IP SHARING : BENEFITS vs RISKS

What is intellectual property(IP)?

Copyrights, trademarks & patents that is all that was considered as IP but its definition has been changing & it has widen its coverage. Now IP also constitutes processes and techniques, methodology and talent described by many experts as intellectual capital.

So, Why IP sharing is a cause of concern in recent times?

Importance of Intellectual property varies with different types of business. While Software development outsourcing requires a high level of knowledge sharing between customer organization and vendor. Consequently, IP rights of stakeholders are involved in one form or another. Thus intellectual property management has become increasingly important for businesses utilizing offshore/nearshore outsourcing. 

What IP rights are conventionally involved?

Outsourcing and shared services arrangements inevitably involve the creation of and use of a variety of IP rights. Typical examples would be patents or expertise relating to technology, products or processes required to provide the services, copyright in software, manuals, publications or reports produced or used in the services and confidential information including expertise or commercial trade information that a supplier may be exposed to during the course of the services.

Importance in IT services outsourcing.

Intellectual property rights are absolutely critical in IT outsourcing. An IT outsourcing inevitably involves the taking over of the service from the customer's IT in-house function by the service provider which actually means the taking over of the know-how, software, and hardware that currently provide those services. Therefore, all that knowledge, computing operating systems, software, information and data they process (customer data, training materials, tools, and other technology, customer guidelines and procedures, processes and methodologies used by the customer and any improvements on those that the customer or provider make) are protected by intellectual property rights which must be safeguarded. Furthermore, it is important to consider whether different intellectual property rights apply simultaneously to one " product" such as software. Therefore, specifying ownership is vital.

Concerns regarding intellectual property created & being improved or to be created.

Intellectual property that a company has to consider can be classified in two kinds first when it is already created on which the other side has no right, these are intellectual property assets that come into the relationship before concluding the agreement. On the other hand, during the outsourcing relationship, both sides will cooperatively improve or create intellectual property. In this case, since both sides work together to create new patents or know-how, this is going to be protected by trade secrets. The right to this type of intellectual property is different and the two companies must decide how these rights are distributed. 

Exceptional concerns regarding the IP that is improved or created during the outsourcing agreement.     

The other kind of intellectual property that a company has to consider is the intellectual property that is improved or created/invented, during the outsourcing relationship. It is crucial for both parties to discuss this issue and include relevant provisions in their agreement. The customer will try not to lose intellectual property ownership in its pre-existing works just because the outsourcing service provider made some improvements. On the other hand, the outsourcing provider will probably demand the intellectual property ownership in the improvements and will also attempt to acquire ownership of any part of the pre-existing work that is related to the improvements. 

 So, what's the solution?.

One approach could be that if the intellectual property that is improved or modified or created is unique and specific to the customer's business, then the customer will want to own it. However, if the intellectual property is generic to the outsourcing business or necessary for the provider to provide services to others, the service provider will typically try to retain its ownership. If either side retains ownership of certain intellectual property, the other side should try to obtain a license to use/exploit that intellectual asset. So It is important for the customer to know whether the service provider is planning to use the software for serving more customers. If that is the case and if the customer believes that by serving other customers, the customer will eventually lose their competitive advantage then the customer must try to prevent the software being used to service its competitors by refusing to grant to the service provider any such license to use it. 

                                                      

 Another approach would be for both the customer and the service provider to own jointly developed intellectual property. Joint ownership in the intellectual property sounds to be a fair approach in cases where the customer and the service provider worked together to create, improve or develop it.

For SMEs & startups.

Intellectual property is one of the company’s most valuable assets. This is especially true for SMEs and startups where it can be the only tangible asset. Risks of not protecting IP are further escalated when outsourcing comes into play. That’s why customer organizations must effectively deal with related issues & use all types of IP protection: physical, electronic and legal.

There has to be proper due diligence...

Prior to concluding any outsourcing initiative customer organizations should conduct IP due diligence and risk assessment. As a result, the company will be able to safeguard its intellectual property and clearly define which functions should be kept in-house and which can be outsourced.

                              

Following indicative steps could be taken:

IP due diligence may include the following indicative steps:
• Identify areas of critical importance to your business
• Carefully assess business knowledge and determine if moving it outside the company or to an offshore location will compromise company practices
• Identify and document all of the IP assets associated with the outsourced task
• Determine ownership rights in the identified IP
• Carefully review third-party or jointly- owned IP
• Identify existing or alleged breaches of contract, infringements, disclosure of confidential information and trade secrets
• Assess how well the legal infrastructure in the foreign country will protect IP rights
• Determine jurisdiction and enforcement (applicable laws, their enforceability, dispute resolution mechanisms)
• Define termination, expiration or exit clauses of arrangement
• Determine other IP-related responsibilities if applicable: ongoing maintenance and upgrades to the IP; payments of transfer fees; product liability, IP insurance, etc.

                                                        

After exhaustively conducting IP due diligence, the company can proceed to the evaluation of potential outsourcing partner. Results can be used during negotiation of outsourcing agreements to provide for IP-related issues that may arise, & also to consider which Intellectual properties can be outsourced. 

To conclude..

As with most issues on outsourcing or shared services projects, preparation is everything and the best time to get the details right is at the beginning of a project when the supplier is keen to win the work, competition is at its fiercest and you still have the ability to choose another supplier if you had to. Getting it right in the early stages can prevent many battles later on.

                                                                

 An outsourcing business strategy, if well implemented by following an exhaustive Intellectual property due diligence, will mitigate intellectual property-related risks.

                                                                           

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Team Codezilla