IPR Protection in a PES Engagement

For most technical organizations today, outsourcing software product engineering services (PES) to technology firms has increased for economic and strategic reasons. A myriad of challenges such as higher cost of acquisition, demand for diversified technology resources for a shorter period and dynamic delivery models at a fraction of margin has forced organizations to look for outsourcing software PES to other technology companies. This enables the organization to remain focused on its strategic business goals while benefitting from PES best practices and sustainable delivery models.

The advantage of outsourcing PES to a technology vendor is the access to skilled architects with knowledge of the latest operating environments, project managers with experience in operating in a global environment, and teams skilled in the latest software product engineering methodologies. The enterprise identifies market needs that help generate new product ideas, while the ideal vendor can understand these ideas and translate them into the world-class products.

However, outsourcing PES to an external vendor comes with its own set of challenges. At the centre of success over competition is protecting the intellectual property (IP) of an organization. Outsourcing requires the sharing of a wide array of proprietary knowledge, with the nature and critical importance of IP differing in every sector of industry and business. When an organization outsources its PES, it is sharing vast amounts of information which is an amalgamation of ideas, innovation, technical expertise and business intelligence. In a product development environment marked increasingly by global development teams, the threat to product IP is immense. Protecting IP is very critical, and can become a challenge when product design is outsourced, especially when the organization has to ensure that business objectives remain unaffected.

Whether the outsourced PES project will take place domestically or offshore, the customer organization must identify, account for and clarify ownership related issues of IP assets improved or created during the relationship with the vendor. More often than not, many companies overlook or pay inadequate attention to this very important aspect. Risks of sharing IP assets with PES vendors include challenges in monitoring and/or dealing effectively with various types of breaches of contract clauses, theft or misappropriation of trade secrets, misuse or loss of other types of IP rights that can result in partial loss of control of business, and poor or inconsistent quality of products thus threatening the reputation of the customer.

The customer organization must undertake an IP due diligence enquiry before finalizing a PES vendor. There are several approaches to sharing ownership rights over IP, which is improved or created during an outsourcing relationship. One approach would be for the customer to own all IP improved or created during the outsourcing relationship, with the vendor using the IP through a negotiated license agreement. Another approach would be for the vendor to own all such IP, with the customer taking a license through negotiations. Both the customer and vendor can also jointly own the resulting IP, though this can get messy in case of a breach. All approaches are complex and must be carefully evaluated and negotiated before entering into an agreement. The agreement should deal with ownership and use of the IP assets both during and after the termination or end of the outsourcing relationship.

Some questions organizations should consider while protecting their IP are:

  • Who will own the customized features, improvements, new technology and product in outsourced work?
  • How does one determine whether ownership will be exclusive to one party or another or held jointly?
  • What entitlements will each party have to exploit jointly created IP?
  • What will happen to customer’s IP when it wants to switch vendors or terminate the contract?

The value of the IP rests in the company’s ability to keep relevant information confidential, hence guarding its competitive advantage. One way is to rely on a Non-Disclosure Agreement (NDA) for keeping such vital business information confidential. While such agreements provide for broad protection, and are a relatively low cost IP protection measure, they may be of limited value should litigation issues arise.

The contract must clearly define ownership over all IP assets created by the PES vendor during the outsourcing relationship. The customer should account for all IP and associated data and clearly fix the limits within which these IP assets are to be made available to the vendor. An important aspect of protecting IP is to analyze the PES vendor’s existing agreements, that is, if the vendor will sub-contract the project to another consultant, or if the vendor is working for other companies that could be potential competitors. If so, what additional safeguards may be needed to safeguard the IP assets to be shared with the vendor?

Basic Steps Customers Can Use to Protect Their IP

  • Ensure that the outsourcing agreement includes provisions to protect IP
  • Ensure clarity of ownership or joint-ownership of IP assets created or improved during the project
  • Set-up an integrated, well functioning IP protection and security program
  • Put in place mechanisms to prevent ‘mixing’ of proprietary trade secrets with those of the vendor
  • Be aware of any limits on use of licensed third party IP

Companies today are treating IP protection as not merely as a legal concern but as a strategic business tool. Not having in place fundamental IP protection measure could adversely impact business and competitive advantage. Outsourcing development of software products needs a comprehensive business strategy whereby IP is seen as pivotal to a successful relationship. An outsourced relationship with a PES vendor if well implemented along with a holistic IP policy will mitigate risks and improve the competitiveness of the products offered by the company.


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