October 2009 Archives

Here is an interesting story over at XEconomy on Royalty-based venture financing. According to the story, royalty based financing is a technique previously used in mining or other royalty-rich industries, which is now being applied to technology firms:

The concept of royalty-based financing is simple. Instead of buying equity in a young company, an investor agrees to receive a percentage of the company's monthly revenues--up to a limit of, say, three to five times his or her investment. Instead of waiting five or 10 years for a startup to go public or get acquired, an investor can start seeing returns almost immediately. This approach means investors should be able to fund a much wider range of startups than just those that typically receive venture backing--the ones that have potential to grow huge, fast. The downside is that your returns are capped, so if you do end up backing the next Google or Amazon, you still only get five times your investment back.

The story notes that this could be an alternative to VC funding for start-ups.

Royalty based financing is just one of a number of new alternative financing mechanisms that have developed over the past few years. Athena Alliance has been working on a new report on case studies on intangible asset financing. That report is due out shortly -- so stay tuned.


Thanks to Technology Transfer Tactics for the heads up on this article.

This morning's advanced estimate from the BEA of 3rd quarter GDP came out better than expected at 3.5% growth. Economist had expected a 3.2% growth rate, according to the Wall Street Journal. And some had recently been predicting an even lower number.

Many are crediting the upturn to the stimulus package, which boosted consumer spending. As the BEA notes:

The upturn in real GDP in the third quarter primarily reflected upturns in PCE [private consumer expenditures], in private inventory investment, in exports, and in residential fixed investment and a smaller decrease in nonresidential fixed investment that were partly offset by an upturn in imports, a downturn in state and local government spending, and a deceleration in federal government spending.

I would, however, note that the last point of government spending. State and local government spending actually declined and federal spending was less than in the 2nd quarter. I'm sure this will fuel both sides of the "next stimulus" debate.

I would also note that contribution of trade is based on incompletely trade data (from only July and August). Continued progress on the trade deficit depends heavily on the value of the dollar. As the Financial Times noted this morning, the dollar fell on the GDP news -- which will help exports and hurt imports. Already, however, some of the US's major trading partners are complaining about the weaker dollar hurting their economies (i.e. their exports). As a story in this morning's Washington Post notes:

This week, a top aide to French President Nicolas Sarkozy called the value of the dollar "a disaster" for Europe, warning of dire consequences to the global economy if it remains at its current levels

However, as the story all points out:

the Chinese yuan, still closely pegged to the value of the U.S. currency, has fallen just as much as the dollar on world markets, serving up a double whammy to countries with fast-appreciating currencies like the euro. It also means that China, the country that enjoys the single biggest trade surplus with the United States, has actually seen that surplus grow during the recession.

So, be aware, as I noted with the 2Q data, these are advanced estimates subject to revision. The 4th quarter 2008 and the 1st quarter 2009 figures were substantially revised. The 2nd quarter 2009 number was revised from a -1% percent advanced estimate to a -0.7% final. Today's figure will be similarly revised as more complete trade and other data are available. The August trade numbers were unexpectedly positive (see earlier posting). The September trade numbers come out on Friday, November 13th.

Still, the data shows a healthy trend:

By now, I'm sure you have heard of the latest headline patent case of Nokia suing Apple. To go beyond the headlines, I suggest you read Joff Wild's interesting analysis of the implications of the case over at IAM Blog - Nokia v Apple. His take is that, played right, it could be a PR boost for Apple. It could also change the dynamics of the standard setting for wireless.

By the way, Joff wonders what will happen to Apple's stock price today. The answer is that it immediately rose (along with the NASDAQ) but then dropped a bit. I wouldn't put to much emphasis on any short term price movements, however. The implications of this suit will take a long time to play out.

Reputation is an interesting intangible. Take for example, the case of the Washington Redskins (or as some wits would say, yes, just take them, please). In a recent interview in the Washington Post, John Kent Cooke, son of the former owner Jack Kent Cooke said this about the current owner: "Dan Snyder destroyed the reputation of this franchise." Now Cooke was the loser in a bidding war with Snyder for the team after his father died, so there may be some "sour grapes" reaction at work here. And Snyder has doubled the value of the franchise from the $800 million he paid for it to an estimated value today by Forbes of $1.6 billion. Snyder has built the franchise into a marketing powerhouse. As Forbes notes:

The Redskins remain the most profitable team in the league, posting operating income of $90 million. FedEx Field has 91,704 seats, the most in the NFL, and even though the team has struggled on the gridiron it is hard to find an empty seat come game time. Premium seating is also a hot commodity in D.C., as the Redskins generated more than $45 million in luxury suite revenue for the Redskins last year, the most in the NFL.

However, Snyder has not produced a winning team, let alone come even close to the glory days many remember under the elder Cooke.

The timing of the Cooke interview is not coincidently, I suspect. The Redskins are off to a dismal season -- to such an extent that I recently heard a Washingtonian tell people that he came from a city with no professional football team. In an unrelated WP article, Steven Pearlstein summed up this situation like this:

What do you call a business that consistently overcharges its customers for an inferior product, hires the wrong people and pays them above-market wages, and yet still manages to be one of the most profitable and valuable franchises in its industry?
Here in the nation's capital, we call it the Washington Redskins.

(Pearlstein's piece was on the pending Supreme Court case on the NFL's anti-trust exemption)

The team may be a moneymaker right now. But I would note that the Forbes article was written about the past -- and as the caveat goes, past performance is no prediction of future results. Reputation is built on performance. If a sports team fails to deliver, past reputation will only carry you so far. Yes, there will always be the diehards. But diehards don't fill stadiums (ask me about the new Nationals baseball park). A story in today's Post -"As Redskins fumble, some fans are saying, 'See ya'" describes how some fans are staying home:

In most cities, a few thousand fans skipping NFL games during a bad season wouldn't be remarkable. But in Washington, the empty seats reported recently at FedEx Field have raised a question long unthinkable in Redskins Nation: Are significant cracks appearing in one of professional football's most rock-solid fan bases?

So, even if you aren't a football fan, watch the progress of the Redskins. It may be an interesting case study in the nature of the intangible we call reputation.

Over at the Technology Transfer Tactics blog, there is a posting entitled Hospital TTO takes a different path to commercialization with private sale of IP. The story is about a pending IP sale:

The technology transfer office at Childrens Hospital Los Angeles (CHLA) is veering off the traditional path to commercialization, with a pending sealed-bid private sale of a portfolio of 10 issued U.S. patents and foreign patent applications for noninvasive substance detection, including a noninvasive blood glucose monitor. The TTO has hired the IP brokerage firm ICAP Ocean Tomo, LLC, in Chicago to conduct the private sale for the hospital. CHLA had tried the traditional commercialization route with this particular technology for several years, says Jessica Rousset, director of the hospital's TTO. However, the standard path was slow-moving, particularly given the limited availability of the inventor, who is also a healthcare professional, she reports.

What is interesting about this both the patent sale and the description of patent sales. At first blush, it sounds like patent auctions are a radical new concept to the technology transfer offices. The article uses terms like "veered off the traditional path" and contrasts the sealed-bid sale as different from "standard path." One wonders about why the concept of IP sales is such a non-traditional idea to technology transfer offices.

Turns out that the sale really is a different path. As the piece explains further:

CHLA worked with ICAP Ocean Tomo to negotiate a customized template license agreement, which in turn will be conveyed to potential bidders. The agreement is a hybrid between a straight sale and a standard license agreement with all of the reporting obligations and various triggers for payments to the IP holder, she explains. CHLA isn't granting the IP rights as an assignment, which is ICAP Ocean Tomo's traditional model, "but as an exclusive license, which is necessary for federally funded IP," she [Rousset] explains. "Furthermore, we were able to get the appropriate reservation of rights in the terms and conditions that is customary when licensing government-funded technologies," allowing CHLA and other academic institutions to continue to work with the licensed IP.

The way this is phrased it sounds like this is a model to overcome barriers for sale of federally funded IP. This may be variation of a sale-lease back arrangement OceanTomo has done before and the auction of some NASA patents earlier this year. I am especially interested in the restrictions allowing academics to work with the IP - which overcomes the sometimes problem of universities patenting a foundational technology.

So may be this really is a new approach after all.

A new report from International Law Office - "Tangible Tax Relief for Intangible Assets" highlight changes being in Ireland's tax treatment of intangibles. The proposals dramatically broaden what qualifies for tax relief as an intangible asset. As the report cites, the definition will now include

 • patents and registered designs, design rights and inventions;
 • trademarks, trade names, trade dress, brands, brand names, domain names, service marks and published titles;
 • copyright or related rights within the meaning of the Copyright and Related Rights Act 2000;
 • certain plant breeders' rights;
 • know-how generally related to manufacturing or processing;
 • sale authorizations in relation to medicines or products of any design, formula, process or invention;
 • rights derived from research prior to authorization, on the effects of items covered directly above;
 • licences in respect of such intangible assets referred to above;
 • any 'non-Irish' right similar to those outlined above; and
 • goodwill to the extent that it is directly attributable to the items set out above.

These changes may also rekindle the debate on intangible tax havens. As the report notes:

It is anticipated that the changes to the tax regime will encourage more companies to develop and exploit intangible assets from an Irish base and should help to increase Ireland's portfolio of overseas investors.

It is this portfolio of overseas investors that is at issue. As we discussed in our earlier report Intangible Asset Monetization: The Promise and the Reality, the issue here is company transferring their intellectual property to subsidiaries located in countries where the royalty income is tax at a low rate or not taxed at all. The parent company "sells" the IP to the subsidiary and then pays royalties to that subsidiary for the use of the IP. Key is whether that "sale" is a fair market value and therefore the appropriately taxed.

As I noted in various earlier postings, the Obama Administration has highlighted this as something to be dealt with in a tax reform package. But that earlier report was a Treasury Department proposal. President's Economic Recovery Advisory Board (headed by Paul Volcker) has been tasked with coming up with a tax simplification plan. We will have to see if they take on this issue as part of their work.

Thanks to IP Finance for bring attention to this report.

In a posting a couple of years ago, I raised the issue of patents for tax strategies. Since then, the issue has been quietly percolating along. A ban on these types of patents (essentially a specific form of business process patent) was included in the House passed version of patent reform, but not in the Senate bill as reported out of the Judiciary Committee. Now an interesting coalition has written a letter to the House Ways and Means Committee asking that they move on a stand alone bill. The group is made up of consumer organizations, taxpayer rights groups and tax planners including the American Institute of Certified Public Accountants, the American College of Tax Counsel, the American Society of Appraisers, Citizens for Tax Justice, US PIRG, and Consumer Action (to name a few).

This may be a useful strategy. The talk in Washington right now is about some stand alone tax bills passing this year, such as a jobs creation tax credit and extension of the first time homebuyers credit. Even if a stand alone bill doesn't pass, there are multiple avenues to enactment. There is the patent reform bill (which we continue to hear may be moving this year). The NY Times Economix blog also raises the question if the Administration's tax simplification efforts will take is on as well. And there is the Bilski case before the Supreme Court on the broader issue of business process patent. With all these venues, something may finally be done about banning patenting tax strategies.

Thanks to Tax Prof Blog for highlighting this letter.

This afternoon, President Obama announced a set of new initiatives on small business lending. According to the fact sheet, the Treasury Department will make additional funds from the Financial Stability Plan available to community banks and Community Development Financial Institutions (CDFIs) for small business lending. The Small Business Administration will raise the loan limit in the 7(a) loan program from the current $2 million to $5 million, raise the loan limit for 504 project loans from the current $2 million to $5 million for standard borrowers and from the current $4 million to $5.5 million for manufacturers, and increase the limit on the microloan program from the current $35,000 to $50,000. The purpose of these changes is to make more credit available to small businesses that were too big for SBA programs but were having trouble getting bank loans.

It should be noted that recently the SBA rewrote its standard operating procedures to explicitly allow 7(a) loans to be used to purchase intangibles. Before there were severe limitations on the purchase of intangibles -- which were lumped into the amorphous (and risky) category of "goodwill." This is a change we called for earlier this year when the President announced a previous SBA loan program (see earlier posting).

However, as we noted back then (and noted in our earlier report, Intangible Asset Monetization: The Promise and the Reality and paper, "Building a capital market for intangibles,"), there are other changes that need to be made. It is still unclear whether intangible assets can be used as collateral for such loans. Working with its commercial lenders, SBA should develop standards for use of intangible assets as collateral, similar to existing SBA underwriting standards.

The third element of the President's announcement today was that he is calling for a small business credit conference, to be hosted by Treasury Secretary Geithner and SBA Administrator Karen Mills. The purpose of the conference is to "establish further steps the government can take to help small businesses access the credit that is so vital to their growth, and to economic prosperity in this country." Helping small businesses unlock their financial resources latent in their intangible assets would be a perfect topic for this conference.

In a piece in yesterday's Financial Times (The free market is not up to the job of creating work), Mort Zuckerman includes but goes beyond one of the standard suggestions: more spending on infrastructure. His call for a $65 billion National Infrastructure Bank echoes many others' push for greater public spending to create jobs. What is especially interesting about Zuckerman's piece is that he also calls for a 100% research and development tax credit. In other words, the government should subsidize all private sector R&D.

The justification for these proposals is a concern over the type of jobs being created:

If there is any growth in jobs, it will come mostly from healthcare, education, restaurants and hospitality services. Healthcare alone made up all the net jobs created in the last decade. Such service jobs cannot, however, support growth and innovation.

and over the macroeconomic effect of not creating jobs:

Since spending depends on employment it is critical to determine whether the labour market will remain weak. Given the level of household debt, the drop of confidence, the decline in the value of homes and the tightness of credit, it is hard to see how consumer spending will rise enough to improve economic prospects beyond a weak recovery - which creates few new jobs.

I agree with the concern - but am not sure of the remedy. First of all, not all innovation comes from R&D. Second, while I support a permanent R&D tax credit, 100% is bad policy. It completely removes any market-based reality from the decision process. Third, if the concern is demand creation, it is not clear that more R&D will have an immediate increase in demand. Investments in the R&D infrastructure have a greater immediate impact - which was why it was included in the stimulus bill. Increasing R&D is important for long term growth - but not short term demand.

Let me suggest an alternative. As I've argued before, we need a knowledge tax credit that includes worker training and education. So rather than a 100% R&D tax credit, let us use those funds for a 100% worker training and education tax credit. This would have the dual effect: It would increase our human capital -- a major input to the innovation ecosystem. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).

As I have said over and over again, rather than pay workers to stand in unemployment lines, let's pay them to sit in a classroom.

Last week, the World Economic Forum released its Financial Development Report. Headed up by Nouriel Roubini, the report concluded that:

The United Kingdom, buoyed by the relative strength of its banking and non-banking financial activities, claimed the Index's top spot from the United States, which slipped to third position behind Australia largely due to poorer financial stability scores and a weakened banking sector.

But on the financial stability index, the US wasn't even in the top 20. We ranked 38th (and the UK ranked 37th). As the report states:

The breadth of factors covered in the report means that countries with high financial instability scores like the United Kingdom and US could still achieve a high relative ranking in the Index due to other strengths.

In the US those other factors including the strength of the non-banking financial sector and the financial markets. On the down side, the US scored relatively low the strength of auditing and reporting requirements (25th) and the regulation of securities exchanges (29th). Interestingly, WEF's Global Competitiveness Report had the US at 39th with respect to the strength of auditing and reporting standards (see earlier posting).

Like the competitiveness report, this report used subjective surveys of business leaders. On the only measure related to intangible assets, the US came in 15th. When asked about intellectual property protection (1 = is weak and not enforced; 7 = is strong and enforced), the US had a score of 5.33, right behind Japan. Singapore, Sweden Finland, Switzerland and Austria all scored over 6. The competitiveness report had the US at 19th for the same question, with a score of 5.44. The wording was slightly different in the competitiveness report, where they specifically included a reference to counterfeiting and didn't include a specific reference to enforcement.

Like the competitiveness report, I would take these rankings with a grain of salt. But the details can be revealing. Those who want to dig into the report's fine points may find some interesting tidbits.

I have long followed Jeneanne Rae's writing on service innovation in Business Week. Jeneanne's latest column looks at the The Problems with Obama's Innovation Strategy. Like me, she sees it as a good first step -- but only a first step. Among the points of concern she raises, there are two I would highlight. First, she notes that:

We know from studying innovation in large-scale entities such as Procter & Gamble (PG), UPS (UPS), and Kaiser Permanente and in other governments such as Finland, Japan, and South Korea that success requires that innovation have a permanent place within a large entity's structure.

I agree, which is why in our working paper Crafting an Obama Innovation Strategy we called for the of the Presidents Council on Innovation and Competitiveness.

Second, she state that:

Moreover, scientific research funding and grants aside, there is precious little money available for discovery-related activities that would help decide what type of strategies are needed when it comes to spending the type of big bucks this plan endorses. But as the innovation strategy outlines, many of the problems America is facing are large, complex, and interrelated. Many, like education and health care with their multifaceted social aspects, are particularly hard to figure out.

Again, I agree. This is exactly why innovation policy needs to be more that a technology policy.

I disagree with her suggestion that we take a step back and rethink the spending. Unlike her, I don't believe the funds will be poorly spent. Most of the funding goes for programs already establish and with a proven track record. And are woefully underfunded. If anything, the President's innovation policy does not go far enough in redressing the last decade of under-investment.

The President's policy also does not go far enough, in my opinion, in a number of new policy and programmatic items. In an earlier posting, I outlined a number of the additional step that could be taken (passed based on our working paper). Those include dramatically expanding the Manufacturing Extension Partnership (MEP) program and enabling the National Science Foundation's (NSF) Engineering Research Centers program to support the creation of Design Research Centers as well as promote research and teaching of integrated design thinking. If the Jeneanne's major concern is the lack of the support structure to underpin our innovation process, these two programs are examples of the support structure in place -- but under utilized.

So, I'll repeat my earlier bottom line" the President's Innovation Strategy is a good starting point. But more needs to be done. Jeneanne's critique raises some interesting points. Now let's get to work coming up with solutions.

For the past few years, McBassi & Co has been doing studies on the relationship between investments in training and company financial performance (generally as measured by stock price). Their results have been consistent: companies that spend more on training do better in the stock market than those who don't. That data was, however, based on the long bull market. So, earlier this year, they looked specifically at the more volatile (and downward heading) financial industry sector. While the data is limited, the report, Training Investments As A Predictor Of Banks' Subsequent Stock Market Performance, shows that companies who made higher previous investments in training did better when the downturn came than companies who did not. They draw the following conclusions:

•  First, common sense suggests that training investments have their intended impact: those firms that make greater investments in this area subsequently perform better as a result.
•  Second, training investments may well serve as a proxy for the degree to which a firm is willing and able to take a long-term perspective, rather than focus excessively (and destructively) on quarterly earnings.
•  Third, expenditures on training (and in particular, changes in those expenditures) may serve as a window into an organization's future financial health and well-being (or lack thereof).
The bottom line is that a company's spending on training is a critical piece of information for its stakeholders to know. If you're an investor or employee, you should demand this information. And if it is not forthcoming, or if it suggests that the firm is headed in the wrong direction, you might want to consider heading for the door.

I'm a little hesitant to endorse the findings of the report completely, given the limited data for the downturn period. I hope they will be doing a follow up as more data is available. But I do agree with the general conclusions: there should be disclosure of what companies do regarding investment in the intangible asset of human capital. More information on intangible assets will only help both investors and managers.

Paul Krugman makes an important point in his column today The Uneducated American. He notes that funding for education has been gradually eroding, that employment in education has been declining in this recession when normally it should be increasing, that attempts to increase funding to state and local government which would have helped fund education funding were unsuccessful, and that US college graduation rates are below the average for advanced economies. As Krugman states "we need to wake up and realize that one of the keys to our nation's historic success is now a wasting asset. Education made America great; neglect of education can reverse the process." Amen to that.

This morning's announcement that President Barack Obama is winner of the 2009 Nobel Peace Prize is more than a personal achievement. It is a win for the United States - and what the brand "America" stands for. The Noble Committee's statement noted that:

Obama has as President created a new climate in international politics.
. . .
His diplomacy is founded in the concept that those who are to lead the world must do so on the basis of values and attitudes that are shared by the majority of the world's population.

As I've noted before, the brand "America" has taken a beating in the past. This award will help improve the brand's image and value. Congratulations to US.

The trade deficit took an unexpected turn for the better in August, according to the latest data from BEA. The combination of rising exports and falling imports reduced the deficit to $30.7 billion, compared to $31.9 billion in July. According to the Wall Street Journal, "Economists surveyed by Dow Jones Newswires had expected a further widening in the deficit to $33.6 billion." This is good news if the overall trend continues. However, the August improvement was due to declines in petroleum goods. The deficit in non-petroleum goods actually worsened. Nor was the increase in exports a completely good news story. Exports of capital good and consumer goods declined. Most of the rise in overall exports was due to the automotive sector and industrial supplies.

Our intangibles trade surplus also edged up slightly by $120 million. Exports and imports of both business services and royalties rose in August. The increase was so slight, however, that the intangible trade balance has essentially remained unchanged for the past 7 months -- hovering at about $11.1 billion.

Our deficit in Advanced Technology Products also improved, dropping to $5.6 billion in August from almost $6.6 billion in July. The bad news is that the improvement was due to a drop in imports, which declined faster than the drop in exports. This is especially true on information and communications technologies and aerospace where both imports and exports declined significantly. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.







Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows: Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes. Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Today's Real Time Economics blog has a piece on how Gap Between Desired and Available Jobs Skills May Grow. The story covers a recent survey by the Springboard Project of the Business Roundtable. According to the story:

The skills gap is already a problem: 62% of the employers surveyed said it's difficult to find qualified applicants to fill open positions. And more than half said there's a serious mismatch between their employees' skills and the needs of their companies, sometimes to the extent that it affected the company's productivity.
It's not that workers don't have an appetite for improving their skills. Looking at more than 1,000 workers, eight in 10 workers indicated they'd be interested in participating in a training program. Nearly six in 10 already had gone through skills training and said they'd do it again. Those who had participated in training had a fairly positive view of the experience and tended to be more confident in their ability to find a new job if they needed to.

And here is another reason for a knowledge tax credit. According to the Springboard press release, "Employers offering training are nearly twice as likely to increase their workforce."

According to Bloomberg News:

Starbucks Corp., the world's largest coffee-shop operator, sued a former executive and accused him of violating a non-competition agreement by accepting a job with Dunkin' Donuts Inc.

And another Bloomberg story relates that:

The U.S. International Trade Commission will start a probe into a claim by closely held Paice LLC that some Toyota vehicles infringe a patent for a way of supplying torque, or force, to a car's wheels from both an electric motor and internal combustion engine.

The story also notes that:

The ITC, in an unrelated case, is currently considering the standard that must be met before patent owners who don't make products can file complaints.

Never a dull moment in the legal fights over intangibles. One more reason why companies (and policymakers) need to think carefully about the management of intangible assets.

Speaking of manufacturing, here is how the US is doing, according to the American Small Manufacturers Coalition's Next Generation Manufacturing survey. The survey outlines what it means to be "world class" and assesses American companies on that scale. The elements of being world class include Customer-Focused Innovation; Engaged People/Human Capital; Superior Process/Improvement Focus; Supply-Chain Management & Collaboration; Green/Sustainability; and Global Engagement.

I was especially heartened to see the emphasis on customer-focused innovation. As the report notes:

Through 2015 and beyond, growth will not merely be fuelled by increased market share and higher sales volume. Instead, it will be powered by rapid development and deployment of profitable products, services and solutions that serve more highly segmented customer needs. A focus upon delivering high-value customer solutions - not products or services alone - will differentiate the best manufacturers from the rest. Product lifespan will continuously shorten and mere product extensions will be poorly adapted to the increasing demands for unique and specialized products and services. Companies that master profitable and sustainable innovation will thrive, while companies that struggle with this competitive advantage will be severely compromised.

However, most US companies have a long way to go. Almost 85% of the companies surveyed recognized that is important or highly important to their success. Only about one third had systems in place to measure and monitor their process in this regard. The vast majority (almost 85%) annually launch less than 10% new products (World class is benchmarked at 20%) and 75% have less than 25% total sales from new products (three years old). Most distressing is that 30% have less than 5% of their sales from new products. So almost a third of the companies are apparently not even trying to innovate.

The same pattern is repeated in the other areas. As the report states:

While over three-quarters of manufacturers believe human talent management is important or highly to their business success over the next five years, less than one-third are at or near world-class performance in this vital business management proficiency.

The report's conclusion is grim:

A serious gap exists between the strategies U.S. manufacturers believe are critical to their future success and their actual progress in implementing those strategies. More than a quarter of American manufacturers - representing over 90,000 firms - are at risk because they are not at or near world-class in any of the six strategies. These firms are already competitively compromised.

The report does not offer any policy prescriptions. Its detailed analysis does set out a roadmap for improvement. We need to figure out what the most appropriate policies are for each of these areas. One that I have been advocating is the knowledge tax credit. The survey finds that over 70% of the companies devote less than 20 hours a year to training (and of that almost 30% devote less than 8 hours). World class is benchmarked at over 40 hours a year. The knowledge tax credit would be a direct way of helping companies raise their level of training. There are others, such as export assistance programs that can address the lack of global engagement.

Armed with this report, our task is now to match solutions with the problems. Not all will be (or should be) government programs. But a strong public policy backdrop will be needed if we are to transform manufacturing in America.

One other point to follow up on the previous posting on the UK's Innovation Monitor 2009. According to the survey's press release:
 •  52.2% of the companies introduced process innovations over past three years and 35.1% plan on introducing process innovations over the next three years;
 •  38.0 % of the companies introduced organizational innovations over past three years and 26.3% plan to do so over the next three years;
 •  53.2% of the companies introduce product innovations over the over past three years and 59.0% plan to do so over the next three years; and,
 •  39.0% of the companies introducing service innovations over past three years and 42.9% will do so over the next three years.

So even in tough times, innovation remains important. And service and organizational innovation are an important part of the mix.

Collaboration was also an important topic. In 2009, 94.4% of the respondents collaborated with customers, up from 84.6% in 2008 and 56.8% of the respondents collaborates with the research base, up from 46.6% in 2008.

A recent story about Ford's attempt to sell Volvo to a Chinese company highlights what is happening in the auto industry to protect intangible assets. The story - Geely, Ford Volvo Talks Said to Falter on Safeguards - not only discusses the Ford/Geely talks on Volvo but also mentioned the GM Opel deal:

In July, General Motors Co. rejected an offer for Opel from Beijing Automotive Industry Holding Co. after failing to agree on safeguards for designs and technology, Xu Heyi, the Chinese company's chairman, said on July 24.

The companies are right to be concerned about protecting their intangibles. As noted in an earlier posting, the car companies have very valuable patents. But, interestingly, the gist of the Ford/Geely dispute over Volvo goes beyond patents. Since Ford and Volvo share design features, Ford wants any deal to protect the design blueprints.

Protecting trade secrets, such as designs, is much trickier than protecting patents. And foreign companies are already concerned about patent protection in China. To make matters more interesting, much of the intangible asset is in the tacit knowledge of the workforce including the design team. It was often said that Boeing's skill was getting a million parts to fly in formation. This integration skill was supposedly a key barrier to entry for competitors. Yet, that has not prevented the development of a competitive aircraft industry.

Protecting that tacit knowledge would seem simple - since tacit knowledge is difficult to transfer. But once it is learned, there are few controls (non-compete agreements supposedly try to protect it). And in many cases, the transfer of that skill is critical for a partnership/joint venture to succeed. The auto industry negotiations highlights the difficulty of walking that tightrope between necessary collaboration/disclosure and protection.

At least the auto companies understand the dilemma. In the past, one of the critiques of companies was that they didn't really understand what they were giving away (or were over optimistic about their ability to protect their competitive position). Looks like that may be changing.

There was an interesting article in Financial Times earlier this week entitled "Banks accused of shunning innovators". The piece described the results of the Innovation Monitor 2009 survey of small and medium size manufacturing firms by the UK's EEF - their manufacturing organization. The general findings did not surprise me: manufacturing companies are having trouble getting financing. That is the same in the US. In fact, the Commerce Department's Manufacturing Council (an advisory committee to the Department) has recommended the creation of direct government loan programs to help manufacturing companies.

What is striking about the UK survey, however, is that companies who have investing in innovation are more likely to be turned down for financing. As the FT article notes

Two-fifths of companies had found it harder to get bank finance in the past 12 months and none had found it easier. Successful innovators were 40 per cent more likely to have trouble accessing credit than companies that had difficulty generating a return from investments in innovation.
The EEF said the likeliest reason was that many innovations made during the recession were intangible - in areas such as processes, organisation and marketing - and that banks shied away from financing them without significant personal collateral or guarantees from management.

Clearly something is wrong with the financial system that goes beyond the recent meltdown. Whereas triple AAA rated CDOs, credit default swaps and other financial instruments that no one could understand were seen as risk-free, company investments in intangibles was seen as too risky.

All of this calls for activities to better understand investments in intangibles. Last year, Athena Alliance published a report on Intangible Asset Monetization: The Promise and the Reality. We are in process of finishing up a follow on report of case studies. That report will show how some companies and financial institutions were able to provide financing using intangibles as the backstop. We will post an announcement when the report is released.

The Wall Street Journal has an interesting article on improving health care -- Hospitals Find Way to Make Care Cheaper -- Make It Better. The article describes the efforts of a state agency in Pennsylvania to publish medical outcomes information for hospitals:

The theory underlying the Pennsylvania program is that, to create a truly competitive health-care market, consumers need hard information showing which hospitals perform better.

The results so far are positive. As the article notes:

The state has found that publishing results can prompt hospitals to improve, and that good medical treatment is often less expensive than bad care.

As the manufacturing sector learned over 20 years ago, quality pays for itself. But unless you measure for quality, it doesn't get managed. Hence the need for better data. What a novel idea -- improving information in the Information Age!

Some times I wonder if companies really understand that their customer relations can be a negative intangible -- and what sounds like a good idea may not be. Let me illustrate. This morning I got an "important message" phone call. This was a real person, not a machine, who started out stating he was calling about a debt collection issue -- always an unnerving way to begin a conversation. He wanted to know if I had paid my October mortgage yet. I had (yesterday). And the payment is not overdue until the 16th.

When I called Bank of America (company that holds my mortgage) customer service to find out whether this was a legitimate call or some new scam, I was told this was a new "courtesy" reminder call. Now, I can't remember if I have ever been late with a mortgage payment. If they looked at their records, they would have seen that. I don't need a preemptive reminder call. Rather than a "courtesy," to me it was at first disturbing and then annoying.

And it left two strong impressions. First, does Bank of America think that nagging its customers creates a positive relationship? Second, if they feel the need to speed up the mortgage collection process by a few days, what does that say about their financial situation? Granted, a couple of days quicker collection probably amounts to some real money. But is it worth the negative intangible of souring customer relations?

Of course, that is a calculation that the company needs to make. However, I'd be curious to know if they actually thought about it in that way. Too often, intangibles such as customer relations don't even figure into the decision process. Or they are handled elsewhere - not connected to other decisions. Yet, as we keep stressing, these intangibles are a major source of enterprise value. Attention to intangibles should be part of a company's DNA. In the case of Bank of America, my most recent experience leads me to believe that it isn't.

So the job of raising awareness continues.

As the unemployment numbers continue to disappoint, the question naturally arises of where the jobs will come from. As many have noted, including an article in today's Wall Street Journal, many of the lost jobs will not be replaced in the same industry -- for example in finance or real estate. Most predict that health care jobs will take their place - especially to care for an older population. In fact, health care and local government are the only sectors that have grown in recent quarters and are forecast to grow over the next year (see a great interactive graphic of sectoral employment provided by the Journal). But no one knows how the need to rein in health care costs will impact employment in the sector. Nor is it clear that there are enough jobs in the health care sector to make up for the losses elsewhere.

The graphic helps tell the rest of the story. As expected, it shows the steep decline in construction and manufacturing employment. But it also shows the recession driven decline in professional and business services -- with no uptick in the near future. Likewise with the leisure and hospitality sector. Interestingly, both of these might be thought of as derivative sectors: they need some one else to be doing economically well in order to prosper. If other companies are not doing well, they aren't buying as much in business services. And if workers aren't doing well, they aren't spending as much on leisure activities.

Thus, the question can be refined and reframed as this: where are we going to get the primary jobs that will drive the rest of the economy?

There are some answers. The emphasis on clean tech will provide some - in both manufacturing and construction (especially in retrofitting). But this is not a certainty. As I've noted, other countries are seeking economic salvation along the same path. I suspect the real answer will come from somewhere we don't necessarily expect. After all, the history of long term employment forecasts is spotty at best. Key will be to lay the correct economic groundwork. And that, as I've argued over and over again, will come from paying attention to investments in innovation and intangible assets.

So, ok let us worry about jobs. But let us also concentrate on the factors to create those jobs -- and put in place a solid innovation and investment strategy. In the long run, that will be our best jobs creation strategy.

Michael Milken urges investors to look at the broader intangible assets. In an comment piece in the Financial Times on Sunday (Prosperity rests on human and social capital) he notes:

Amid all the changes since I first went to Wall Street 40 years ago, basic investing principles have not changed at all. Attractive opportunities still await those who do careful research; capital structure still matters; and the best investor is a social scientist who analyses markets from both macro and micro views.
The macro view sees the 21st century defined by global competition for the world's most valuable asset, human capital. Nations build this by strengthening education, healthcare, access to scientific knowledge, opportunities for women and incentives that attract skilled immigrants.
. . .
Besides human capital, prosperity also requires social capital. Macro-focused investors look for a strong commitment to private property rights and the rule of law in the areas where a business operates. They ask if workers can aspire to more than a job and realistically dream of being owners. Are companies encouraged not only to take entrepreneurial risk, but also to provide solutions to society's needs?

In other words, pay attention to the larger set of intangible assets -- those outside of just the individual company -- as you make your investments. And, I would note, the same advice applies to policymakers.

Neil Wilkof (over at IP Finance) has recent posting on What Are Valuable Patents. The piece looks at a couple of papers on patent vulnerability and touches upon the multitude of reasons why people file for patents.

But what I found most interesting was this throw away comment:

there is nothing inherently valuable in a patent that has been examined and granted by a more senior examiner, unless such a patent is connected with activities that have "real economy" value.

What is so interesting is that this statement is taken as self-evident by almost anyone is the IP field. The thinking goes something like this: "Yes, patents are important to have - for a number of reasons, but most patents are economically worthless."

If that is the case, then why are we still using patents to measure economic activity (innovation and competitiveness)?

The September employment data was released by BLS this morning an showed a rise in the unemployment rate to 9.8%. Nonfarm payrolls declined by 263,000. That was much greater than expected. According to the Wall Street Journal "Economists surveyed by Dow Jones Newswires survey had expected a 175,000 decrease." The data on the number of involuntary underemployed (part time for economic reasons) also was disappointing. It rose slightly in September to just under 9.2 million -- which would be "little changed" in technical terms (see chart below). I would also note that the increase over the past two years has been due to slack work - as one would expect in a recession. As I noted last month, we seem to be in a static middle ground right now as far as involuntary underemployment is concerned--not getting worse, but not yet improving.

Over at the blog IP finance Jeremy Phillips reaction to a new book on IP valuation is that he "can't help feeling that, if we've created a web of issues that take nearly 700 pages to expound, we have unleashed a monster of our own making." In fairness, the book Calculating Lost Profit in IP and Patent Infringement Cases appears to be a highly technical handbook that covers case law and legal procedures in infringement cases as well as valuation methodologies for determining lost profits damages. But Jeremy's reaction (as an experienced IP professional and academic) is instructive as to the difficult nature of the valuation proposition.

Another illustration of those difficulties is the Cisco deal to buy Tandberg. That deal is appears to be driven by good strategic reasons. As the New York Times notes:

Cisco has sold expensive, room-sized video conferencing systems to companies that it calls TelePresence systems. Tandberg has similar technology but also sells smaller-sized, cheaper conferencing units. In addition, Tandberg has specialized software for managing video conferencing systems and for creating connections between conferencing systems that rely on different underlying technology.

In other words, Cisco is buying Tandberg's intangible assets. (Of course, we will see if they keep one of those intangibles: the brand.)

But, according to the Wall Street Journal, the $3 billion deal "is an all-cash tender offer that Cisco characterized as an 11% premium to Tandberg's closing price Wednesday, and 25.2% higher than a three-month average price for the stock." So first of all, the book value of Tandberg is mostly likely lower than its market capitalization -- because of the value of intangibles are not counted on the books. Second, Cisco values those intangibles even more than that general market and is therefore willing to pay the premium. Which of those three valuations is correct?

Interestingly, we will know after the fact what the value of Tandberg's intangibles was. After the acquisition, Cisco will have to carry the value of the intangibles and the goodwill on their books (even though Tandberg is prohibited from assigning a value to the intangibles for its accounting purposes). It will be interesting to see how much of the over book value is assigned to intangibles and how much is carried as goodwill. It would also be interested to hear about the valuation methodology used to make that determination.

But while we will see the outcome of the accounting decisions, I doubt we will get a look at the process. Maybe SEC or FASB should start requiring that as well. Then someone could write a 700 page book on the rules for disclosing the processes of valuing intangibles.

According to various press reports, Penske Automotive's deal to buy Saturn has fallen through and GM has said it will close the company. The reason: lack of manufacturing capability. Penske was really buying the brand and dealership network, not the manufacturing operations (which had been essentially merged into GM's operations). And they couldn't find another car maker to make their cars for them.

As I've noted before, Saturn was meant to be a grand experiment in a new way of making and selling cars. Well, the selling part of the experiment was the only part that survived. Now it looks like even that is gone.