Selling your brain power

The intellectual property residing in companies can be turned into profit by licensing it to customers. Just make sure you follow...

The intellectual property residing in companies can be turned into profit by licensing it to customers. Just make sure you follow the guidelines, writes Danny Bradbury

People use the term "vapourware" to describe software that is not released on time. But in the strange, metaphysical world of intellectual property law, the phrase could arguably be used to describe software in general. Copyrighting text and music is relatively easy, but trying to protect and profit from streams of ones and zeros is an area fraught with difficulty.

The notion of intellectual property in the IT sector has led to some bizarre legal cases. Last year, British Telecom discovered that it held what it thought was a patent on the technology underlying hyperlinks. This prompted the telecoms giant to begin legal action against Internet service providers, claiming that their customers have been using technology concepts that it owns. Search engine company AltaVista also claimed in January that it owns the patents to several key Internet indexing and spidering technologies.

By making statements like these, companies are effectively staking a claim on the very concepts that underlie the Web. The issue of whether they are legally valid is secondary to the question of whether it is good for the industry when companies make such claims. It could be argued that the successful patent claim on hyperlink technology could stifle innovation in the Internet community.

Extra revenue

Opportunistic legal bickering aside, intellectual property can be used for positive ends in the IT sector. In particular, companies that have developed software for their own internal use may find that they can make a profit from turning those products into solutions for sale to their customers. In doing so, they could conjure revenue out of nowhere, turning an internal research and development effort that was to be written off as a business cost into an independent revenue stream.

"The essential thing to recognise with intellectual property is that it is not just one asset - it is any number of assets in a number of countries," says Philip Atkinson, IT partner at legal firm Eversheds. "Once you start looking at it that way, it is straight to the bottom line because you have done the work already."

The trick lies in identifying internal intellectual property that could be turned into a licensable product, Atkinson explains. This involves pinpointing assets that can exist outside your core business and which can be provided to customers without damaging your competitive edge.

Companies need to think about generating leads that can tell them where to license this intellectual property and that could involve exploring an entirely new customer base. Any conversion of internal intellectual property into extra revenue will involve incremental investment. It is not a case of money for nothing.

It is also wrong to assume that there are no potential pitfalls when licensing your intellectual property. For one thing, says Richard Cross, knowledge management principal at Xerox, it is the application to your own environment which makes a software product or process work. Companies trying to apply their internal intellectual property to customers' environments may meet with varying levels of success.

This leads to issues of internal acceptance. Getting buy-in from your own employees and management may be easier than getting buy-in from other companies' staff. Cultural differences are important here, as is the fact that if a product was developed properly for internal use, user acceptance testing and requirements management would have kept your end-users in the loop from an early stage. Other organisations' staff may react negatively if they are asked to accept a product or process in which they had no input.

Still, Xerox's experiences in this area are an example of successful intellectual property conversion. The company took a product called Eureka, which was developed to manage knowledge internally, into the public domain and has been making money from it ever since.

The project started when Xerox appointed a team of social scientists to examine the activities of its support engineers. The research group found that there were times when technical problems had no documented answers. In such situations, the engineers would exchange information on an informal basis.

"It is almost as though the community itself became the expert system," says Cross.

The company used this information to structure a more formal knowledge sharing process, in which solutions and tips from engineers would be subjected to peer review. Software was developed to support the process and facilities were introduced that allowed engineers to take credit for their contributions.

"Eureka started off as applied research and Xerox Service happened to be a willing guinea pig. As it gained momentum, people realised it was pretty powerful," says Cross. "Companies have shown strong interest and we have tested it with a number of external clients. We said, 'Let's package it up and make it more repeatable and deliverable.'"

The company is selling the intellectual property as both a software product and a methodology. Cross explains that he does not feel that Xerox is giving away a competitive edge by selling the product, because the real value for Xerox lies in the data being fed into the software. He claims that the company saved $11.2m (£7.6m) last year using the product through a 5% reduction in parts usage and service hours.

"The content of Eureka in terms of our own information about our own products is not being taken to market," Cross explains. "It is the tool and the process. We would be delighted if one of our direct competitors came to us and asked us to implement it in their business."

Who owns what

One key safeguard when taking intellectual property to market is to make sure that you own the technology you are selling, says David Knight, a partner at Lochners Technology Solicitors.

It may seem obvious but it is surprising how often companies will try to license intellectual property without ensuring that they own the copyright on it. And just because it has been developed internally, this does not automatically mean it is their's.

"So many businesses fail to realise that when they get a subcontractor in to work on software, unless they agree that all work will be signed over to the company, the subcontractor retains all the rights," Knight warns. "That is critical step number one - get everyone who is not an employee to sign copyright over to you."

Consequently, keeping the paperwork is important if you think there is any chance that your intellectual property is to be sold outside the company.

Another trick is to put things in your code that prove it is yours, says Knight. Protecting software is difficult these days, but putting in comments that show it is your code or a blind sub-routine that can be identified uniquely as yours could provide some protection in court.

Patents versus copyright

This brings us to the issue of patents versus copyright. Traditionally, European law has favoured software copyrights over patents, explains Atkinson. The difference is that, while copyright protects the direct copying of software code, technology patents protect authors against infringements of the concepts behind their code, rather than against the duplication of the code itself.

In practice, if a company can prove a competitor's software does something in the same way as its own patented software method, it can sue - even if the software used to do it is written differently.

But patents are slowly encroaching on the European IT sector. In the European Patent Convention, there is a clause that prohibits the patenting of software programs. It is nevertheless possible to patent the function of the software, Knight says. This may seem like a semantic issue, but it is enough to open up the patent process to companies wishing to pursue it.

The more ambiguous nature of the European law has hindered the growth of the patent market. "We are behind the US because there are now fewer software patents on the European books than there are in the US," Knight warns. "Also, there is a lesser skill in dealing with a software patent."

Eureka is protected under existing copyright law, says Cross, but the associated consulting methodology carries at least as much value and yet "copyrighting a methodology is almost impossible".

"In law, we can copyright the physical material we have written it on but the ideas are impossible to copyright. A customer would be able to apply the ideas elsewhere and it would be difficult for us to take any action," Cross explains.

This situation is changing. Business process patents, which are already established in the US, are making their way into the UK and they will make the protection of methodologies more viable, according to Knight.

While this may make it easier for companies like Xerox to protect their intellectual property in the open market, it gives industry pundits cause for concern. Knight describes one true story in the US where a company patented the process of exercising a cat with a laser pen. Shining the light from the pen onto the floor causes the cat to chase it around.

This example raises the issue of misuse. Where patent law exists, companies will try to use it to prove that they own the rights to the most basic, taken-for-granted ideas.

Knight suggests that organisations can get around this problem by registering their own processes first. "It may be worthwhile doing that to give you a bargaining counter if you ever need it and to make it publicly noted," he suggests. But this gets expensive very quickly, putting smaller companies at a disadvantage.

As patents for software (or at least software functions) catch on in Europe, companies taking their intellectual property to market will face a legal minefield. They can at least protect themselves by ensuring that they have legal copyright ownership of their code and processes before they prepare them for sale to customers.

Yet2Com finds partners for inventors

Given the current fashion for online exchanges and trading hubs, it is hardly surprising that a trading facility has emerged for intellectual property. Yet2.com (www.yet2.com) is an online marketplace for technologies that could be licensed, enabling companies with a particular need to find partners that have already conducted the necessary research and development. The business-to-business exchange's stated benefits include a reduced time to market for customers and increased research and development profitability for suppliers.

The company, founded in 1999, is sponsored by British Telecom, Boeing and Ford. It has begun offering additional services, including access to the Derwent World Patents Index, a database with information on more than 14 million patents.

Tips on managing your intellectual property

  • Assess the value of the tool you are thinking of selling against the data you put in it to see if it threatens your ability to compete

  • Ensure that you own all the copyrights by tightening up your human resource controls for contractors

  • Keep records on all copyright contracts signed

  • Insert code that proves it is yours

  • Make sure that you build a sales channel that understands the customers you are trying to sell to

  • When selling outside, learn from the processes you went through to get the intellectual property accepted by your end users.

    Budget update

    The recent Budget gave hi-tech companies and IT departments a boost by providing tax relief on a wide range of intellectual property, writes Nick Huber.

    This relief, subject to consultation, will include expenditure on computer software development.

    This means that companies acquiring hi-tech firms with intangible assets will receive tax relief, reflecting the intellectual property value of the company they are buying.

    The broader aim is to stimulate IT investment and encourage growth in the UK's hi-tech firms. Intangible assets on average account for over 20% of the market capitalisation of UK high-technology companies, according to a study by Taylor Johnson Garrett, a City law firm.

    Tim Conway, policy director for the Computer Software Suppliers Association (CSSA), says, "If someone like Marks & Spencer wants to develop a full-blown dotcom, the tax rates now mean that it is better off financially if it develops an application in-house rather than buying a dotcom."

    IT directors have also backed the tax reform.

    "Bringing intellectual property and goodwill into the tax system will indirectly benefit UK IT departments as it makes the IT sector more competitive," says Roger Marshall of the Elite Group of IT directors. "We have seen UK companies in the retail sector, held back before investing in e-commerce start-ups."

    The proposals are open to consultation until the end of May.

  • This was last published in March 2001

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