Assessing a supplier from an IP perspective

By Donal O’Connell

Supplier Relationship Management:

Good supplier relationship management is the discipline of strategically planning for, and managing, all interactions with third parties that supply goods and/or services to an company in order to maximize the value of those interactions. In practice, it entails creating closer, more collaborative relationships with key suppliers in order to uncover and realize new value and reduce risk.

Good supplier relationship management involves the systematic enterprise-wide assessment of suppliers’ assets and capabilities with respect to the overall business strategy. The output from such an assessment should determine what activities to engage in with different suppliers. The focus of supplier relationship management is to develop two-way, mutually beneficial relationships with strategic supply partners to deliver greater levels of innovation and competitive advantage than could be achieved otherwise.

Successful supplier relationships require a win-win. It is important that there is understanding of the costs and value along the entire supply chain. A true partnership leverages these costs and value to both parties’ advantage. Both parties have to accept accountability. Appropriate service levels and metrics need to be built into the Agreements. Equal time needs to be spent aligning incentives and penalties. Critical information should be shared between the two parties as early as possible as information is the grease that makes an integrated supply chain work. It is crucial that there are plans in place for exceptions and major contingencies. Expect and reward honesty and make relationship meetings meaningful and value adding.

IP must be part of the assessment:

All that said, many supplier management exercises fail to properly assess the intellectual property (IP) situation of the supplier, despite the fact that the importance of intangible assets including intellectual property is growing, often equaling or surpassing the value of physical assets for a company.  The state of the intangible assets of a company can determine their share and corresponding influence on the market. The way a company is now valued has changed considerably with intangible assets making up approx 80% of the value of the company.

The challenge dealing with IP:

The challenge I see is that many Sourcing / Procurement people do not have the skills, experience, process or methodology to properly access the IP maturity and sophistication of suppliers (either hardware or software) and properly assess the supplier from an IP value and risk perspective.

They lack a broad definition of IP. They do not know how to determine the maturity of the supplier from an IP perspective. They are unaware of how to judge the IP environment of the supplier. They cannot plot where the supplier sits of the ‘level of IP control’ axis. They do not understand the different ways in which IP adds value.

Simply put, they do not know what questions to ask, and how to interpret any answers received back.

I am being unfair. A few do, but most do not. Yes it is important to consider obvious issues like the implications of 3rd party IP rights but this is only one of many IP issues which should be considered when dealing with suppliers.

I would even go so far as to to say that many IP professionals lack the skills. process and methodology to conduct such supplier assessments from an IP perspective.

What should be assessed from an IP perspective:

The ideal of any supplier assessment is to identify deficiencies with the supplier’s processes and procedures before they impact. Of course, the purpose is also to identify opportunities. These two equally important objectives apply just as much to the IP portion of any supplier assessment.

Effective questions are questions that are powerful and thought provoking. Effective questions are open-ended and not leading questions. Behind effective questioning is also the ability to listen to the answer and suspend judgment. This means being intent on understanding what the person who is talking is really saying. What is behind their words?

Although it may vary greatly depending on the exact nature of the product or service being supplied and how critical this supplied item is for the company, I would propose that the IP portion of the supplier assessment explore the following issues …

  1. What is the supplier’s IP awareness level?
  2. What is the supplier’s definition of IP and good IP?
  3. Where is the supplier on the IP Maturity Ladder?
  4. Where is the supplier in their eco-system from an IP perspective?
  5. What is the supplier’s comfort level on the ‘Level of IP Control’ axis?
  6. Describe the IP Portfolio of the supplier
  7. How is IP adding value to the supplier?
  8. What are the IP risks facing the supplier and describe IP risk mitigation activities?
  9. What IP resources are available to the supplier (internal & external) and how are they deployed?
  10. Describe IP Governance by the supplier

These ten questions listed here are high-level abstract questions as such and much more detailed check-lists exist that describe individual components of each of these ten. I should also state that the first question listed, namely IP Awareness and the last question listed, namely IP governance, are like  bookends keeping all of the others properly in place.

The purpose of this IP portion of the supplier assessment is to determine the overall sophistication of the supplier from an IP perspective, and to identify IP value and risk.

Final thoughts:

Legal and intellectual property text books typically describe intellectual property and patents in particular in somewhat negative terms.  For example, a patent is not a right to practice or use the invention, rather, a patent provides the right to exclude others from making, using, selling, offering for sale or importing the patented invention for the term of the patent, which is usually twenty years from the filing date.  A patent is, in effect, a limited property right that the government offers to inventors in exchange for their agreement to share the details of their inventions with the public.

However, the legal aspects of intellectual property sometimes get too much attention, while the business aspects suffer. It is as if when looking at a tree, all we saw were the roots. Yes, the roots of a tree serve an important role to anchor it to the ground and gather water and nutrients to transfer to all parts of the tree, and for reproduction defense, survival, energy storage and many, many other purposes. However, it is the trunk, the branches and especially the leaves of the tree which capture our attention.

This more enlightened view describes intangible assets and intellectual property in particular as a means to build innovation as opposed to block. Innovation including collaborative innovation with a supplier is reliant on some form of management and control. Intellectual property is the means to manage this process as knowledge and technology needs to be managed as transactions of objects in the development stages as these objects may now be as valuable as or even more so than the resulting products and services. Intellectual property in this regards can be seen as a means to objectify knowledge so it can be properly managed. Without an understanding and appreciation of intangible assets and intellectual property, technology development becomes prohibitively difficult.

This is a fresher way of viewing intellectual property, namely as a management system for knowledge-based business instead of a legal right to exclude others.

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