The importance of protecting intellectual property (IP)

Dear entrepreneurs

How important is it to protect your company’s intellectual property (IP)? I mean, you had this fantastic business idea a few years back, got your business plan finalized and your business up and running, the profits are coming in and you are smiling while going to the bank (well, you are one the lucky ones because not all entrepreneurs smile when they go to the bank :) ).

I had the privilege to assist a manufacturing company (being in business for several decades) the other day to determine their current and potential IP data leakage risks and to assess their current IP data leakage prevention controls. They did experience IP theft and wanted to improve on their IP security control. Short story – some previous employees have taken manufacturing drawings with them and started to compete with them (let us call them “Company ABC”) in the market by bidding for the same projects.

Statistics show that over and above fraud, IP theft (just one of the many business risks an entrepreneur is facing these days) is increasing in companies. Especially with the current world-wide economic situation, people AS WELL AS companies are more prepared to steal IP and to sell or use it. Internal hacking of systems (i.e. by employees and NOT outsiders) has increased over the past three years and more and more people are willing to consider stealing IP data of their employers or associates!

What is the end result of IP data leakage?

Profit erosion is the end result (final impact) of any risk. In the case of IP leakage, Company ABC could experience profit erosion in different ways. For example, if a competitor would get hold of a specific IP (e.g. a drawing with its specific design information e.g. calculations etc.), profit erosion could be experienced as follows:

• Loss of potential profit: Company ABC could lose or be defeated in tender proposals where a competitor successfully bids at a lower price. In this instance, Company ABC loses potential income and profit. The loss of potential income is normally “invisible” and goes “unnoticed” and is, unfortunately, not always controlled in a deliberate manner by company Management.
• Reduction in profit: By considering above scenario, Company ABC could be forced to propose at a lower price in order to win tenders – resulting in less income and profit.
• Unnecessary expenses: By taking legal action against a competitor, unplanned expenses, e.g. legal fees, will put a burden on profitability.
• Loss of Research & Development (R&D) costs: Costs associated with R&D would be lost (wasted) to a great extent.
• Damage to public image: In general, Company ABC could be seen by clients and potential clients as not competitive anymore (due to the lack of original, unique products* or as a result of not competitive pricing); eventually resulting in less sales, income and profit.

* Note: Clients would normally not recognize the fact that the competition uses stolen IP as their procurement decisions are normally based on price and budget limitations. Clients just don’t care – as long as they can buy at lower prices. Buying decisions are these days based on short term motivation, e.g. to spend within budget, and not to procure quality products for the long term.

It is extremely important to note that above risk scenarios would normally NOT be once-off cases but that they, most probably, could occur multiple times per one or different IPs over years. In other words, if the margin on one specific product would be $30, 000, Company ABC, when defeated in tender proposals or forced to propose at a lower price, would experience:

• Loss of potential profit when defeated in tender proposals: Should Company ABC gets defeated in, for example, 5 different tender cases in one year (i.e. where a competitor successfully proposes in 5 different cases at a lower price by using Company ABC’s IP); it would mean a loss of $150, 000 in potential profit. Furthermore, if, for example, 5 different IPs are at stake in one year, at the same margin, it would mean a loss of $750, 000 in potential profit in one year. Over a period 5 years, it would mean a loss of $3, 750, 000 in potential profit.
• Reduction in profit when forced to propose at a lower price: By considering the above scenario, should Company ABC be forced to propose at a lower margin (e.g. of $20, 000 instead of $30, 000) in order to win tenders, it would result in a reduction of $10, 000 in profit per tender case. By the same token, the above calculations can be applied by taking into account 5 cases per IP, 5 different IPs over a period of 5 years, resulting in a reduction of $1, 250, 000 in profit.

Over and above the risk that Company ABC’s own IP can be leaked (stolen), the risk also exists that inadequate and/or ineffective logical (i.e. IT security controls) and manual controls (e.g. over physical drawings) can facilitate the theft of Partner IP. Besides that the occurrence of this risk could also result in loss of potential profit or reduction in profit, Company ABC could incur huge legal costs as well as infinite damage to their public image; eventually resulting in less sales, income and profit.

It is therefore important that, when writing your business plan, you do consider your business risks too – in this case, IP theft. What does it help that you got a nice business plan in place but your business is slowly bleeding to death over years because you don’t protect your IP? We need to consider IP data leakage risks too when starting a business and we need to do it on a regular basis to protect our businesses’ long term prosperity.

In my next blog post I will discuss a more conservative quantitative method to calculate current and potential profit erosion when experiencing IP theft.

I will also discuss some control measures you can implement to reduce your risk of IP theft in your company.

If you have any questions, you are welcome to contact us at blog@business-around-the-globe.com

Warm regards

Michiel Jonker, CISA

Tags: business, Business Plan, intellectual property, IP, IP data leakage, IP data leakage protection, IP leakage, IP protection, IP theft, plan