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February 22, 1999

Protecting Innovation

IT systems are more valuable than ever, so CIOs are guarding their companies' investments

By Justin Hibbard

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anaging intellectual capital, once the responsibility of business managers and accountants, is becoming a priority for IT professionals. A company's most valuable assets now include proprietary information systems, business methods enabled by IT, and developer know-how--all vital elements of intellectual capital. But are companies getting the most out of these assets? More important, are these assets protected? Astute IT executives are scrambling to ensure that the organizations, methodologies, and technologies they've taken years to assemble aren't taken for granted--or vulnerable to poaching.

Several recent court cases have thrust those issues to the forefront. In a case that could set a precedent governing ownership of IT workers' knowledge, Wal-Mart Stores Inc. is pressing a lawsuit filed late last year against Amazon.com that alleges theft of trade secrets. And scores of E-commerce patent applications are flooding into the U.S. Patent And Trademark Office each week following a Supreme Court action last month that affirmed that business methods linked to software can be patented.

Those legal maneuverings have some companies worried. "These Internet patents keep me awake at night," says Chris Schenken, intellectual property and technology counsel at United Parcel Service of America Inc. Schenken is afraid not only that UPS will be left behind by its competition, but also that the company will violate IT-related patents it didn't know existed.

Savvy technology managers now use a combination of legal defenses and common sense to protect and exploit their companies' most innovative IT systems and to encourage and retain their most talented IT personnel.

Generally, IT managers don't think this way. "CIOs are fast asleep," says Jay Walker, chairman of Walker Digital, an intellectual property laboratory that specializes in IT patents. Instead of being just enablers of business, says Walker, "they're actually inventors of new business methods that are valuable and can be owned."

Accountants are working on ways to quantify so-called intangible assets, which include custom software, IT employee know-how, and other intellectual property--a subset of intellectual capital that's protected by patent, copyright, and trade secret laws. For example, SOP 98-1, a new accounting rule from the Accounting Standards Executive Committee, requires companies to treat software developed for internal use as an asset on their balance sheets.

"The IT capabilities of companies are becoming one of the indicators that stock analysts look at as they evaluate the potential of a company," says Kathy Harris, a research director at Gartner Group Inc. "There are many assets that an IT organization brings to a company, and finding some way to put them into a tangible representation is becoming more important to CIOs."

Software and business methods made possible by IT are even used as bargaining chips. Chase Manhattan Corp., which holds patents on an imaging system for checks and a highway toll-collection system, uses those and other IT assets as negotiating leverage, particularly in joint ventures, says Mark Kesslen, VP and assistant general counsel at Chase. "We have certain lines of business that operate as high-tech businesses, and in those, we view intellectual property as a type of currency," says Kesslen. "It's a competitive advantage."

That's why companies are increasingly sensitive to the vulnerability of their IT assets. "When we put together information or build systems that took a lot of brain power and effort and are particular, then we ought to be able to protect them," says Wal-Mart general counsel Robert Rhoads.

In Wal-Mart's case, the company accuses Amazon.com; its CIO, Richard Dalzell; Drugstore.com; and venture capital firm Kleiner Perkins Caufield & Byers of hiring 14 former Wal-Mart IT professionals who, Wal-Mart alleges, when working as a group in their current positions, will inevitably share their knowledge of Wal-Mart's distribution, logistics, merchandising, and data warehouse systems--all Wal-Mart trade secrets. It's an argument based on a controversial doctrine of intellectual property law known as "inevitable disclosure." In an affidavit filed with the original lawsuit, Wal-Mart CIO Randall Mott says the defendants were "very surgical" in their selection of Wal-Mart's IS employees, choosing people with deep knowledge about specific parts of Wal-Mart's proprietary systems (see story, p. 64).

Wal-Mart considers these systems--it lists 44 programs--critical to its hyperefficiency as a supply-chain partner, customer-service innovator, and, ultimately, a $115 billion retailer of consumer goods. According to language in the original lawsuit, Wal-Mart's information systems have given the company "an enormous competitive advantage against other retailers by enabling it to reduce its inventory substantially, while continuously im- proving its ability to respond to the demands and buying habits of its diverse customer base."

Certain Experiences
Robin Reed, principal at the Reed Group LLC, the recruitment firm that hired former Wal-Mart employees for Amazon.com, denies that her firm chose candidates for their knowledge of Wal-Mart's proprietary systems. "What we hope to gain when we recruit someone is their interpretation and their understanding of a certain set of experiences," Reed says. "We don't want trade secrets."