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One of the initiatives of the EPO's Strategic Plan 2023 (SP2023) is to strengthen its governance. In 2020, the EPO focused on improving strategic alignment across the Office, streamlining decision-making processes and adapting priorities to the pandemic, all while increasing transparency.
Firstly, the Office streamlined its governance bodies and integrated its quality management more closely with its strategic and operational management bodies. Specifically, the Quality Board worked more closely with the Management Advisory Committee and the DG 1 Executive Operations Committee. An extensive review to improve the effectiveness, efficiency and timeliness of management workflows was also conducted last year.
The balanced scorecard (BSC) key performance indicators help senior management to monitor progress with implementing SP2023, evaluate its impact and fine-tune actions, if necessary. In 2020, the Office cascaded the BSC down to a directorate-general and principal-directorate level in a bid to more closely align efforts to achieve strategic goals.
Almost all SP2023 programmes and projects were formally approved and launched in 2020. Implementation priorities were reviewed throughout the year in light of the pandemic and a comprehensive development programme and support network was set up to grow staff project management skills and promote collaboration and peer-to-peer knowledge transfer. A year after the launch of SP2023, a lessons-learnt exercise was carried out on its implementation. This led to a shift towards pipeline-based delivery planning, consolidation of the project portfolio and a streamlined project management methodology.
To achieve excellence, the EPO also continued its journey towards implementing best management practices in 2020. The Office obtained ISO45001 certification for its occupational health and safety management and gained ISO9001 recertification for the patent process. The crisis triggered by the pandemic demonstrated that both the quality and the occupational health and safety management systems were working effectively, providing a solid framework for timely and effective reactions.
Applying the best practices of the ISO9001: 2015 standard to all areas of the Office is vital for efficient governance. Against this background, the EPO set up projects to extend the ISO9001 quality management system to the entire Office last year. A more structured form of reporting was also implemented in 2020. This not only increased transparency; it also fostered a deeper stakeholder understanding of how the efforts, actions and performance of the Office have unfolded during SP2023 implementation. This reporting included an annual work plan, annual review and regular reports to the Administrative Council.
Principal Directorate Internal Audit and Professional Standards continued to work independently and without interference in 2020. Its staff enjoyed full access to all documents and resources required to conduct their work, in conformity with the regulations in place.
Directorate Internal Audit (IA) successfully reduced the backlog of internal audits by delivering 18 audit reports. In 2020 the roles and responsibilities of all parties involved in the internal audit process were clearly defined and communicated to the EPO's senior management.
With audits conducted of the EPO's quality management system and its occupational health and safety management, IA contributed significantly to the Office's ISO9001 recertification and its initial certification under ISO45001. Based on a significantly simplified process to follow up on internal audit recommendations, IA expects to observe an increase in the ratio of recommendations implemented in 2021.
In line with international standards for internal auditing, IA underwent a highly successful independent external validation of its services. Certified compliance with the criteria of the German Institute of Internal Auditors reached 93% in 2020. This marks a 6% increase versus the previous external assessment.
The 2021 IA Annual Programme is based on senior management input and an independent risk assessment. It addresses audit subjects across the entire SP2023 and covers the Reserve Funds for Pensions and Social Security requirements. Based on the achievements of 2020, IA is set to further increase its efficiency and effectiveness and to establish itself as a value-adding service within the EPO.
To boost transparency and create a continuous improvement loop, the EPO set up a corporate exception handling procedure and register in 2020. The aim is to record all exceptions to rules and procedures in finance, procurement and HR. It will serve to facilitate reviews and highlight potential adaptations required of the Office's internal legal and financial framework.
In 2020, the EPO also launched a corporate risk management framework featuring a single corporate risk register. Risks are now properly documented and managed, with mitigating actions agreed in a structured fashion. The framework will become fully operational in 2021.
Finally, the Office started to combine all these initiatives into a holistic, integrated management approach. This aims to promote a culture of continuous improvement and reduce the duplication of resources or conflicting objectives across the Office.
Strengthening the EPO's external governance is central to the EPO's long-term sustainability. In 2020, the SP2023 external governance programme began to conceptualise ideas for enhancing the transparency and efficiency of the setup of the European Patent Organisation, for adjusting the Administrative Council's Rules of Procedure, and for modernising the Council's technological infrastructure. Once implemented, these improvements will reinforce relations between the European Patent Organisation and its member states, as well as other important external stakeholders.
In 2020, the EPO's Data Protection Office (DPO) was mandated to create and implement an enhanced and modern data protection framework for the EPO. This meant raising data protection standards at the EPO to safeguard the rights and freedoms of staff, customers, external stakeholders and partners.
Digital transformation - and especially teleworking - requires a different approach to privacy and security than working from centralised offices with in-person meetings. With the revision process initiated in 2020, the EPO's new data protection rules will be enshrined in its Service Regulations. This will fully align the EPO's data protection framework with best-in-class counterparts in international organisations and European data protection legislation.
To promote a culture of transparency and accountability, the DPO conducted an Office-wide campaign in 2020 to raise awareness of privacy and data protection among staff and management. The campaign aimed to foster a deeper understanding of personal data processing, as well as related checks and risks, and how to mitigate them through appropriate safeguards.
A key element of implementing the new framework is the EPO's new network of Data Protection Liaisons (DPLs) set up last year. The DPLs serve as the first point of contact for the Office's operational units, ensuring the DPO's timely involvement in any processing of personal data. The new DPLs underwent intensive training in 2020 and are already active in ensuring compliance within their respective areas.
Another milestone reached in 2020 was the DPO's introduction of a procedure to investigate and address security incidents that may impact personal data. In 2020, the DPO tackled several personal data breaches that occurred either due to human error or to a bug detected in IT systems. Remedial actions and preventive measures were defined by the DPO and implemented to address each breach and to avoid any recurrence in the future.
The DPO also continued to offer Office-wide support on processing personal data last year. The number of requests for advice submitted to the DPO in 2020 more than doubled versus 2019. This demonstrates a growing awareness of the importance of compliance and accountability in the area of privacy and data protection.
Lastly, in 2020, the EPO strengthened its co-operation with other international organisations and the European Data Protection Supervisor. Several initiatives were launched within the DPO's network of international organisations to foster synergies, the harmonisation of policies and procedures and the dissemination of best practices.
Financial Study Phase I and II
In 2019, the EPO commissioned a Financial Study conducted by the external consultants Mercer and Oliver Wyman. The study was published in 2019 in two phases: Phase I - Development of four scenarios; and Phase II - Developing measures to address the funding gap. After a careful analysis of the different parameters and global economic developments, the Office considered that the "Base 2 - Economic Cycle" scenario (assuming a global economic recession) was the most appropriate.
According to this scenario, the Office was facing a funding gap of EUR 3.8 billion over the next 20 years. On the basis of a sensitivity analysis evaluating the risk of a persistent low interest rate environment, the Office proposed to retain a EUR 2.0 billion buffer, bringing the coverage gap to be closed to EUR 5.8 billion. In view of the global economic downturn caused by the pandemic, the "Base 2" scenario has already become reality.
The bundle of financial measures
In 2020, the EPO focused its efforts on selecting an appropriate bundle of financial measures to close its funding gap. A package of six measures was submitted to and validated by the Budget and Finance Committee and the Administrative Council. The six measures are:
The bundle is expected to have a positive impact of EUR 6.4 billion on the coverage gap, leaving some room for manoeuvre if some measures fail to deliver the savings expected.
Implementation of these financial measures got underway in 2020. The new salary adjustment procedure was elaborated in consultation with staff representatives and unanimously approved by the Administrative Council in June. Its subsequent implementation took place in December 2020, which marked the end of the previous salary adjustment cycle and the beginning of a new six-year cycle.
The increase in the contribution rate to the Reserve Funds for Pensions and Social Security (RFPSS) was adopted as of 1 January 2020. The inflation-based fee adjustment was also integrated in the EPO's budget for 2021 (and in estimates for 2022-2025). The digitalisation measure remained in the investment phase throughout 2020 and is ongoing.
As for surplus cash transfers, a total of EUR 125 million was approved for transfer to the RFPSS by the Administrative Council , and transfers to the EPO Treasury Investment Fund are taking place in line with cash generation from the EPO's operations. The implementation of the other measures is monitored in the course of the EPO's regular financial management processes.
A comprehensive communication campaign on the Financial Study was also conducted in 2020 via multiple channels. It covered the proposed bundle of measures, the timeline for their implementation and the EPO's new salary adjustment method. A working group was set up with staff representatives to discuss the envisaged changes to the salary adjustment method. The Office also held extensive consultation rounds on the proposed financial measures to gather feedback from staff, staff representatives and external stakeholders. Changes to the salary adjustment method proposed by staff representatives were evaluated and presented to staff. Various deep-dive explanatory videos provided full transparency on the new method and were complemented by a lengthy list of FAQs and a special mailbox for staff input. The aim of this extensive communications campaign was to raise awareness of the EPO's long-term financial sustainability among staff.
Budget and finance
In 2020, the EPO achieved a standardised operating result of EUR 259m, which is EUR 95m (26.8%) below 2019, primarily due to higher staff costs.
On the income side, despite the challenges in 2020, the EPO was able to maintain high levels of production. As a result, income from procedural fees was only slightly below that of the previous year (EUR -3m or -0.3%) in 2020. In terms of renewal fees, internal renewal fees are down by EUR 34m, reflecting the evolution of the EPO's stock, while national renewal fees are up by EUR 16m, driven by the increased number of grants in recent years. The total operating income in 2020 was EUR 1 986m, slightly below that of the previous year (EUR -36m or -1.8%).
On the cost side, higher current service costs and the fact that many staff postponed leave led to an increase in staff costs. Staff costs rose by EUR 59m last year compared with 2019, while non-staff costs remained at the previous year's level. Non-staff costs remained unchanged, as lower costs due to cancellation of travel and switching to online meetings offset investments in IT equipment and other COVID-19-related cost increases.
The budget surplus for 2020, after investments in the capital section, amounted to EUR 349m, exceeding forecasts but remaining below the 2019 figure.
Moving on to IFRSs, the operating result for 2020 was a loss of EUR 537m, marking a deterioration versus 2019. This was primarily due to an increase in the current service cost for employee benefits resulting from a lower discount rate applied in 2020.
In 2020, the EPO generated a financial profit of EUR 221m, mainly resulting from gains on Reserve Funds for Pensions and Social Security assets (EUR 423m) and the EPO Treasury Investment Fund (EUR 133m), reduced by the interest cost on the defined benefit obligation (EUR 337m).
The value of the Reserve Funds for Pensions and Social Security assets at the end of the year was EUR 10 343m and the EPO Treasury Investment Fund closed the year at EUR 3 138m. The EPO's total assets amount to EUR 14 729m.
The equity of the EPO increased by EUR 0.8bn in 2020, primarily due to high actuarial gains resulting from the impact of the new salary adjustment method. At the end of 2020, the EPO's negative equity amounted to EUR -16.9bn.
Despite the turmoil in global financial markets caused by the pandemic, the EPO Treasury Investment Fund (EPOTIF) achieved a profit of EUR 133m in 2020. This represents an annual return of 4.4%.
In the two and a half years since its launch, EPOTIF has generated an annualised return of 4.6%, which is slightly above the long-term target of 4%. During this period, the total profit generated by EPOTIF amounted to EUR 361m and contributed to the EPO's long-term financial sustainability. The results achieved to date validate the EPO's investment strategy of focusing on long-term returns regardless of short-term market volatility.
In 2020, the EPO transferred EUR 50m from its cash surplus to EPOTIF, taking total transfers since inception to EUR 420m. In June 2020, the Administrative Council decided to invest 60% of the Office's annual cash surplus in EPOTIF.
The investment model of using an external administration company (KVG) and the internal governance framework implemented in 2019 has proven robust during the pandemic. In the review performed by external auditors in July 2020, the EPOTIF setup was once again certified to be of high professional quality.
At the time of EPOTIF's launch, the Office committed to the Budget and Finance Committee to review the EPO Investment Guidelines within three years. The review is scheduled to be completed by the end of the second quarter of 2021.
The EPO is fully committed to promoting sustainability and reducing its environmental footprint, with the overarching goal of going CO2-neutral by 2030. In 2009, the Office adopted the Eco-Management and Audit Scheme as the framework for minimising its environmental impact and fostering a sustainable work environment for staff. In 2020, initiatives launched by the EPO under SP2023, and accelerated by developments related to the pandemic, delivered some impressive early wins.
The digitalisation of workflows in the EPO's core processes, for example, led to a dramatic drop in paper consumption. In 2020, the EPO used 58.7 million fewer sheets of paper than in 2019, representing a significant decrease of 47.5%. An 80% decrease in duty travel during 2020 also resulted in a drastic reduction in CO2 emissions. This was largely due to the pandemic, but accelerated a positive trend proactively supported by changes to the EPO's travel policy in favour of online meetings. Similar trends were seen in the generation of waste, which decreased by 39.8% compared to 2019.
In addition, a series of awareness-raising activities including digital seminars and the Global Digital Clean-up Day involved staff in fostering "greener IT" and "green by IT" solutions at the EPO.
Public trust in the EPO and its services
As a public institution, the EPO provides services for civil society, users and partner offices and organisations. To this end, it is essential that the EPO provide tools and products that are readily available, recognisable and usable. But it is equally important that the public can fully rely on the services and information offered under the name of (or associated with) the EPO, and that the EPO ensures that its name and position - and the trust it is afforded - are not used for unauthorised purposes or by other parties. To preserve the public's trust in the EPO and its services, the Office initiated the "IP strategy" project under SP2023 in 2020.
As a global standard-setter in IP, the EPO also has an active role to play in raising awareness of patents and their positive impact on the economy and society. The "Outreach and awareness" programme aims to inform and inspire the general public, younger generations and the local communities of the EPO's host cities. With this programme, the Office aims to:
Key achievements in 2020: