Many businesses have the dilemma that as they grow, it can be more difficult to both manage the existing business and continue to deliver innovation. Being creative takes time, yet innovation is the lifeblood of a company that wants to develop. One solution is to outsource your research and development.
To propose outsourcing innovation could seem somewhat extravagant in these days of financial austerity, yet some argue if done carefully it can save hours of time and effort in research, and, of course, it can also bring fresh perspectives and ideas.
Until relatively recently, most Western companies preferred to keep their R&D in-house. These attitudes are changing, however, and some of the largest IT and telecom suppliers, as well as those selling cars and consumer goods such as cameras and TVs – even aeroplanes - are starting to buy in designs of digital devices, predominantly from Asia. In some cases these are complete designs, in others the companies who commission them tailor them to their own specifications.
By using this model, they are able to provide customers with tools that incorporate the latest technology at a competitive price – much more so than if they had retained their own R&D labs. This is now being extended to Western pharmaceutical companies combining with Eastern biotech research companies to bring innovative drugs to the market. Companies have cut their other expenses to the bone, and for those who still have R&D departments it is often now one of the biggest items left on the balance sheet.
How far this trend towards a global network of design partners will go is debatable. Some of the biggest electronics companies are cutting their R&D teams and are concentrating on developing the proprietary architecture and establishing the key specifications, while managing the global R&D partnerships. The model varies widely, with some companies outsourcing the entire R&D function and others always contributing some of their own ideas to each product line, while others perhaps contribute their own designs only to their premium rather than the cheaper product lines.
Very few companies who use this outsourced approach are prepared to discuss it, and there is usually a wall of secrecy about who they buy in their designs from. One reason is that companies wonder what their investors will think if there is no intrinsic IP in the business. Where will future share value be created? While it is common practice to outsource services and manufacturing, outsourcing design can give rise to the question as to how much IP does the company own and how much profit from the product is being paid in licensing fees? And they worry about the risks involved – for example, that if their partners decide that having been the ones who came up with the idea, there is no reason why they can’t sell a similar product themselves, perhaps slightly cheaper while undercutting you in the process, and benefit from generic promotions to create the market that you have undertaken.
Surely all is straightforward - – the contractor will simply state in the contract what the terms of engagement are. Unfortunately it’s not quite that simple. You need to understand exactly how far such a contract will protect you. For example, will it stop the subcontractor selling a similar – although not identical - design to another company? Or a perhaps a component of the design they have produced for the contractor? And although it may protect you for the future, do you know that the subcontractor has not already provided something similar to another company and you could be in breach of their intellectual property if the subcontractor then develops a variation for you
This trend is likely to continue, however, and if a good client contractor relationship exists, then the work may proceed without any hitch to the satisfaction of all those involved. But disputes can arise, and it is important to ensure that a good outsourcing agreement that is fair to all parties is in place so that there are no misunderstandings. One issue that can arise, for example, is who owns the IP of what has been developed – the subcontractor, the contractor or someone else?
There are a number of issues to consider, including how extensive the contract should be. Over rigid SLAs can be counter-productive. And there may be circumstances in which it is appropriate for the subcontractor to retain ownership, or at least a right to the IP they create.
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Contracts may require subcontractors to report arising IP, but how can you be sure that the subcontractor has designed or invented something that contains robust IP? Other questions that arise include, should the subcontractor be required to provide confirmation that there is no arising intellectual property if they believe this to be case? Who is then going to protect the IP and how?
It is important to determine early the kind of relationships that are at stake and the exact role of all parties. Are you going to ask them to provide a full design, or an outline design? And where might it be necessary to obtain rights to background IP, for example the right to access and use designs necessary to make alterations to off the shelf equipment that will be purchased?
If your subcontractor in turn subcontracts part of the process, could there perhaps be a difficulty later on in proving who owns any arising IP? This is the kind of potentially expensive and time-consuming problem that a contractor really wants to avoid.
Any outsourcing arrangement that involves more parties than originally anticipated by the contractor can lead to disputes. Unless the contract contains clauses to cover this, there is no specific requirement to declare that work has been further contracted, and the original contractor may often be unaware that this has happened unless and until there is a problem.
An agreement should include statements regarding further subcontracting which ensure that a subcontractor can only subcontract further with formal consent from the client. It should also state that if they do so they must abide by certain provisions, such as that they should adhere to the terms and conditions of the original agreement (including confidentiality), and that the supplier is liable for anything that is further subcontracted. If you are the client, you should retain the right to check the terms of a subcontracting arrangement before it is entered into.
Of course, not all countries recognise IP rights in the same way as in Europe and the US. India, and other Eastern countries, China and Russia for example are often involved in outsourcing projects, but their IP laws are very different from those in the West. It is important to understand the level of protection you are likely to get under those local laws before outsourcing to those areas.
The first step, before entering into an outsourcing arrangement, is to determine the extent to which local law protects your IP. The outsourcing agreement needs to ensure that the supplier abides by such laws as do exist; define the IP that needs protecting in the clearest possible terms; and be very clear about confidentiality. This needs to cover not only the work they are doing for you but also about any information about your company and its future direction that may become available during the project.
The agreement should also consider whether the subcontractor can use parts of the design in a different project; can they work for a competitor at the same time as they are working for you or if not, how long after completion of your project must they wait before so doing.
It is important to make sure that you do not become responsible for the liability of a supplier if they have ignored third-party rights or local laws, so a clear indemnity clause should be included in your agreement to help minimise any negative impacts of your supplier not abiding by local laws and practices.
As with most things, preparation is vital, and when it comes to outsourcing, careful attention to the nature of the contract is very important. Having a good process in place for dispute resolution from the outset can be key to success in this increasingly common practice.
Coller IP is a specialist in commercial IP management and valuation. Web: www.colleripmanagement.com