Thursday 9 April 2020

Darren Olivier

Covid Predicting - To Boldly Go Where You Have Not Been Before.

Right now, trying to understand the financial effect of Covid-19 on one’s trade mark practice may be as futile as predicting the murderer in an Agatha Christie novel and it’s certainly not as fun. One also does not have the luxury of sitting back and enjoying the twists as they play out. Livelihoods and businesses are quite obviously at stake. This exercise in apparent futility has therefore become necessary. Fortunately there are benchmarks and characteristics of a trade mark practice that one can use to assist attempt this. I approach it from a South Africa perspective but it may be useful for other countries, particularly developing countries.

We know the following:
  • Traditional trade mark practices, especially in countries like South Africa that have not adapted to regional or international filing or multi class systems, strongly rely on filing numbers for their well-being.
  • Filings have a knock-on effect within the business and movements can be felt even decades into the future in renewal departments. Depending on examination and publication time rates they can be used to predict income in short and the medium term. They also tend to underpin opposition-based practices (more about this later).
  • National trade mark filings are closely in tune with movements in global share price indices. Both the .com fall in 2001 and the 2008 financial crisis reflected in the S&P financial index, lead to almost identical declines in trade mark filings at the major registries. But for a short lag, filings dropped and rebounded in unison with the index. This is illustrated below. The Covid crisis has shown itself though, to be more severe.

    S&P Index 1999-2015 (Wikipedia)
    Trade Mark Filings Africa (WIPO)

    Trade Mark Filings South Africa (WIPO)

    Trade Mark Filings USA (WIPO)
  • Emerging market economies, like South Africa, are generally harder hit than developed economies because they are a net importer of IP and are consequently at risk of greater movements in filings albeit that the graphs above indicate that the effect on trade mark filings is almost equal.
  • Movements in GDPs (mostly calculated every quarter) are typically predicated by stock indices and foreign exchange rates which provide a more immediate indication of a trend. However, they can also be volatile in the short term. Both are therefore useful benchmarks in understanding what will happen.
  • As the United States is still the largest filer of trade marks outside it borders, it stands to reason that developments in the US need to be monitored closely, including the effect of stimulus packages.
  • Most emerging markets are cushioned by their currency. Trade mark law firms tend to invoice in dollars or other relatively strong currencies. This generally means that a reduction in volume of filings is buffered by the foreign exchange gain in the dollar price per filing. Indeed, in bad times, IP firms often perform very well or at least benefit from the built-in hedge.
  • Large and long standing trade mark filing practices have a very diverse client base meaning that the vulnerability of one industry or sector is often balanced by the well being of another. Whilst Covid-19 almost certainly has universal impact, there are sectors that are likely to benefit. This is includes healthcare, food and agriculture, telecoms. 
  • The effect on contentious practices (oppositions, counterfeiting, litigation) in the short-medium term is more affected by direct austerity measures, delay and a reluctance to litigate unless necessary. Counterfeiting, on the other hand, is likely to increase especially in online trade. If there is a lockdown in the courts, this naturally slows down the litigation process and hence the flow of funds.
  • Well directed and efficient outsourcing practices stand to gain out of the pandemic. As price pressure rises within businesses, the need for more cost-effective solutions becomes paramount. The rapid drop in the exchange rate (caused by the pandemic and also by the Moody downgrade in the case of South Africa) create currency arbitrage that a trade mark practice could take advantage of.
  • Trade mark practices with strong local filing practices can expect declines in their business in line with economic trends in South Africa and do not have as much to gain from the currency weakening (indeed foreign licenses for databases and management software have just become significantly more expensive). This is so unless the client base happens to focus on sectors that are niche and resilient.
  • The effect of digital transformation driven by home-based lockdowns, the reduction or cancellation of expensive overseas trips for business conferences in the short term and the need for effective online marketing create both opportunities and risks for business that affect bottom line.
  • More resource and cost will be required to chase debtors and manage cash flow as lock-up periods increase, companies go out of business and pressure is bought to bear on firms by long standing clients trying to manage their own cash flows. Leadership also comes at a price as partners will be required to spend more time leading, communicating and managing their teams more effectively.
  • Among all this turmoil and possible gloom, is the realisation that this is a pandemic, which by its very nature, is global problem. We are all in it together. Unlike many other businesses, a diverse trade mark filing practice is generally resilient, representative (every business has a trade mark), delivered online and capable of export. These are very fortunate advantages to have.
  • Remember that any trade mark firm that has routinely attempted to predict its currency volatility for budgeting and hedging purposes has been humbled many times. This prediction has similar unknowns.
  • At some point in time, economies will bounce back. This is reflected in the performance in the Rand after extreme undervalued levels. Those in the "know" appear to be predicting that this could occur as early as the third quarter of 2021.

Having said all this, what is the practical solution to determining the impact on one’s own business from a fee perspective only? This is a formula one could try:

Step one: obtain your client list and fees per client, separate it between local and overseas based clients. You could also split it into US and other for the overseas based clients.

Step two: identify any clients who you think may benefit or partly benefit. It is not likely to be many. You can do this based on your knowledge of their business, by analysing their share price or even asking them. The rest will decline. If the client is another law firm, try to assess who they represent and perhaps their own financial standing or vulnerability.

Step three: try and identify by how much they will decline or increase. Ideally you would want to do this for every client but if this is not possible, separate them out into sectors, find an appropriate benchmark (again share prices in those sectors may be useful) and mark that against each of the clients in those sectors. The Goldman Sachs bar graph above could be helpful.

Step four: for the overseas based clients include the currency hedge. If the Rand does bounce back as is predicted, it is likely that the economic effects of Covid will also have tapered off.

Step five: factor in aspects like a lag effect (given the dramatic drop off this might not be much), any areas of work that you may know, for other reasons, could profitable e.g. any outsourcing, adjusted fee losses (time spent elsewhere) for additional marketing, debt control or management, and then add a dose of just plain common sense.



Make a prediction.

Darren Olivier

Darren Olivier

Subscribe via email (you'll be added to our Google Group)