Introduction:
In today’s digital economy, intangible assets (IAs) such as intellectual property (IP), data, and trade secrets make up the majority of a company’s value. However, most businesses fail to adequately manage these vital assets, leaving them vulnerable to loss, theft, or devaluation. This article explores how companies, particularly in the technology sector, can better understand, protect, and manage their IAs.
- The Hidden Risks in Intangible Assets:
Despite IAs accounting for over 90% of a company’s value, they often go unprotected due to a lack of understanding of the risks involved. While businesses might consider legal events like IP infringement, they frequently overlook other threats such as insider actions, accidental data loss, and trade secret disclosures. For technology companies, key assets like code, algorithms, and proprietary data are especially at risk.
For technology companies, key assets like code, algorithms, and proprietary data are especially at risk.
What makes these risks even more pressing is their tendency to surface at critical times, such as during investor due diligence or when an acquisition is on the table. At these moments, the lack of a clear IA inventory or risk management strategy can derail negotiations, lead to lower valuations, or even scuttle deals altogether.
Key Takeaways:
- Beyond Legal Risks: The risks to intangible assets extend far beyond IP infringement. Companies need to be vigilant against data leaks, code corruption, and unauthorised disclosures.
- Intangible Assets Inventory: Many companies struggle to even identify all their intangible assets. Creating and maintaining an inventory is essential, especially when faced with due diligence during funding rounds or acquisitions.
- Innovation in the Face of Risk: Lessons from Industry Giants
Even the most innovative companies can falter if they don’t adapt their risk management strategies to changing landscapes. History has shown that some of the most significant companies, despite having cutting-edge innovation ecosystems, have been caught off guard by emerging risks. For growing technology companies, this highlights the importance of not just innovating but doing so with a clear understanding of the risks involved.
Key Takeaways:
- Focus and Collaboration: For smaller companies, the key to innovation lies in a focused approach to risk management and strategic collaboration. Understanding what you excel at and where you need support helps protect your core innovations while mitigating risk.
- Speed as a Differentiator: Speed to market is crucial, but it must be balanced with managing risks effectively. Use IP strategically to safeguard your unique value proposition while you scale.
- Bridging the Risk Management Gap: Not forgetting Intangible Assets
The challenge for many companies is that managing the risk around IAs requires a different approach than managing physical assets. Traditional methods often focus on the tangible, ignoring the unique characteristics and vulnerabilities of intangible assets. For instance, insider risks—whether malicious or accidental—pose a significant threat that standard risk management practices may not address adequately.
To bridge this gap, companies must adopt a comprehensive risk management strategy that includes:
- Internal Controls: Implement robust policies and controls to manage insider risk. This includes strict access controls, employee training, and clear protocols for handling sensitive information.
- Regular Audits: Conduct regular audits of intangible assets to ensure they are properly accounted for and protected. This is particularly important as these audits are often a focal point during due diligence by investors or potential acquirers.
- Risk Assessment and Mitigation: Develop a risk assessment framework to identify potential threats to your intangible assets and outline mitigation strategies. This proactive approach can help prevent losses and ensure that your assets are adequately protected.
- Insurance: You probably have insurance covering your physical assets and other risks, but not your IP and IAs. There is excellent cover from big providers like WTW, don’t make this mistake.
Key Takeaways:
- Holistic Risk Management: Look beyond the traditional scope of risk management to include internal and accidental threats. Establish internal protocols and regular reviews to keep your intangible assets secure.
- The Importance of Valuation and Clarity: While it may be challenging to assign a precise value to IAs, a clear understanding of how these assets contribute to your business is essential, especially when presenting to investors or acquirers. A straightforward approach that ties IAs to revenue and growth prospects can make a compelling case during due diligence.
- Preparing for the Future: IP Risk as a Boardroom Issue
The management of IP risk should be a board-level priority. As the digital economy evolves, regulatory changes increasingly demand greater transparency around IA management and cybersecurity. Moreover, with IAs being a major component of company value, investors and acquirers are scrutinising how these assets are managed more closely than ever before.
Inadequate risk management not only leaves companies vulnerable to losses but can also impact their credibility during due diligence processes. Investors want assurance that a company has a solid grasp of its most critical assets, their value, and the risks they face. Failure to provide this clarity can result in lower valuations or lost investment opportunities.
Key Takeaways:
- Bring the board agenda into the present: IP and IAs should be near the top of the agenda, being accountable most of company value. They dovetail with cyber risk and so the topic should be monitored holistically.
- Culture and Education: Embed a risk-aware culture within the company. Educating employees and leadership about the significance of IP and IA risk management not only protects the company but also enhances its appeal to potential investors and partners.
Conclusion:
For technology companies, intangible assets are not just valuable—they are essential to long-term success. Managing the risks associated with these assets is crucial, particularly when investors or acquirers come knocking. By taking a proactive approach to IA risk management, companies can safeguard their invisible value, demonstrate their strength and preparedness during due diligence, and position themselves for sustained growth in the evolving digital landscape.