IP Benchmark Study INSOURCING - THE RARELY USED SAVINGS POTENTIAL

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1 IP Benchmark Study INSOURCING - THE RARELY USED SAVINGS POTENTIAL The importance of intellectual property rights continues to grow. But how can a growing number of cases be handled efficiently in the IP department? A benchmarking report is now available to answer questions such as these. Together with twelve heads of well-known IP departments, Andreas Bong, a partner at Otto Henning Management Consultants, has developed a survey, which focuses on the key issues in the management of patent and trademark departments. Trends, organisational structures and outsourcing strategies were considered, as well as cost optimisations and cooperation with legal firms. To create a broad basis for evaluation, the report addressed the top 150 companies from six European countries. The focus of the participating sectors are automotive, chemicals/pharmaceuticals, electrical engineering, mechanical engineering and the consumer goods industry. "Managing a greater workload with the same number of employees." According to the leaders of European IP departments this is one of the top priorities for 2015, together with "cost optimisation and cost reduction". In practice this often means an additional burden for those departments. How do the participants come to grips with this? The participants of the Benchmarking Report 2014/15 published in February IP mention the outsourcing of selected activities to law firms as one of their preferred strategies. Especially for less complex tasks, it may be economically feasible to outsource this work to external service providers, because they can provide the service more quickly or cheaply. Additional perspectives can confirm an in-house assessment Another reason for hiring firms may be the inclusion of an additional perspective to confirm an in-house assessment. Secondly, outsourcing will very often be the result of a lack of resources in the IP department. This deficiency can be caused by insufficient staff numbers (quantitative) or due to a lack of specialised staff expertise (qualitative). In addition, the work can relate to a country, which is not covered by staff in the IP department. The international distribution of these reasons for outsourcing has not been comprehensively determined up to now. The result was all the more surprising (see chart 1): outsourcing due to a "lack of quantitative resources" was cited as a leading reason by 34 percent of respondents, which shows that many study participants can only absorb an increasing workload with the help of law firms, as there are no plans to build up internal staff numbers.

2 The second reason mentioned by 32 percent of respondents was the lack of internal coverage of a country. Other reasons are significantly less important: the lack of specialist knowledge as a reason for outsourcing is mentioned by 10 percent of respondents, as well as obtaining an additional perspective a reason which is always regarded as critical, because of its negative impact on the reputation of the internal IP department. Even if a second, external perspective is involved, it is expected that the internal staff have previously examined this case in detail. Under the analysis framework, average external consulting costs were EUR 16 million, which means that for each participant around 1.6 million euros were spent on assessing internal decisions. Even for participants with rather smaller patent portfolios the resulting outlays were in the order of EUR 560,000. Costs or speed are rarely a reason for outsourcing Other reasons for outsourcing were cost or speed advantages (6 percent and 5 percent) and outsourcing at the request of internal customers (2 percent). While German companies mainly commissioned external services due to a lack of geographic coverage, the dominant reason for foreign companies was the lack of quantitative resources. Certainly scarcely any patent department can be found, which carries out all of its tasks without any external support. In light of complex challenges it is uneconomical to keep every sort of expertise that could possibly be required on hand, especially for smaller patent departments. It is more likely that the leadership of the department will decide on a different approach, whereby the tasks with the highest value will be carried out internally. Participants in the study reported the processes that they outsourced and the extent to which they did so (see Chart 2).

3 The processing of the inventor's compensation is carried out purely internally by 96 percent of participants, followed by portfolio management (86 percent) and the processing of invention disclosures (81 percent). Advice to business units comes in fourth place with 79 percent internal handling. The higher the value of an activity, the greater the proportion of internal processing Apart from the very standardised inventor remuneration, this confirms the expectation that the higher the value of a service to the company, the greater the proportion of internal processing. The implementation of initial applications and subsequent applications does not seem de facto to be a focus for internal service delivery in any country. The differences between countries are also interesting: firms headquartered in Germany tend to award less work to external parties than their European neighbours. While on average 62 per cent of German companies perform the activities listed completely in-house, this is the case for markedly less than half of the foreign participants. The outsourcing rate is higher overseas than in Germany This, of course, also affects the distribution of the total costs of the patent department (see graph 3).

4 While German companies have a distribution of internal to external costs of 48 percent to 52 percent, the external cost percentage abroad is much higher at 64 percent. The scope of the external procurement has, as expected, considerable impact on the total cost of the provision of services by the patent department (see chart 4). The average internal cost per patent is EUR 410 (median EUR 344) and there are no relevant differences between the participating countries. The external costs, however, amounted to an average of EUR 622 and clearly show the financial impact of the above-mentioned outsourcing practice: the average costs for German companies are EUR 424. Companies in Switzerland and the United Kingdom have the highest external costs at around EUR 700 per patent, followed by Benelux and France with about EUR 660 per patent. Thus, the total cost per patent in Germany are also lower on average. The total costs for domestic companies are not at the level of the average of EUR 1,031, but are up to 20 percent lower, while those of other participants are up to 18 per cent higher. Insourcing helps to reduce costs, but is not given any emphasis A relationship between extensive external procurement and a similarly high total cost per patent cannot be disputed. Of course, the different hourly rates charged by a firm per country and any existing framework contracts affect the level of external costs. This

5 influence was also recognised by the participants. For this reason, 48 per cent of the foreign participants in the study cite the "reduction of hourly rates by law firms" as a top priority for Increased insourcing as a greater means to reduce overall costs is not seriously considered or is not fully feasible under company guidelines. In this case companies with a large and diversified portfolio, as well as a large number of staff in the IP Department, show significant potential for optimisation. Because external costs as a share of the overall budget increase significantly with increasing portfolio size and staff numbers, this shows negative economies of scale. While comparable small departments have the lowest proportionate external costs, departments with more than 75 IP staff show the highest share of external costs with 67 percent. The reasons for this are certainly complex and could lie in the complexity and international nature of the portfolio. In addition it can also be surmised that it is increasingly difficult to request from management an expansion in the employee base for IP departments that are already large even if the external costs and, therefore, the overall cost per patent could be reduced by doing so. Companies should, at least, have no difficulties with growth, as according to their own information for 2015 a "war for talents" presents no challenge to participants. Andreas Bong

6 Boxes: The Study Collection focus: the top 150 companies (based on the size of the patent portfolio) in Belgium, Germany, France, Netherlands, Switzerland and the United Kingdom Content: Questions regarding developments and trends, organisation, outsourcing, cost and cooperation with firms Top 5 industries: automotive, electronics, mechanical engineering, chemical/plastic/pharmaceutical, consumer goods Patent portfolios of participants: 44 percent above 10,000, 19 percent between 5,000 and 10,000, 37 percent under 5,000 Trademark portfolios of participants: 46 percent above 10,000, 0 percent between 5,000 and 10,000, 54 percent under 5,000 Survey period: August to November 2014 (next survey 2016) Created by: Otto Henning GmbH, in cooperation with BUJ and "In-house Counsel"