Why ignoring the matter of intellectual property may come back to bite you.
Intellectual property can sound like an esoteric subject and one that mos people manage happily to ignore most of the time. But it has some big implications. In days of old, capital appeared to rule. Big companies owned big things and lots of them. Steel plants made Andrew Carnegie rich. Henry Ford built factories around the world to produce his vehicles. These are easy to spot and some have been going for decades. The reality is that the great entrepreneurs made their money by shaking up the rules of business and employed capital as a means to realise their vision. Ford exploited the innovative use of production lines.
It may be that there is little truly new in the world, but at a time when barely profitable Tesla (Market capitalisation $54 Bn) has accelerated past Ford ($34 Bn), despite making a fraction of the incumbent’s number of vehicles, the differences are brought into stark relief. Amazon’s market capitalisation is just shy of $800 Bn at the time of writing. Its 2017 accounts show property and equipment assets of $49 Bn. So what explains the $750 Bn extra value?
As the worlds of service design and sourcing practice change, what can safely be ignored and where is care justified when it comes to intellectual property?
The Properties of Property
Intellectual Property has aspects in common with other forms such as tangible assets. It can be owned, bought, sold, lent and wasted. Most importantly, it can be managed. “Management” implies handling, direction and control, conscious disposition to achieve an objective. It is rational to devote time and attention in proportion to value and risk. For Amazon, there is intensive care of prized assets. Most have no idea of the pecuniary value of their intellectual property. There are occasions on which it is worth-while putting a number on this, for example when fund-raising or making a disposal. On other occasions, the scale of “1,2,3, lots” seems entirely adequate. If it is valuable, are you taking appropriate care to safeguard and exploit it? Whose job is this? What are they doing about it?
When it Matters
I support organisations by sourcing services, managing service transitions and as an expert witness in IT and sourcing disputes. For too many organisations, they find their intellectual property’s value only when it is too late and they have lost it. In theory, suing another party is designed to put the wronged party back in the position that they would have held had the offence not occurred. The reality ignores many aspects such as management time and distraction to pursue it. Going to court is neither quick nor easy. It is preferable to prevent than to restore. There is also the risk that you will not win.
Many considering a change of supplier find the hard way that assets that they assumed were theirs are not. This can have a significant effect on the service levels provided. Have you considered:
- What does your service agreement say about the ownership of service and system designs created during the service period and your ability to make use of them beyond termination?
- Do you have all the processes, knowledge articles, high- and low-level design documents gathered and stored in an ordered, revision-controlled repository that an incoming supplier could use?
- Do you have terms in your agreement that you could rely on to prevent your supplier taking knowledge of the way your strategic initiative has worked and replicating it in your main competitor? What are the actions you have taken to safeguard strategic secrets?
I have met several commercial managers who aggressively claim ownership of anything that has touched their organisation. Few suppliers say anything in public when encountering such a beast. They just negotiate the relevant clauses carefully and mark design products with a ©. The Neanderthal is easily out-witted. These suppliers know that copyright rests with the author by default. They also take care with their terms of employment and service agreements with contractors to ensure that any of their work is assigned to the supplier during the course of their engagement.
An effective negotiation recognises that there are some red-lines for a supplier. A good deal is good for both parties. The customer will wish to see rich and comprehensive knowledge exchange to the incoming supplier. The supplier in negotiation will consider their core operating method and account-specific methods. They will guard the first jealously from the eyes of competitors but will be persuaded easily to share the second, especially if doing so helps them win the business. The catch comes when it is realised that this division is nothing like as tidy in reality as it appears in this text. Effective action starts before you award the contract in thinking through what is important to you and what to protect.
Exit plans are generally seen as falling into several categories including “tedious”, “hard” and “can be put off to another day”. The population of the exit data set is one of the occasions on which you are likely to find the quality of your Intellectual Property preparation. If your supplier relations are excellent and the organisation of information is tidy, you are likely to want to continue with the incumbent. The distribution of quality is not even and does not favour customers. If you intend to leave the discovery of what your exit information planning and data quality until just before you start the transition, you are stacking the odds against yourself. If your terms are not good, the time to renegotiate is in advance of depending on them.
What has changed
In these days of RPA, AI, digital transformation and accelerating competition, some of the techniques that have served in the past are no longer adequate. This is amplified by the progressive reduction in contract length, the fragmentation of monolithic services into towers and the consequent increase in the frequency of supplier transitions. RPA and AI take immense effort in tuning tools to the situation. Who in your contract owns the intellectual property of their configuration? Once more, the core supplier red-lines come into play: expect them to protect the configuration of their core tool-set. Negotiate a perpetual license to account-specific configuration. This does not mean that you are likely to cut-and-paste configuration files from one supplier to another, it is more likely that tool-sets will differ and code will be incompatible. It does however give you a running start on what the exception cases and logic for handling them may be.
If you have said nothing in advance in your contract, you should expect no access to this configuration at the time of transition. That could set you back many thousands, not to mention the precipitous fall of service levels and the effect on your own career prospects.
Action for Today
The full range of intellectual property law is one for the specialist lawyers, of whom I am not one. The area of practical interest is however quite focused. The Intellectual Property Office (UK) publishes a helpful guide. This is a good place to start. The World Intellectual Property Office (WIPO) does likewise for this international area. Most intellectual property concerns in outsourced services concern confidentiality / trade secrets or copyright. You can probably ignore the rest in your initial assessment. Consider:
- What intellectual property is critical to your organisation’s competitive success?
- Trends in your industry and competences that your board is prioritising for development;
- Changes that you know are coming (like service contract renewals);
- The attitudes of your current supplier, your attitude towards them; and
- Operational developments (e.g. RPA, cloud migration, AI) that will change your IP-landscape.
Then with respect to intellectual property and your services:
- What do your contract terms currently say?
- Have a friendly critic have a look at the agreements from the perspective of your supplier (Red Team techniques). What do they plan to do?
- What assets do you have that are most valuable? Can you exploit them more?
- What do you most need to protect? What are the risks? How can you best do that?
- What needs to be routinely managed and maintained? How best to do this?
An example of IP exploitation has been seen in Ocado’s licensing of warehouse robot technology to Morrisons. Ocado has built a lead in this area, Morrisons needed to catch up. Such deals can be valuable to both parties.
When it comes to protection, the most frequently adopted approach is secrecy. Sensitive assets are marked as such and access to them is guarded closely. A famous example is the recipe for Coca-Cola, which by hear-say is known to only a handful of individuals. A comprehensive arrangement needs to accommodate eventualities such as a competitor hiring the people and gaining access to their memories. Many people sign non-disclosure agreements (NDAs) lightly. Some later regret it.
Intellectual property has long been a foundation of competitive success. In these days of digital commerce, it is more explicit and obvious than it may have been in the past. The assets that flow from this can be of huge value, worthy of protection. The value at stake is worth a minimum of conscious periodic review to ensure that appropriate care is being taken before someone else steals it. Guard your valuables!
This article was first published in Intelligent Sourcing Issue 9 Spring 2019