Consulting firms and IP

by Andrew Watson on 18 November 2008

Last week I was having an informal conversation with some colleagues who also happened to be from a consulting business (but not IP or legal consulting). Over an excellent pub lunch on a rainy London day, we got to talking about IP (naturally enough when I’m involved in a conversation) and its role for consultants. The question came up about the importance of intellectual property for consulting firms, as this line of work almost always involves transferring any formal IP rights to the client. I thought that IP could play a strong role, but needed some time to further develop my thoughts (hence this post).

The consulting business in a nutshell:

  • Clients pay for applied knowledge that achieves some sort of result (new sales, restructuring management, IP strategy, reports, training, etc);
  • Consultants create or transfer the knowledge requested by the client (often in person or through reports);
  • The client then requires the rights to the knowledge (licence or assignment of copyright in reports, licensing of know-how, etc) so it can actually use what the consultant produced to achieve its goals.

So that’s more or less it: Consultants have a bank of knowledge and skills that clients then pay to use on specific matters. They certainly create knowledge (and IP), but then have to turn around and transfer it (in whole or by licence) to their clients

As a formal matter, the concepts of foreground IP and background IP come into play here. Generally, background IP consists of the core skills and knowledge (and their legal protections) that consultants can apply to any client. Foreground IP consists of all knowledge generated around this particular client’s specific problem and often will be exclusively licensed to that client. There is a technical legal discussion here that I want to acknowledge but move past: I’m not concerned at the moment with how you structure the legal aspects of the consultant/client relationship but rather on the core of IP and consulting.

So what stays at the core — inside the consulting business — that can be protected by IP and used to build the business?

ConsultingPulse has been thinking about the same problem, and in an interview with Paul Collins of Equiteq LLP highlights what I also see as key reason to take this issue seriously:

[Y]ou must demonstrate that your services are built upon intellectual property that belongs to the firm, rather than just the combination of the individual skills of your consultants.

Without this, Paul points out that consulting firms will find difficulty in getting higher valuations upon sale or merger. I’d also add that building up the structure around the firm (as opposed to the individuals) will also lead to higher revenues along the way. But these points address why consultants should build up an IP structure around the firm but not what they should build it on.

I think that the answer is to:

  • write it down – get as much information about the practice area out of the consultants heads;
  • manage it – use tools to manage that knowledge effectively, such as using a wiki or other Knowledge Management (KM) tools; and finally
  • protect it – examine all the ways that you can protect that knowledge as an asset of the firm.

The answer to the last point may be through IP such as copyright, database rights, trade secrets, and even patents or through other means such as employment law (non-compete agreements) or simple physical security (need to know access backed up by encryption and access controls).

IP and building value is of course a major theme of this blog, but in light of Andrew’s post last week about the IP consulting services market I have a final parting thought. As legal consultants, we need to combine best practices from both law firms and from management consulting firms. I think many IP services tend to come at their business from a law firm perspective, and tend to ignore some of the key intelligence from the consulting community. As we all hopefully grow together (and grow the market for our services), I’d like to see more from the consulting perspective as part of the conversation.

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IP strategists: Management consultants or lawyers? | Tangible IP
12.04.08 at 3:11 pm

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Tony Rice 03.05.09 at 10:20 am

Expanding on the reference to Paul Collins’ comments on IP in consulting firms: The equity value in a consulting firm increases when future sales and profit growth become predictable. Hence the risk for the acquirer goes down. One of the major factors that creates greater sales potency in a firm is the creation of repeatable methodologies independent of any one individual. So packaging up processes into repeatable solutions (IP) pushes up revenues, reduces future profit risk and therefore increases equity value. There is more information on the whole subject of equity value in a consulting firm on the equiteq website

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