12 September 2021

It’s Farewell to Shelston IP, as IPH Executes Another ‘Integration’

IntegrationThe corporate behemoth that is IPH Limited (ASX:IPH) – which at close on 10 September 2021 had a market capitalisation of A$2.00 billion, and was trading at a near-all-time-high of A$9.270 – has, through a series of acquisitions and ‘integrations’, brought about the demise of a number of well-known names in the Australasian IP firmament.  Fisher Adams Kelly, Callinans, Cullens, Watermark and Baldwins are all brands that, until not so long ago, were familiar to anyone with an interest in the IP services market, but which no longer exist.  And on 8 September 2021, IPH announced [PDF, 98kB] that Shelston IP is next in line.  Shelston IP will be integrated with Spruson & Ferguson Australia, with the combined firm operating under the Spruson & Ferguson brand from 1 November 2021, at which time the Shelston IP brand will be retired.  Full systems integration is expected to occur in December 2021.

Ironically, at the time of writing, the ‘About us’ page (Wayback Machine archive, for posterity) on the Shelston IP web site summarises the firm’s history as follows:

Shelston IP has provided excellence in intellectual property for over 160 years. Throughout this time we have developed deep relationships with our clients including with some of the world’s most recognisable companies; relationships that span more than fifty years. Like our clients we never stand still and have innovated, grown and aligned our business for success ensuring we will still be here in another 100 years.

Sadly, this is not to be, and many (me included) will be sad to see the demise of yet another firm with such a long history.  But IPH – unlike Xenith IP Group Limited, the listed entity that Shelston IP itself established and which went on to own Watermark and Griffith Hack before being acquired by IPH – has been uncompromising in its determination to generate greater efficiencies and profitability from its stable of firms.  And while IPH is not without critics, both within and outside the profession, it is no mean feat to build a A$2 billion company.  By my estimation, this now makes IPH large enough for inclusion in the ASX 200 index.  Love it or hate it, according to established financial metrics, IPH is a hugely successful enterprise.

I have taken a look at some of the data on changes in the number of patent attorneys at firms within the IPH group over the past 18 months or so, as well as the group’s patent filing numbers over the past financial year, to try to get a sense of where the IPH businesses may be heading.  I was also fortunate to have the opportunity to speak with IPH CEO, Dr Andrew Blattman, on Friday 10 September 2021.  In what follows, I will present a few of my observations, along with relevant comments from my discussion with Dr Blattman.

Dr Blattman is, of course, the CEO of a listed company, and he has obligations to shareholders and the market that may limit what he can say publicly, and which at the same time constrain him from misleading the market in any way.  Not everyone (including me) will agree with everything he says.  However, I have done my best to accurately report his comments without distorting or misrepresenting his views.  (I have used the blockquote style when reporting Dr Blattman’s comments to clearly differentiate them from my opinions and commentary, although it will be obvious from the context that they are not exact quotes.)  I am not trying to engage in hard-hitting journalism here, just to be a source of information and opinion.  And please keep in mind, if you choose to engage through the comments section at the end, that the High Court has just confirmed that I am legally responsible for any defamatory content you may post!

Patent Attorney Numbers Declining in IPH Firms

Based upon the contents of the Register maintained by the Trans-Tasman IP Attorneys Board (TTIPAB), the number of registered patent attorneys employed by firms within the IPH group declined substantially between January 2020 and August 2021.  There are, overall, 36 fewer attorneys – a drop of 20% from 186 to 150 – across all firms now in the group (including Watermark, which has since been integrated into Griffith Hack, and Baldwins, which was acquired and integrated into A J Park).  The exodus has been most pronounced at Griffith Hack, (down by 25%) and Shelston IP (down by 22%).  Patent attorney numbers at both Spruson & Ferguson and A J Park are down by around 16%.

On present numbers, when Shelston IP is integrated into Spruson & Ferguson in November, the resulting firm will employ only 10 more patent attorneys than at the start of 2020, despite having absorbed an entire additional firm.  This would – at least temporarily – make it once again larger (in terms of patent attorney numbers) than FB Rice, which in recent years has grown to become Australia’s largest firm on this metric.  It is not hard to imagine, however, that departures from the merged firms may continue for a little while longer.  I can easily foresee a situation in the next year or two in which, while Watermark, Baldwins, and Shelston IP have ceased to exist, Spruson & Ferguson, Griffith Hack, and A J Park are nonetheless no larger than they were before the integrations.

It is worth pausing to ask whether this is necessarily a bad thing.  Certainly the environment and culture at the IPH group firms is likely be different from that of a privately held firm, in which the business owners work among the other employees.  It is to be expected that IPH would place a greater emphasis on efficiency and profitability than might be the case at a privately held firm, where the owners may have other priorities, in addition to profitability.  Such an environment will not suit everybody – particularly patent attorney ‘traditionalists’ – but there will be others, perhaps including younger and less traditional members of the profession, who will thrive within a more corporate framework.  Meanwhile, a number of attorneys who have departed IPH firms have gone on to establish new smaller firms, some of which will themselves create opportunities for people who have a preference for that type of work environment.

As Dr Blattman sees it, given the maturity of the market, a number of the IPH businesses were not ‘right-sized’, which is what drives the integration strategy.  He said that when IPH acquired Griffith Hack (with the rest of the Xenith group) its profitability was sub-20%, i.e. that along with the other Xenith businesses it was not highly profitable.  However, he believes that where the businesses are now, the direction they are taking, and the way they work, is very different from when IPH took over, enabling them to operate with a reduced head count.  Dr Blattman also noted that much of the incoming agency (i.e. foreign client) work does not require, throughout its life-cycle, the constant attention of a patent attorney, and can be systematised.  He acknowledged that it is different with local clients, but noted that the volume of local client work has been in decline for a number of years in any case.

There is nothing very surprising here.  Nearly three years ago I observed, based on filing data and financial information in the listed companies’ annual reports, that incoming foreign agency work (i.e. filing and prosecuting Australian applications for overseas clients) is more profitable, and less intensive in professional time, than domestic client work.  At that time, firms in the IPH group were doing a greater proportion of agency work, and were collectively filing twice as many patent applications per attorney, than firms in the QANTM and Xenith groups.  I am not sure, however, that this implies that IPH would want to see all domestic clients go elsewhere.  Good quality Australian and New Zealand clients are a potential source of referral work for IPH’s other businesses within the Asia-Pacific region, and the company has previously cited acquiring such clients as a benefit of its acquisitions of firms, such as Watermark and Griffith Hack, that have traditionally maintained a larger share of domestic client work.

On the issue of professional staff who choose careers within the corporatised structure of a group like IPH, Dr Blattman argues that the IPH model creates more opportunity for the next generations of associates, senior associates and principals.  One of the group’s hallmarks, he says, has been the ability to give promotions to people which otherwise – in a mature market – would be very hard to find. 

Of course, there is a significant difference between being a principal in title, drawing a salary, and being a principal who is an equity partner in the business.  But my position has always been that there is a place for both types of role.  For a person who wants more seniority and responsibility, but perhaps without the additional financial commitment and stress that may come with business ownership, a salaried principal position in a corporate firm structure is ideal.  And it is something that really didn’t exist to any great degree in the Australasian patent attorney profession until the listed group model arrived.

Huge Patent Filings for Combined Firm, While IPH is ‘Under Market’

In July, I reported on firms’ patent filing performance over the 2021 financial year (July 2020 to end of June 2021).  Overall, thanks to a strong resurgence in filing in the first half of the 2021 calendar year, the total number of Australian standard patent applications filed in FY21 was up by 3.6% over FY20.  However, all of the IPH firms’ numbers were down, with the exception of Shelston IP, which was up by 17.5%.  At the other extreme, Griffith Hack’s standard patent filings were down by 14.2%. 

While noting that Shelston IP benefited from handling a large proportion of OPPO’s Australian filings [editorial note: the Chinese telecommunications company filed 301 applications though Shelston IP in FY21 – nearly 15% of the firm’s total], Dr Blattman acknowledged the overall decline.  He conceded that IPH group is presently under market, noting that Griffith Hack in particular saw a large decline in filings.  IPH filings were down 8% at the AGM in November 2020, down around 5.8% at the half year, and down about 4.5% at the full year.  Dr Blattman also observed that if Griffith Hack were to be removed from the figures, the remainder of the group would have been up by about 0.7%.

The integration of Spruson & Ferguson and Shelston IP will create by far the largest and most prolific patent filing firm Australia has ever seen.  If all of the two firms’ standard patent filings had been combined in FY21, that would have been a total of over 6,500 applications – more than double the number filed by second-placed Davies Collison Cave.  However, the integration of the firms is likely to lead to some attrition of both staff and clients, for a variety of reasons, and I wondered whether Dr Blattman had any sense of how large that effect might be. 

While Dr Blattman (unsurprisingly) did not have a specific number or fraction, he did concede that there would be some loss in overall filings.  He identified three sources of loss that can occur through integrations.  Firstly there are losses due to legal conflicts that may arise, although this is relatively rare considering that legally contentious matters – primarily oppositions and litigation – are not common in Australia.  Secondly, there are commercial conflicts, i.e. where clients not actually involved in any dispute are nonetheless competitors that have valid concerns about the potential for conflicts to arise.  Dr Blattman indicated that this has also been rare in the integrations IPH has completed, noting that clients have the opportunity to move to another IPH firm, while also recognising that sophisticated clients make their own decisions about where they take their work.  Thirdly, there are professional staff who decide that the integrated firm is not where they wish to be.  This may result in clients following – most commonly local clients where there is a personal relationship, but potentially also some international clients where there is a relationship with a particular associate.

So while IPH recognises that there is a a trade-off in market share and filing numbers with integration, ultimately the advantages of the profitability improvement, and the reset going forward, make it worthwhile.

Dr Blattman noted that with Watermark and Griffith Hack, there was a very small number of corporates that chose not to come into the Griffith Hack business, and probably a larger number of domestic clients (considering that Watermark had a relatively larger domestic client base compared with Spruson & Ferguson and Shelston IP).  He observed, however, that not all domestic clients are equally valuable.  He anticipates that while some clients will probably choose to leave the integrated business, he does not believe that Shelston IP has a large number of these kinds of clients.

On the ‘Retirement’ of Well-Known Brands

One aspect of IPH’s merger strategy that I have found curious is its fondness for ‘retiring’ venerable, and valuable, old brands.  In a historical quirk, Watermark, Baldwins, and Shelston IP could all lay some claim to be descended from Australia’s oldest patent attorney firm, Edward Waters and Sons, which was founded back in 1859.  But by the end of this year all three will be gone, presumably forever.  These brands all possess an enviable reputation, being familiar not only in the Australian market, but to associate firms around the world. 

Many merged businesses – and perhaps particularly in professional services – opt to continue trading, at least for a period, under a compound brand in order to capitalise on existing brand recognition.  So why not a ‘Griffith Hack Waters’, a ‘Park Baldwins’, or a ‘Spruson | Ferguson | Shelston’?

Dr Blattman expressed the view that there are two schools of thought on whether combining brands is the best approach.  He mentioned work by consulting firm McKinsey which suggests that when you bring the two brands together in some form of combination, it may have the effect of weakening both.  So there is work from branding experts that goes both ways.  IPH thought carefully about the options, but ultimately needed to make a decision one way or the other, and has adopted a consistent approach of retiring one of the brands when integrating businesses.

Conclusion – A Focus on Foreign Clients?

There is a pretty clear pattern emerging through firm integrations within the IPH group: fewer firms; fewer patent attorneys overall; and a higher ratio of patent filings per attorney.  This necessarily implies a greater focus on foreign agency work (i.e. incoming filings from overseas applicants), because this is the work that can most effectively be systematised to reduce the intensity of attorney attention required.  It is harder to improve efficiency and profitability of domestic client work, because this fundamentally requires attorneys to be hands-on with the client, their business, and their technology.  This makes it difficult to reduce the professional time involved without adversely affecting service levels.

That is not a bad model if profitability is the main objective.  Foreign originating applications (i.e. those without any Australian resident applicant) made up 91.7% of all Australian standard patent filings in FY21, compared with 91.3% in FY20, 91.1% in FY19, and 90.8% in FY18.  So, while the year-on-year changes are not large, the trend is clear and consistent.

This almost certainly does not mean that IPH firms – and most particularly Griffith Hack, which has the largest proportion of domestic client work within the group – will cease to provide services to local clients.  For one thing, many attorneys find this work the most interesting and rewarding.  And there are other benefits to IPH in retaining a domestic client base.  These include the potential to refer work to its other businesses within the Asia-Pacific region, and to provide reciprocity to help build relationships and generate work from associate firms around the world (although Pizzeys success in building its business almost exclusively from foreign agency work is proof that reciprocity is not the essential ingredient in winning work from foreign associates that many attorneys believe it to be).  But it is likely that attention within IPH firms will increasingly be focussed on the quality of domestic clients, because it is simply not consistent with the business model for attorneys to be spending time on low-value clients.

While IPH is having success in improving profitability, it is less clear how it might achieve growth within its Australian and New Zealand firms.  The integration strategy in fact has the opposite outcome – there are, as noted above, fewer firms, fewer attorneys, and lower filing numbers, than prior to the integrations.  The domestic market is stagnant – and possibly declining – while the market for foreign agency work is showing only modest growth over time.  And there are no further obvious acquisition targets among the privately held attorney firms.  IPH may need to look further afield for its next move.


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