The supply side of IP management: understanding firms' choices regarding IP intermediaries

• English

Studies focusing on the supply side of IP management, particularly on the outsourcing of patent related work, are relatively rare. This paper aims to contribute to the IP literature in two ways. First, a definition of the IP service provider is proposed. Second, I consider three main hypotheses that determine a firm's preference for outsourced IP work. Using data on the outsourcing of patent renewal payments, I found evidence that the choice of IP supplier is affected by: (1) the firm's own IP maintenance capabilities, (2) the firm's IP knowledge utilization, and (3) the IP complexity.

1. Introduction

In recent years, firms have been turning marginal innovations into patents more frequently than previously and all major patent offices worldwide are facing a “patent explosion”. This accumulation of Intellectual Property, and the growth of firms' overall IP portfolios, poses several challenges for the management of IP. Somaya (2012) summarized the literature on strategic patenting and identified opportunities to address important unanswered questions. He pointed out two areas particularly ripe for further research. First, the interplay between firms' internal resources and the capabilities of externally available suppliers. Second, firms' processes related to the hiring and development of expert patent managers and attorneys. In particular, questions related to how firms combine internal and external IP capabilities and the performance implications of these patent related choices, have not been sufficiently studied. Similarly, little theory exists on the analysis of how firms can organize themselves in order to effectively manage their Intellectual Property rights (IPR) in collaboration with external suppliers.

The literature on patent management has only recently focused on outsourcing. For example, Reitzig and Wagner (2010) highlighted the hidden costs of outsourcing. Mayer et al. (2012) studied the development of various types of human capital and their impacts on outsourcing. Moeen et al. (2013) investigated the factors that influence the concentration of a firm's supply portfolio, and Ayerbe et al. (2014) conducted a case study of Thales, a French group in the defense industry, to explore how IP is organized via outsourcing. All these studies centered on the outsourcing of patent filings, patent prosecution or the organization of IPR with external patent law firms. Within the context of the existing IPR management literature, the present research contributes in two ways. First, it extends the current focus on law firms to introduce another highly specialized IP intermediary, the IP service provider. The work done by Ayerbe et al. (2014) shows that the development of intermediaries such as law firms specialized in managing IPR plays an important role in organizing IP; however, questions of which other types of intermediaries exist, and what roles they play, have remained mainly unanswered to date. Secondly, the research provides a greater understanding of firms' strategies for the sourcing of external IP specialists and provides further insights into how firms organize and manage their IP. Besides the work of Moeen et al. (2013), outsourcing of IP work has never been studied with a focus on how firms manage a set of IP suppliers.

Firms' boundary decisions go far beyond pure make or buy decisions and include questions concerning firms' choices among different IP suppliers, and regarding the interplay between a firm's internal resources and the externally available capabilities of IP suppliers. I suggest that understanding the determinants of firms' choices concerning the type of IP supplier they select is important for both management research and practice. Aiming to gain a deeper understanding of why firms choose to engage either IP law firms or IP service providers in their outsourcing of patent related work, this study assesses various potential determinants of choices related to the outsourcing of patent renewal services to external IP suppliers and analyses their impacts.

In order to study the determinants of firms' selections regarding IP outsourcing suppliers, a unique data set of European patents from the EPO database PATSTAT was matched with data from the database of an IP service provider (DSP). The service provider's patent database offers unique insights into the analysis of outsourcing of IP intermediaries. Relationships between the hypothesized determinants and IP outsourcing choices were tested in the context of outsourced patent renewal work. Each year patent holders must decide whether or not to renew their patents. The unique advantage of using patent renewal data from European patents is that, with European patents, a firm's outsourcing choice is not constrained by legal requirements, such as the obligation of non-EU resident firms to use a registered patent attorney (see Article 133, European Patent Convention).

The paper is organized as follows. In Section 3, a summary of prior work in the area is presented, as well as the theoretical framework. Then, the notion of “IP service provider” is further developed, hypotheses concerning firms' choices regarding supplier selection when outsourcing patent renewal work are presented. In Section 3 the research methodology and data set are described. I present empirical results in Section 4 and conclude the paper with a discussion of managerial implications and possibilities for future research.

2. Theoretical framework and hypotheses

The following section contains two major parts. First, the IP service provider is introduced as one IP intermediary specialized in managing IPR, after which a framework explaining how client firms and IP intermediaries are related in the context of annual patent renewals is presented. Second, hypotheses are developed to test potential determinants of firms' sourcing decisions concerning patent renewal services. These hypotheses form the basis of my empirical tests.

2.1. An introduction to the IP service provider as an IP intermediary

Throughout this paper, my conception of an IP service provider as an IP intermediary will be that of an organization (firm) that directly offers or facilitates Intellectual Property services, and that functions as service mediator between patent owners, patent offices and other IP intermediaries such as patent law firms and attorneys. As Ayerbe et al. (2014) noted, organizing IPR calls for specific capabilities, which enable the development of intermediaries, such as service organizations specialized in IPR management. Given these specialist skills, firms that specialize in IP protection activities are typically distinct from those units that specialize in IP generation. Indeed, the capabilities underlying IP generation and IP protection through patents are viewed as being distinct enough to entail the frequent outsourcing of the latter via IP intermediaries: patent jurisdiction and the IP market remain a “black-box” for most patent applicants and inventors. The low transparency of diverse patent institutions, the abundance and variety of regional and international treaties, and the highly specific nature of national patent laws are all factors that create the need for specialist vendors such as IP service providers and IP law firms. IP service providers manage IP rights for their clients at all stages, through processes such as patent renewals, ownership changes, patent searches, and docketing of IP data. Some IP service providers offer IP management software for patent search, administration and evaluation. However, their patent attorneys are distinct from IP service providers. Indeed, patent attorneys may often be former scientists or engineers with expertise in patent law, patent application and patent enforcement procedures. In addition, practicing before a patent office may require legal representation by a registered patent attorney. This differentiation between IP service providers and patent attorneys is important for understanding the management of IP outsourcing tasks and processes, and the role of IP intermediaries in creating value in the outsourcing process. However, there is some overlap in the service offerings of IP intermediaries: for instance, patent annuity payments may be offered by both of these types of IP intermediaries. Importantly, this raises questions concerning firms' decisions about the outsourcing of IP work, particularly with regard to the factors that determine which type of IP intermediary –  IP law firm or IP service provider – is chosen in such cases.

In line with major IP outsourcing studies, this study is situated in a context of specialized tasks linked to IP activities. I focus on firms' outsourcing of patent renewal work to either patent law firms or IP service providers. Expert interviews suggest that there are three major ways to perform patent renewal payments before patent offices: firms can perform patent renewal payment in-house (only if legal requirements, such as legal representation before the patent offices, are met); they can outsource patent renewal payments to law firms/patent attorneys or they can outsource patent renewal payments to IP service providers. As the interest is in IP outsourcing, I limit my analysis to the last two sourcing scenarios. Data from the IP outsourcing providers' database, for which descriptive statistics will be provided in Section 4, confirms this. In this context, Fig. 1 shows firms' outsourcing of patent renewal work directly to IP service providers, while Fig. 2 depicts firms' outsourcing of patent renewal work to IP law firms or patent attorneys, which then themselves may outsource the work to IP service providers. The latter situation can be viewed as indirect outsourcing to an IP service provider.

These figures illustrate several challenges associated with the outsourcing of IP-related work. First, an outsourcing firm must decide which IP intermediaries to select, based on transaction costs and the range and depth of their capabilities, and must determine how to distribute work among these suppliers. Second, the firm must consider the organization and management of all the various IP suppliers involved, including subcontractors. As mentioned above, the specific capabilities of IP suppliers and transaction costs play a large role in explaining firms' IP outsourcing decisions.

Further, the development of intermediaries such as service organizations specialized in managing IPR play an increasingly active role in the new knowledge market. Existing studies in IP outsourcing e.g., Refs. are all based on IP outsourcing choices relating to only one type of IP intermediary (law firms). Hence the question emerges as to why and how firms outsource IP activities among several IP suppliers. Addressing this question is the object of the present research.

2.2. Hypothesis development

I now identify factors that might determine the firm's choice between two different types of IP suppliers – IP law firms and IP service providers – in the context of outsourced annual patent renewal payments.

2.2.1. IP maintenance capabilities

Recent research has highlighted the need to understand how patent related choices are made, especially those related to developing firm capabilities through the bundling and coordination of disparate resources, building capabilities for patent management, and combining internal and external capabilities. Such patent related choices go far beyond "make-or-buy" decisions, and firms may combine several IP suppliers for the outsourcing of their IP work. For instance, firms rely on external suppliers (e.g., law firms) to carry out patent work (e.g., prosecution, litigation, patent legal work).

Answering questions regarding how many and which IP suppliers to use is essential for advising firms on how to attain effective IP management, yet these questions have remained generally unanswered in the IP literature. Moeen et al. (2013) have shed some light on the question of which factors influence the concentration of a firm's supply portfolio. They identify five factors that explain the outsourcing of patent filing activities into the hands of fewer suppliers. They state that the assignment of outsourced work to different IP suppliers takes into account the supplier's capabilities in that domain, and conclude that firms utilize fewer suppliers if the outsourced projects are focused on a narrower (capability) domain.

Thus, firms manage tradeoffs to select the most beneficial distribution of IP work (domains) among different IP suppliers. The capability approach to organizational boundary choices suggests that the relative capabilities of buyers and suppliers are key factors in firms' decisions regarding vertical integration. In this context, it means that the better a firm's patent maintenance capabilities (i.e., to manage tradeoffs), the greater its ability to access and leverage external capabilities by configuring IP work among different suppliers. It can be expected that firms select specialized IP service providers based on their past experiences and specific capabilities in the domain of annual patent payments.

Therefore, I hypothesize:

Hypothesis 1. Firms with a higher IP maintenance capabilities resulting from decision making with associated issues are more likely to outsource patent renewal work to specialized IP service providers.

2.2.2. IP maintenance knowledge

In principle, the annual patent payment can be provided by IP law firms, IP service providers or other parties if legal requirements are met. IP service providers may offer patent renewal services at a more cost effective rate due to economies of scale and efficiency effects. According to expert interviews, IP service providers benefit from lower labor costs because they offer a wide range of services around administrative IP work, which does not necessarily require attorneys. Conversely, outsourcing can result in loss of knowledge, as studied by Reitzig and Wagner (2009). These authors highlight the effects of the outsourcing of patent filings on the technological and legal knowledge bases of the firm, and on its ability to detect IP competitors at later stages of the value chain. They conclude that firms appear to face a tradeoff, wherein they must balance the benefits of outsourcing patent filing activities to external markets against the costs of losing IP related knowledge. On the other hand, it can be expected that firms, which utilize their IP knowledge, are more capable of identifying those IP activities that bear a risk of IP knowledge loss. First, such firms are aware of specific benefits and risks associated with the outsourced work. For example, missing the payment of a maintenance fee results in the lapse of the patent, which cannot be reactivated. However, a firm which utilizes its IP knowledge is in a better position than others to mitigate this risk; for example, by “asking the right questions” in order to determine which alert systems are in place to make sure patents are renewed, and whether or not suppliers are qualified. Second, firms with a profound IP knowledge utilization are more capable of differentiating between legal and administrative IP tasks. In practice, firms combine different IP suppliers, which possess different functional specializations: for instance, the firm might outsource legal IP work to law firms, but use IP service providers for their annual patent payments.

Thus, I hypothesize:

Hypothesis 2. Firms with a greater IP maintenance knowledge utilization are more likely to outsource patent renewal work to specialized IP service providers.

2.2.3. IP complexity

There is a continuous trend towards growing IP portfolios. As a consequence, the management of IP is becoming increasingly burdensome. Also, IP involves multiple skill sets, from technologists focusing on IP generation to attorneys focusing on IP protection thus creating challenges to communicate and coordinate. In addition, firms' own organizational setup might add complexity. The case study of Thales Group, for example, shows that IPR management can be highly complex if numerous foreign business units are involved which are not governed by a central unit. Thus, growing patent portfolios, high multidisciplinary and organizational complexity, require means to manage IP efficiently. One meaning could be to select IP intermediaries who act as mediators between diverse IP stakeholders. A major role of the patent attorney is to act as a mediator between the patent holder and the patent office. Law firms offer legal and administrative services and thus operate in a broader IP service domain. Furthermore, prior experience also plays an important role. As pointed out by previous studies, the outsourcing of prior related projects (such as patent applications) may improve the performance of the focal project because the parties learn how to effectively work and contract with each other. Prior related work such as patent filings, prosecution, or validation enables law firms to gain capabilities in a broader domain and to learn how to coordinate and communicate effectively between the client firm and third parties such as patent offices. Therefore, I expect law firms to be more capable of handling patent renewal work in more complex environments due to the breadth of services they offer and their experiences with prior related projects.