Outsourcing contracts have long contained intellectual property clauses. How do old abuses and recent changes in technology and business influence these and what the parties should be interested in?
Intellectual property (IP) has long been a difficult subject. Many have found to their cost that their rights differ from what they expect. The timing of the discovery for a customer is often during a hurried exit and transition to the incoming supplier. They find the outgoing supplier refusing to share information. This can have a significant effect on the costs and levels of service that they face from the incoming.
The Law
The author is a practitioner, not a lawyer. Most jurisdictions base their intellectual property law on World Intellectual Property Organisation (WIPO) principles. Please take legal advice on your own circumstances. The areas of most common concern are software licensing, copyright and confidence.
The WIPO principles generally vest IP in the creator. IP is property that the creator license to someone else. For this reason, several of my former employers wrote terms into my contracts of employment claiming all inventions, designs, written works for themselves during the course of my employment. A customer may require their supplier to write such a clause. Without it, the supplier may not hold some of the IP in which you are interested. The customer has no direct relationship with the employee. This is a mess worth avoiding.
IP and AI
In artificial intelligence, the ownership of IP arising from the creative work of machines without the support of human actors is currently the subject of legal controversy. Some jurisdictions have established that machines and animals cannot own IP. Your interests in AI IP interests include both the AI programme and the associated training data.
Just as ownership is of interest, so is liability should an algorithm have a role in activity that results in harm. This is a branch of emerging art that is likely to keep the lawyers and their billing clerks busy for a good while to come. Lawyers love indemnity clauses.
IP in Contracts
Most outsourcing contracts have well developed provisions for software licensing. Terms may deal with who owns what licences and provide for novation to the incoming supplier. There will probably also be provision for novation of maintenance contracts with third parties.
Almost invariably there will be a confidentiality clause. This will protect the pre-existing trade secrets of both parties, some making explicit reference to protected IP. A minority of contracts make reference to IP generated in the course of the agreement. The author has seen some suppliers exert strong claims during transition over anything marked with their logo and confidentiality statement. The reason has been to prevent competing successors in service provision undertaking some of the activities formerly provided. This is most acute where the services relate to software owned by a service provider. This is common in some industry sectors. The effect is to inhibit the customer from ever obtaining a competitively priced service. A nice position for the supplier concerned, less so for the customer. The author is content with the common practice of 3rd line applications support (amendment of underlying code) resting with the application developer. Operations sourced for 1st line (contact centre first response) and 2nd line (specialist support and configuration) should always be supported by appropriate tools, configuration data and maintenance information. The Agreement should provide a license for the content of these tools for the successor in operations.
What Happens on Termination and Exit
The agreement should contain a schedule defining the items and services in exit. Exit schedules are frequently badly drafted. During delivery of the service, many customers overlook the obligations. The author managed a transition on behalf of a customer, asking for the latest draft of the exit plan immediately on settling in. First there was havering, then it became apparent that none had been started, despite its being 13 years late. This lack of preparedness was difficult to recover. Any incoming supplier will ask for as much as it can possibly obtain of the service it is taking on. The departing supplier’s lack of readiness in this case did not help to maintain timely transfer, but probably did result in their eventually doing more than they would have otherwise.
Suppliers differ markedly in their attitude to IP. Some are habitually open and see the sharing of process, performance data, designs and the like with a customer to be an effective way to build trust. Trust reduces friction in a relationship and allows the discovery of the best relationship and outcomes for both parties. It can become habitual and a positive element of the service culture, where cultivated by both parties. If that is true of your relationship, you probably have little to fear as a supplier who has been straight with you for many years is unlikely to deceive at the end. But then, you are quite unlikely to want to let go of them!
Suppliers’ Reaction to Threat
Suppliers are most likely to be protective when they feel threatened. It is easy for a customer to suppose that they wish to avoid the display of past negligence or incompetence. Perhaps, it is more likely that there is a perceived competitive threat. It is well worth exploring obstacles, it is possible to overcome many, given a little consideration.
An outgoing supplier will jealously guard its core tool-set, its configuration and operations. These are deployed to many accounts. A competitor who understands them well can use this knowledge to attack them in competition for other accounts. Similarly-sized suppliers frequently come across each other when bidding for business. A customer would be wise to avoid threatening this sensitive area.
Customers’ Management of Suppliers
A customer transitioning from one supplier to another should respect the boundary between this core and the configuration of its own unique processes (e.g. change management authorities, knowledge article decision-trees, scripts for the automation of application fixes and batch-jobs). This is of increasing importance with the rise of robotic process automation (RPA) and Artificial Intelligence (AI). It is in a customer’s interest during contract negotiations to invest in defining what is to be made available in the distant transition from the new supplier. It is at this time that the incoming provider is then keenest to establish good-will and to secure the deal. Do not wait to find what you cannot have when that supplier becomes the exiting party using ambiguity to be awkward.
The delivery of projects normally has associated intellectual property. Designs, processes, configuration and code are all developed and have enduring value in the support of the service once developed. This IP will belong to the customer only if the contract contains a license. It is difficult for a customer to obtain such a license later in the service’s life. The best place for it is the master services agreement. The customer should arrange ordered storage and require update on change. This benefits later projects, minimising both discovery costs and transition. Such knowledge management by customers and suppliers alike is rare in practice, excepting personal filing.
Customers’ Abuse
Some customers take a cavalier attitude to their partners’ intellectual property. This is perhaps understandable when a party is seen to be obstructive and the IP relates to the customer’s operations. A colleague reported an organisation’s purchasing department passing one supplier’s solution to another. A supplier’s complaints of minor infraction are likely to be dealt with politely in private. More flagrant abuse runs the risk of being sued for breach of confidence.
The Effect of RPA
As the leading players increasingly automate, the ownership of configuration IP becomes a significant issue for all. These tools span the supplier’s core operations and customer-unique activity. Unless the incoming supplier uses exactly the same tool-set, the code of configuration is unlikely to be portable between suppliers. If the customer does not obtain a license for the IP of RPA configuration, it will face both a significant drop in service levels on transition and a hefty charge to re-create it as transition cost.
A copy of the human-readable specification of the automated process, licensed for release to the incoming supplier is ideal. This may be in the form of RPA source-code, a configuration file or other documentation. During exit, the incoming supplier will check the reliability and currency of this.
It is all in the Data
The strategic and monetary value of large and targeted data sets is becoming clear. A couple of graduates founded a start-up in 2011 that collected data on lettuce farming. They sold their company, Blue River Technology, to the farm machinery manufacturer John Deere in 2017 for $305m. It is likely that the founders are no longer concerned by student debt.
The components required to make artificial intelligence work are:
- A training data set.
- A core engine.
- Analysis and insight to initiate the algorithm.
Who Owns What?
The supplier normally brings the core engine (unless the customer wishes to build their own, probably using off-the-shelf components) and owns this. Customers should think carefully about the ownership and rights over the data set and reflect their wishes in their definition of strategy and agreements.
One of the considerations in ownership of the data set should be the supplier’s rights (if any) to redeploy lessons to other customer accounts. This may be a valuable right. This particularly applies to processes concerned with the customer’s competitive advantage (e.g. an insurance company’s pricing method for risk in policies). The customer is advised to keep tight control over these data sets. Such a company may wish to avoid outsourcing their artificial intelligence and keep complete control over all aspects of its development. Others may engage an experienced partner to accelerate development and tightly control the supplier’s isolation of the data, information scientists and algorithm from competitors served by the same supplier.
Manage your Knowledge
Outsourcing used to deal mostly with capital assets and services delivered by people, motivated by cost saving. This led to eviscerated retained organisations. In these days of shorter contracts, competition on corporate agility and value in data, the concerns over intellectual property are markedly different. Common practice has a great deal of catching up to do. Old-style IP clauses with screeds on software license and a confidentiality clause did enough in their day. No longer.
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This article is not legal advice.
A shorter version of this article was first published in Intelligent Sourcing, Spring 2018. It is reproduced here with permission.
