Analysis of Technology Spending Underscores Key Appraisal Concepts

||Analysis of Technology Spending Underscores Key Appraisal Concepts

Analysis of Technology Spending Underscores Key Appraisal Concepts

Fulcrum regularly appraises patents, technology, and other intellectual property.  We often encounter resistance from those who are seeking large appraised values to support sales or financing.  When the technology has not been successfully exploited, and there are no tangible plans for such exploitation, the clients often exclaim, “How can the value be this low?  You must be forgetting that:

  1. I spent (fill in the blank), so it must be worth a lot more.
  2. I have a patent.  The patent automatically makes this worth a lot more.”

Intellectual property obtains its value because of the ability to make money.  One makes money with technology either by (i) using improved features to sell more, or (ii) saving costs through streamlined processes or production.  If the technology is not exploited directly, one can license the technology to those who are able to obtain these benefits.

A recent study by Booz Allen addresses differences in the way companies exploit technology.  Booz Allen identified the 1,000 public companies that spend the most on research and development.  They found:

  1. Some companies consistently accomplish more with their technology spending than their competitors, even though they spend less.
  2. Money does not buy effective innovation. “Deep pockets can be dry wells.”
  3. Patents generally do not drive profits.  Increased R&D spending will increase the patents that are created.  However, there is no demonstrated relationship between either the number or the quality of patents and financial performance. (Quality was measured by other patent citations.)  The reason is that “very few patents are truly significant – just as only a handful of the hundreds of books published each year become bestsellers.”
  4. The most effective innovators earn greater returns by viewing innovation as an end-to-end process.  They distinguish themselves by building capabilities in all of the following four areas:
    ·        Creating new ideas
    ·        Selecting products for further investment
    ·        Developing selected products
    ·        Commercialization
  5. The 1,000 largest spenders spent more than $25 billion on R&D.  Booz Allen estimated these 1,000 companies comprise about 85% of all corporate R&D spending.  Surprisingly, this spending is concentrated in just three industries, as follows:
    ·        Electronics, computers & software                   37% of total spending
    ·        Health                                                          22% of total spending
    ·        Automotive                                                   17% of total spending
  6. R&D is going overseas to lower-cost regions.  75% of the new R&D centers that businesses plan to open in the next three years will be in China and India.

The above conclusions conflict with the views described at the beginning of this article.  In the words of the Booz Allen study:

“Conventional wisdom often seems to view R&D as a predictable black box that automatically translates today’s innovation investments into tomorrow’s profits, even if nobody understands how it works.  The principal findings from our study … undermine some people’s faith in innovation as a financial savior; however, they comport with the real-world experience of most corporate decision makers. … Innovation does lead to higher performance, but the process isn’t automatic.”

Fulcrum Inquiry values business and intellectual property.   We also assist with exploitation and licensing plans that allow improvement of technology and patent values.

 

2019-01-15T10:08:13+00:00Valuation and Appraisal|

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