-age employees decreasing and the percentage of math and science students dwindling, the competition for highly trained and motivated employees is intense. Companies are...

One Point of View: It's Time To Think Differently About R&D Assets and The CTO's Role

Company leaders, CFOs, the stock market, and the Federal Accounting Standards Board have begun to realize what CTOs and marketers have always known: the greatest driver of value in a company is its intangible assets. While accounting for the tangible assets (plants, buildings, and desks) is easier, it has not historically captured the value of the most important assets of todays growth companies-the intangibles of R&D investments, brand equity, employee savvy, smarter business models, and customer loyalty. Based on the broad scope of intangible assets, it can be argued that just as with Killer Apps, much of the benefit within the asset class is realized when large networks of developers and users exploit their value. This implies that intangible assets must be managed as any other asset-as a class, with a portfolio mentality and standard financial metrics that account for their fair market values. Such a mind-set opens a world of possibilities, but it requires an operational shift in our relationship with intellectual property (IP). We need to change how we traditionally manage the fruits of R&D as complex technical outputs, to intangible yet transparent corporate assets. And we need to change how we account for such assets-historically, as depreciable goodwill-to assets with fair market values that must track to market changes when value is impaired. These changes lead to the evolution of a new model for IP development and commercialization, one that is focused on the delivery chain and asset value. And they also imply that Chief Technical Officers could evolve to Chief Asset Officers-with P&L visibility, responsibility and accountability. Escalating Value of Intangible Assets The notion of intangible assets having value is nothing new. Economist John Kendrick, who has studied the main drivers of economic growth, contends that there has been a general increase in the contribution of intangibles to U.S. economic growth since the early 1900s, with the ratio of intangible to tangible business capital growing from 30/70 in 1929 to a 63/37 in 1990. What has changed is the rate at which intangibles are outpacing tangibles in importance and the concomitant need to place a value on them. In short, in todays fastpaced and competitive climate, physical assets have limited and ever-diminishing value, minimal leveragability and finite scalability. And capital invested in generic infrastructure provides no real competitive advantage-with enough capital, all companies can buy the same lab equipment or build the same plants. Therefore, in pharmaceuticals the value metric isnt fixed assets-its time through the Food and Drug Administration (FDA) process, or the capability for broad-based drug or treatment reimbursement. In chemicals, the value metric isnt fixed assets-its cost-effective manufacturing processes and upgraded product and service packages that build customer loyalty in the face of mounting offshore price pressure. In cars, the value metric isnt fixed assets but vehicles that help the customer embrace the driving experience. In each of these examples, the value of the asset was generated long before it was captured in the corporate financials as a transaction-an actual sale. The make or break value of the asset happened while it was still intangible: when the drug did or did not pass FDA, when the plant trial realized or did not realize a 100 percent improvement, or when the test driver felt or did not feel the new response of the car to the defined customer desire. Indeed, experts assert that intangibles count for more than half the value of many companies. Baruch Lev, accounting professor at NYUs Stern School of Business, estimates

Managers at Work: Don't Allow Every R&D Customer To Be King!

60 billion for Coca-Colas knowledge assets. Further, Lev estimates Microsoft to be the largest intangible knowledge asset holder at

It's Time to Think Differently about R&D Assets and the CTO's Role

211 billion, Intel at

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170 billion and Merck at

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110 billion. Yet Dupont, with a much larger employee pool than all three of these companies combined, is estimated by Lev to have intangible assets of only

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41 billion. …

Don't Allow Every R&D Customer to Be King!

(1993). Managers at Work: Dont Allow Every R&D Customer To Be King! Research-Technology Management: Vol. 36, No. 5, pp. 15-15.