Maximize Return on Investment on Your License Compliance Spend
A license compliance program should be self-sustaining and provide significant value to a licensor’s organization in both the short and long term through identification of under reported revenue and insights into common contractual issues. Many people think of a license compliance as performing long, expensive audits of their largest customers. However, the most effective license compliance programs leverage multiple compliance tools in addition to full scope onsite audits to maximize the return on investment for their organization. Below are few compliance tools that top licensors successfully utilize to identify missed royalty and licensing revenue:
Full scope audit
Full scope onsite audits are typically a necessary aspect of a successful license compliance program, as they identify under reported amounts while also sending a clear message to the marketplace that the licensor is serious about protecting its intellectual property, creating a level playing field for its licensees, and assuring that licensees are reporting accurately. In particular, for large licensees, or those licensees who have elevated risk factors, a full scope audit is the best approach for assessing compliance with contract terms and identifying unreported royalty and license fee obligations. Observing walkthroughs of processes, witnessing live data extraction and system reports, and performing live interviews with relevant licensee personnel provides valuable insight to experienced auditors as to whether there may be issues with licensee’s reporting. Furthermore, it provides insight into whether or not the licensor’s IP is managed and utilized as per the contract terms. Full scope audits typically have a longer cycle time and higher costs than other compliance tools, so it is important that a thorough risk analysis is performed on the licensee’s reporting data and publicly available information in order to perform full scope audits of the right licensees.
Limited scope audits
The main difference between a full scope and a limited scope audit is the extent of testing procedures performed during the audit. An experienced auditor can identify the key risks for a particular licensee or group of licensees to determine the crucial areas for the review. While extensive testing related to pricing, discounts, product testing, or inventory analysis may be imperative for many licensees, some of these procedures can be minimized or removed for other licensees depending on the specific licensee’s environment, contract terms and the licensor’s evaluation of the licensee’s risk profile. Limited scope or targeted audits can significantly shorten the time for audit preparation and inspection, while generating significant ROI by prioritizing high risk areas.
Many licensors have begun to implement a process of performing limited scope compliance reviews of new licensees. This if often done on a milestone basis (e.g. six months after the licensee’s first reporting, or one year after the license agreement is signed). The benefit of these ‘educational’ audits is to gain comfort that the licensee has processes in place to accurately track and report payments due to the licensor. An early audit can also identify areas where contractual interpretations differ between the two parties and allow the licensor and licensee to come to a mutually acceptable agreement before the monetary impact is too significant, avoiding a costly dispute at a later date.
One option for performing a contract compliance review is to perform a remote audit without visiting the licensee in person. Benefits of remote audits include cost savings through eliminating travel expenses, increased flexibility on scheduling, and the potential for shorter cycle times. However, there are limitations to this approach, including inability to perform live walkthroughs of processes and interviews of licensee personnel, and inability to review live systems and data. Therefore, remote audits are typically performed only for licensees who do not have elevated risk factors.
Utilizing several of the compliance tools above is likely the best approach to ensure that you are collecting the royalties and license fees you are entitled to under your license agreements. The right balance of the compliance approaches above will vary depending on your licensing environment and licensee base. An experienced audit firm can advise you through this process.
Audits are not the only tool available for licensor’s looking to gain assurance regarding licensee compliance.
Data Analytics Based on Internal and External Data points
In most industries there is a wealth of data available internally and externally to licensors to identify the products that contain the licensors’ IP. Additionally, insight into approximate sales volumes of the relevant models can be gained through data points such as market research reports, licensee press releases or the licensee’s financial reporting. Top licensors have processes in place to gather and disseminate this data to proactively spot potential errors in licensee reporting. Identifying the relevant market data points is essential in helping licensors make the crucial decision of which licensees to audit and which compliance tool to initiate (i.e. whether a full scope or limited scope audit should apply), and also determine which licensees require immediate follow-up to address non-compliance identified based on the market data.
Connor Consulting Corp. (“Connor”) is a leading independent audit firm that specializes in contract compliance. Connor is a strategic advisor to industry leaders such as ARM, HDMI, Dolby and many others. Contact us today to explore the benefits of a contract compliance program for your organization: +1 (415) 578 5002 or fill out an inquiry at http://www.connor-consulting.com/work
About the Authors
David Gettelman is a director at Connor Consulting Corporation. David has over 10 years of experience in the technology, semiconductor, and consumer electronics industries.
Ana Newman is a manager at Connor Consulting Corporation. Ana has over 7 years of experience in audit, risk, and compliance services across the technology and finance industries.
Connor has managed hundreds of IP-related audits and have helped numerous companies collect lost revenue and improve their control environment and licensee base relationships. Connor has global teams with an average experience of 10+ years that specialize in IP royalty audits, third party review, contract compliance, and software asset management and license compliance.