How prepared is your organization to deal with the anticipated downturn, and the negative financial consequences that will inevitably follow?
There is a whole battery of strategies and measures you are probably thinking of to mitigate some of the risks: scrutinizing spending, deferring investments, vendor re-negotiations, or maybe even layoffs. The truth is that no one can predict the impact of the next recession. There is no silver bullet to forecast by how much orders will decline, how revenue will be impacted, or how exchange rates might fluctuate and impact your bottom line.
With that much uncertainty impacting your business, you want to look at some strategies to counterbalance these threats. Creating, or stepping up, your license compliance program might just be the right move as it protects your licensing revenue from erosion and brings back unpaid royalties. And the great thing about license compliance revenue is that it is oftentimes a high-margin strategy!
Stopping revenue erosion
When you start to actively monitor your supply chain and your licensees through comprehensive compliance measures (such as audits, marketplace monitoring, or licensee outreach campaigns), you are sending a strong message: that you are looking closely at your revenues and that you are serious about payment discipline. Doing a sporadic audit does not help. You need to audit a large population of your licensees across all geographies over a long period of time. Don’t just cherry-pick but perform strategic targeting exercises and get buy-in internally to also audit large customers. What you will quickly see is that payment discipline improves, and licensees start paying more attention to reporting and paying more accurately as audits can become expensive (contractual clauses oftentimes dictate interest on unpaid royalties, or passing on audit costs on to the licensee if a certain threshold is surpassed). Receiving payments through the “front door” is always better as audit settlements rarely obtain one hundred cents to the dollar. The time-cost-of-money cannot be underestimated here.
Bring back unpaid royalties
Performing audits should be the gold standard for you if your licensing revenues constitute a significant portion of your total revenues. Auditing helps you to get a better understanding of how your IP is being used, how well the internal controls of your licensees are, and to ensure that any incorrect reporting is highlighted and unpaid royalties are brought back to your organization.
Of course, you’ll need an experienced audit team that can help you get the most out of your IP. There are also many different strategies on how to set up an audit team. You can do 100% in-house, or you can outsource all those activities to an experienced partner. It all depends on your resources, and time horizon. While auditing does bring tons of revenue back, it comes at a cost beyond the cost of auditing: settlements are rarely a zero-sum game. You will need to sit down with many of your licensees and negotiate a settlement.
While there will be cases where you will recover 100% of the unpaid royalties (plus interest and contractual charges), most often you end up finding a middle ground. The problem is exacerbated if you didn’t audit for a long time (or ever!) and all of a sudden an audit reveals millions of dollars of unpaid royalties. There might be malicious intent of under-reporting, but it could have also been a human mistake, which led to the error becoming the norm and now you have to settle for less than 100%. (right, stop the erosion!)
While the revenue consideration clearly is exciting and important, many organizations have a hard time implementing the right program. I think there is a misconception on how to view the compliance organization. I have written about it previously, but the shift must be from a cost-center to a profit-center setup. The portfolio of compliance activities is super profitable if executed correctly. You can expect an ROI of 10x, oftentimes more than 20x in the first year alone. Once you look at the compliance function from a profit perspective and be able to realize the returns, you will wonder why you hesitated for so long.
In summary, as you can see the value of setting up a compliance program and how it can offer a solid line of defense against an upcoming economic downturn. And once you are at it, compliance is just good governance and should become part of your corporate DNA at all times.
Let me know if you agree and what you think in the comments. Thanks!