TVP – Metric 27 Number and Quality of Patents

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1. Metric Definition

A family of related measures of patent value, including the percent of patents that are useful, their value on an interval scale, the percent of granted patents retained, and the cost of invention.

a. Metric 1: Percent Useful

 Measures the percentage of active patents from the company’s total patent estate which are incorporated into or used to defend the firm’s commercial products or processes.

b. Metric 2: Value Ratio

Measures the interval rating (one to five) for potential strategic value times rating (one to five) for strength of protection divided by 25 (maximum attainable value). It yields a number between zero and one.

c. Metric 3: Retention Percent

Measures the percent of granted patents maintained.

d. Metric 4: Cost of Invention

Measures the number of patents from R&D, or R&D effort costs. One can also calculate this using the number of useful patents from R&D.

2. Advantages and Limitations

a. Metric 1

The advantage of this metric is that it allows one to look at the utilization of patents and not just the number generated. By examining the percent useful, the value of the patents is much more obvious. The disadvantage of this metric is that it weights all of the useful patents equally, whereas some could be more valuable than others based on the amount of revenue they protect. 
 

b. Metric 2

The advantage of this metric is that it considers the strategic value of a given patent and the degree of protection vs. just the potential use of the patent. The limitation of the measure is that it is more qualitative and subjective and involves multiplying, which increases the variability around the measure. An additional limitation is that the calculation across all patents can become rather cumbersome.

c. Metric 3

The advantage of this metric is that it looks at patents which are being maintained, likely due to their potential for future utilization vs. current utilization. A limitation is that it does not include the potential value of maintaining these patents.

d. Metric 4

The advantage of this metric is that it allows the user to assess the cost of the invention process to better determine if the cost is reasonable vs. the strategic value. A limitation is that it potentially focuses on the negative outcomes of the patented technologies.

3. How to use the Metric

a. Metric 1

This measure can be used to track the use of technology’s patents over time. This can provide signals as to whether or not patent work is being supported; is of adequate usefulness; or if the company’s core and protected technologies are deteriorating.

b. Metric 2

This measure can be used to assess the true financial and business value of patents to the organization and should be done by cross-functional team knowledge about both the business potential and the technology. Depending on the size of the businesses in which the company invests, a one for strategic value would represent a business of minimal attractiveness in size (i.e. volume, revenue, or profits) and a four would represent a business of maximum attractiveness in size. Depending on the product life cycle for the business, a one for strength of protection could mean minimal “tactical” (less than two years) competitive advantage or easily replicated. A four for strength of protection could mean a transforming technology which would be expected to last 10 years or beyond; or where the technology is virtually impossible to replicate by competition or the patent almost impossible to circumvent successfully. 
 

c. Metric 3

This measure could be tracked by the legal department and updated as part of an analysis done at a set frequency to assess whether or not certain patents should be maintained. Key decision criteria should be developed, i.e. likelihood of future use and strategic value of future use.

d. Metric 4

This measure could be used as some set frequency to assess the cost of invention vs. the strategic value so that the organization can track this measure and relationship over time.

4. Options and Variations

In addition to any of the above metrics, one could also consider measuring the number of times a patent is cited by others. This is assumed to indicate the value it offers to others in developing technology. If only of interest internally, then only references made via internal patents should be counted.

The interval rating scale for potential strategic value could be based on an even more qualitative assessment, such as one being of minimal strategic value (in which case one would question why a patent was utilized) and up to four being of critical strategic value (i.e. new business category, key competitive threat, high growth potential)

5. Champions and Contacts

6. References

Acs, Z. J. and Audretsch, D. B. 1989. Patents as a Measure of Innovative Activity. Kyklos, 42 (2) pp. 71 – 180.

Chakrabarti, A. K., and Anyanwu, C. L. 1993. Defense R & D, Technology, and Economic Performance: A Longitudinal Analysis of the U. S. Experience. IEEE Transactions on Engineering Management, 40 (2), pp. 136 – 145, May. This article has many references on patents as a technology indicator.

Curtis, C. C., 1994. Nonfinancial Performance Measures in New Product Development. Journal of Cost Management, 8 (3): pp. 18 – 26. This article covers the relationship of patent number and patent quality with other metrics.

Griliches, Z., 1990. Patent Statistics as Economic Indicators: A Survey, Journal of Economic Literature, XXVIII, 1161 – 1707, December.

Honig – Haftel, Sandra. 1990. The Effect of Reward Systems on the Development of Patents in High Technology Firms. Sc. D. diss., University of New Haven.

Artz, K. W., Norman, P., Hatfield, D. E. 2003. Firm Performance: A Longitudinal Study of R&D, Patents, and Product Innovations, Academy of Management, Best Conference Paper 2003 TIM (Privately-published information)