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. It may be assigned or licensed as a property. 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 should be interested in whether their supplier writes 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.
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. It has been established in some jurisdictions that machines and animals cannot own IP. It has been suggested that the ability to assign rights through contract may be stretching the law.
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.
What is Seen
Most outsourcing contracts have well developed provisions for software licensing. Terms deal with who owns what licences and provisions for passing them to an incoming supplier so that continuity of service is assured. 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. Whilst the author is content with 3rd line applications support (amendment of underlying code) resting with the application developer, 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 and passed on during transition to a successor.
There will be an exit schedule defining the items and services to be delivered. Exit schedules are frequently badly drafted and disregarded during delivery of the service. 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 is infinite in its request to know about the estate and its operation. The departing supplier’s lack of readiness 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 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. It is more likely that there is a perceived competitive threat. It is well worth exploring obstacles, many can be overcome given a little consideration.
An outgoing supplier will jealously guard its core tool-set and operations. These are deployed to many accounts. A competitor who understands them well can use this knowledge to attack them in competition. Similarly-sized suppliers frequently come across each other when bidding for business. IP relating to the core toolset, its configuration and service operations design is rightly protected and withheld. 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). Investing in the early definition of what is to be made available, ideally during transition in, is in the customer’s interest as the incoming provider is then keenest to establish good-will. 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 only belong to the customer if a license is assigned in contract. A project manager ignorant of IP provisions cannot be blamed if these are overlooked. The best place for it is the master services agreement. Once generated, the products need to be stored in order and curated when changes are made. 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.
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. Claims for minor infraction are likely to be dealt with through a polite complaint 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 the development of which it is paying through the service, it will be faced by both a significant drop in service levels on transition and a hefty charge to re-create it as transition cost.
What is needed is a license to use the human-readable specification of the automated process that can be released to the incoming supplier. This may be in the form of RPA source-code, a configuration file or other documentation. The reliability and currency of this should be checked at the time of exit. Any component that relates to supplier-specific linked applications (e.g. a configuration database) can be redacted to protect the outgoing supplier.
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 data set that can be used for training
- A core engine
- Analysis and insight to initiate the algorithm.
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. If the process concerned is associated with the customer’s competitive advantage (e.g. an insurance company’s ability to price the risk in policies) they are well advised to consider keeping a very tight control over the data set and anything abstracted from it. 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. Strategic assets should be guarded carefully.
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.
