Give a Little, Get a Little

Most companies view handing intellectual property to an outsourcer as delivering the castle keys to marauders. Outsourcers need access to customer names, automated business processes, and their clients’ homegrown software to do their jobs. But unscrupulous contractors can also do a job on clients. Businesses such as Apple Computer and Pearl Investments, a Portland, Maine–based hedge fund, have sued their service providers for revealing company secrets or for using client systems for their own gain. Fortunately, sharing IP doesn’t have to be all risk, no reward. Consider this: In 1983 (the primordial mists of information technology outsourcing), then-fledgling systems developer Bloomberg approached Merrill Lynch with a proposal to build a program that delivered up-to-the-minute financial data to the brokerage’s employees. But instead of paying Bloomberg $30 million to develop proprietary software, Merrill Lynch paid $30 million for a 30% stake in Bloomberg and temporary exclusive rights to the system it produced. The software was so successful that after a while Merrill Lynch waived exclusivity, letting Bloomberg sell it to other brokerages. Still, Merrill Lynch retained first-mover advantage (established during the exclusivity period) and continued to derive value from the system. Eventually, it sold one-third of its stake in Bloomberg (or 10% of the total ownership of Bloomberg)—which had flourished—for $155 million in 1996. Companies hoping to strike similarly advantageous deals must recognize that information assets (intellectual property) differ from physical assets in that they can be at once given away and retained. Requiring exclusive ownership of everything developed in the outsourcing relationship makes sense for physical assets but can be shortsighted when it comes to information assets. Allowing outsourcers to resell the information assets they create for clients gives those vendors incentive to make sure their products are exceptional. It also lets outsourcers amortize development costs across multiple clients, which can mean lower fees for everyone. So companies sacrifice some of the competitive advantage of owning a unique technology in return for getting that technology at a lower price. Sharing the rights makes even more sense in offshoring arrangements. A contract is only as good as the legal system that backs it up, and some countries’ intellectual property laws are ambiguous or downright lax. If the outsourcer’s country will not enforce a solid intellectual property contract, assume some of your IP is going to slip outside the gate, and take comfort in the lower fees you’re paying and the higher quality of service you’re receiving. “At the length truth will out,” Shakespeare tells us, and the same goes for intellectual property. Companies that outsource would do well to focus less on what they give up and more on what they get in return.

Give a Little, Get a Little

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