Ip issues in global software outsourcing

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Ip issues in global software outsourcing

  1. 1. MEMOIRE DE RECHERCHE 2011/2012NOM et PRENOM de l’auteur 1: SATHE Vaibhav Vishwanath, E113001 SUJET DU MEMOIREIntellectual Property Issues in Global Software OutsourcingDevelopment of framework analyzing critical factors that impact intellectual propertytransfers in global software development outsourcing scenarios- NOM DU DIRECTEUR DE RECHERCHE: Prof. Dr. LEMAIRE Jean-Paul La diffusion de ce recueil CONFIDENTIEL Non  est strictement réservée à ESCP Europe.
  2. 2. AffidavitI the undersigned, SATHE Vaibhav Vishwanath, E113001, certify on the honor that I havenot plagiarized the paper enclosed, which means that I am the only author of all the sentencesthis text is composed of. Any sentence from a different author than me was written inquotation marks, with explicit indication of its source. I am aware that by contravening to thepresent rule, I break the recognised academic principles and I expose myself to the sanctionsthe disciplinary committee will decide on.I also confirm this work has never been submitted during studies prior to ESCP Europe. Ifthis work has been written during studies conducted in parallel, I must precise it.The remarks written in those pages only commit me. Paris, May-03-2012 SATHE Vaibhav Vishwanath
  3. 3. École supérieure de commerce de Paris — Europe 79, avenue de la République, 75543 Paris cedex 11, France Intellectual Property Issues in Global Software Outsourcing (Questions de propriété intellectuelle dans le contexte mondial du logiciel sous-traitance) Vaibhav Sathe Master in Management 2012 student ESCP Europe, Paris Campus Submitted To: Prof. Dr. Jean-Paul Lemaire Professor, ESCP EuropeLangue de la thèse: Anglais© 2012. ESCP Europe. Tous droits réservés.
  4. 4. ContentsIntroduction ................................................................................................................................ 1Distributed Delivery Models...................................................................................................... 3 Business Implications ............................................................................................................ 3 Outsourcing Levels ................................................................................................................ 4 Software Development........................................................................................................... 5 Outsourcing Contracts ........................................................................................................... 7Intellectual Property ................................................................................................................... 9 IP in Products ......................................................................................................................... 9 IP in Services ....................................................................................................................... 11 Trainings .............................................................................................................................. 11 Management of IP ................................................................................................................ 12Legal Framework ..................................................................................................................... 14 IP Laws in the world ............................................................................................................ 14 Contract Laws ...................................................................................................................... 16 Employment Contracts......................................................................................................... 17 Case Study: Pine Labs vs. Gemalto Terminals, High Court of Delhi [20] ............................ 19Client-Vendor Relationship ..................................................................................................... 21 Trust ..................................................................................................................................... 21 Verification .......................................................................................................................... 22 Other Aspects of Interaction ................................................................................................ 23Corporate Strategy ................................................................................................................... 26 IP due diligence.................................................................................................................... 26 Business Intelligence ........................................................................................................... 27Research Methodology ............................................................................................................ 31 Problem Definition............................................................................................................... 31 Variables Extracted .............................................................................................................. 33 Survey Design ...................................................................................................................... 34 Survey Responses ................................................................................................................ 35 Factor Analysis Configuration ............................................................................................. 38 Factor Analysis Results........................................................................................................ 39Conclusion ............................................................................................................................... 44 Managerial Implications ...................................................................................................... 44 Limitations and Future Scope .............................................................................................. 45References ................................................................................................................................ 47Appendix-I: SPSS Outputs ...................................................................................................... 50
  5. 5. Executive Summary The objective of this study was to identify factors that affect Intellectual propertyTransfer in global software outsourcing scenario. The study also aimed at establishingrelative importance of these factors based on variance in expert opinion. The report begins with overview of software outsourcing and offshoring models. Itexplains managerial implications and benefits vs. risks involved. After discussing types ofcontracts in outsourcing, the scenario with software is specifically discussed. The termIntellectual property is then defined with its application with respect to both software productand service sectors. Then the report establishes IP management approach. We then proceedwith brief discussion on legal background and framework and establish how it varies incritical countries like USA, EU and India from software outsourcing point of view. A samplecase study elaborating importance of legal understanding and intricacies of contract is alsodiscussed. Report then proceeds with defining role of trust between partners and discussedvarious aspects of interaction between employees of two organization. Report discussedvarious factors that impact the communication and possible impact on smooth IP transfersbetween the partners. Report then discusses aspects from corporate strategy and defines roleof corporate intelligence, IP due diligence in safeguarding company’s interests regards tointellectual property. After compiling list of all important variables, a primary expert survey was conductedin order to derive underlying factors using statistical summarization techniques. Asummarization exercise reduced 39 variables into 13 factors among three aspects – Legal,Human Resources and Corporate Strategy. The explained variability helps companies decidethe priority of the factors.
  6. 6. Intellectual Property Issues in Global Software Outsourcing 1 Introduction Business landscape is changing at dramatically high speed today, thanks to moderntechnological developments especially in communication and computation areas.Competition has naturally exploded in its dynamic environment as traditional barriers haveweakened and new opportunities have risen. This has created need of absolute efficiency inbusiness environment. Companies have started focusing on their core competenciesentrusting other activities to vendors specializing in those. That’s why we can see that intoday’s businesses activities like recruitment, IT infrastructure & maintenance, internalpayroll & accounting, supply of raw material are increasingly done by contractors. Thisallows the firm to focus on core business areas where it takes on head on with its competitors. [3]Simple and largest examples of it can be of Apple . It designs and markets devices likeiPhone and iPad employing around 60,000 employees worldwide. But it has outsourced thetask of manufacturing to Taiwan based Foxconn Group which employees over 800,000 in itsfactories which manufacture several hundred millions of these devices every year. ThenApple has contracted large oceanic freight services which ship these devices to retail shopsowned by Apple or partners across the globe. Naturally, a computer company Apple has noexpertise in running hardware manufacturing plants, worker management, operationalmanagement and transport. By negotiating best prices in advance, Apple can delegate thesetasks to vendors which have expertise and ability to deliver as per mobile manufacturesdesign requirements. This frees up large amount of Apple resources which are dedicated toactivities like designing new devices, develop software and applications, run marketingcampaigns and manage relationships with carriers, retailers and partners. From competitionstandpoint, these activities matter to the company and not way in which it is manufactured ortransported. Apple registers hundreds of patents while designing these devices. But, when
  7. 7. Intellectual Property Issues in Global Software Outsourcing 2Foxconn or any other supplier manufactures these devices based on these technologies, canwe believe that they learn nothing about it? Isn’t it possible that outsourcing vendors andemployees get massive knowledge of specifications, techniques and know-how of makingthese devices? While company focusses on core expertise for competitive reasons, the waysemployed pose risk that the same technology, same intellectual capital can fall into hands ofcompetitor. It is known that Foxconn not only manufactures Apple handsets but also haslarge manufacturing contracts from Apple contractors namely, Samsung, Motorola, Microsoftand Nokia. So, how does Apple trust Foxconn with its ultimate intellectual secret? What arebenefits companies get by outsourcing? How do companies protect knowledge leaks fromtheir employees? Do inter-company contracts play any role? Do governments ensure suchintellectual property is protected by laws in respective countries? Do benefits of outsourcingoutweigh all the risks? In this thesis, we will try to look at global outsourcing of software projects andidentify how companies create, identify, protect and transfer their intellectual capital. We willidentify benefits and risks in outsourcing. We will also look at various forms of projectdelivery including outsourcing and offshoring. From literature survey we will identify variousvariables that affect intellectual property protection in global outsourcing scenario. Theliterature will include books, published journal papers, case studies and articles published inrelevant area. We will conduct expert survey in order to gather opinions of people withregards to importance of the variables. We will then run exploratory factor analysis tosummarize these variables and identify factors that affect IP protection. We will look fromboth sides of clients and vendors. This study will be useful to companies worldwide whichare considering outsourcing of software products to take precautions while structuring theoutsourcing contracts.
  8. 8. Intellectual Property Issues in Global Software Outsourcing 3 Distributed Delivery ModelsIntroduction Let’s look at some basic definitions related to outsourcing terms that have evolved [2]recently . Outsourcing means contracting out certain pre-defined tasks to third party. It isnot necessarily outside country of origin of the firm. Offshoring means getting done certaintasks outside country of origin. Offshoring need not involve outsourcing as company itselfmay open subsidiary in a foreign country. Business strategy generally includes combinationof both outsourcing and offshoring. Nearshoring means offshoring business activities to acountry which is closer to country of origin on parameters like geographical distance, culture,language etc. This reduces significant number of management challenges encounteredotherwise in offshore team management. Multisourcing means a business strategy which is ablend of internal and multiple external sources in order to optimize available resources. Onshore OffshoreInsource Same firm/same country Same firm/different countryOutsource Different firm/same country Different firm/different countryFigure 1 Delivery ModelsBusiness Implications [2] A variety of reasons may exist for outsourcing based on case to case . The mostcritical benefit is cost savings due to economies of scale or geographical location. Nextincentive of outsourcing is translation of fixed costs to variable costs. It reduces initialinvestment and instead firm makes payments on contract basis at regular intervals. Anotherbenefit is also the ability to concentrate on core competencies of organization by out-contracting support functions. Many a times outsourcing is also used to address issues invariability of resources to address immediate or short time requirements of number ofresources or particular expertise. Outsourcing or offshoring can also result in improving
  9. 9. Intellectual Property Issues in Global Software Outsourcing 4efficiency of organization due to better relocation of resources. Offshoring providesopportunities to tap into global talent pool, many times at cheaper cost. The flexibility gainedby organization is critical in today’s delicate condition in terms of competition or economicoutlook. However, Outsourcing is like a double edged sword. While there are many benefits asexplained above, it also has several risks involved. In the past, profit making enterprises haveoperated with a certain amount of secrecy to guard their trade secrets from rest of the world.They also used to control a larger portion, sometimes entirely the value chain of the business.But, with increasing number of players participating in value chains, the businesses had tobecome more transparent. They have several trusted partnerships where partners have greatervisibility into internal details of organization. Among other issues is the high rate of failure ofmarriage of two organizations due to variety of differences like organizational and nationalcultures, business priorities and operational methods. In each business scenario, company hasto identify a win-win situation among all partners which include suppliers, clients andcontractors. This definitely complicates the managers’ job of achieving hard business goals.Outsourcing Levels In any business outsourcing is done at multiple tiers of operations [4] [5]. At basic levelis low-wage human capital involving unskilled or manual labor. A second level ofoutsourcing involves outsourcing of standardized production tasks, a typical semi-skilledfactory labor, which adds limited value but at lower cost. A third level involves knowledgebased outsourcing which includes educated workforce in science & technology working instate-of-art R&D facilities. The knowledge based outsourcing involves multiple stages. Onone end it is manual knowledge delivery of tasks which cannot be automated, like data entry& processing. While on other end, it is research and development resulting into defining next
  10. 10. Intellectual Property Issues in Global Software Outsourcing 5generation products. The intellectual capital at stake increases exponentially as you movefrom lower stage to upper. Figure 2 Interactions among stakeholders in typical outsourcing scenarioSoftware Development On global scale, software development is both outsourced and offshored, primarily forcost competitiveness. The inefficiencies in labor markets in matured economies like highcosts of living and legal requirements on benefits, working hours and holidays result in muchhigher human resource costs. This forms fundamental costing for software development. Butthen how do distributed teams coordinate on delivering software globally? The global fiberoptic network which powers the Internet is the fundamental enabler for this phenomenon. Inaddition to improvised communication network, other factors which contribute are higheravailability of skilled, educated and English speaking workforce in developing countries likeIndia, China, Mexico and South East Asia. Overall, software development factors in thirdstage of skilled knowledge based layer of outsourcing levels. Based on requirements ofbusinesses it spreads across all stages in the third layer from basic level data entry operatorsto cutting edge research in areas related to computer science and information technology.
  11. 11. Intellectual Property Issues in Global Software Outsourcing 6Typical term used for this sector is IT/ITES which comprises of Information Technology andInformation Technology Enabled Services. Information Technology Association of America[7] defines Information Technology as the study, design, development, implementation,support or management of computer-based information systems, particularly softwareapplications and computer hardware. While ITES is defined as a form of outsourced servicewhich includes industries like banking, insurance, telecommunications which includes use ofmodern IT evolution. Estimated size of total IT service industry was over 1.1 trillion USD [6].IBM is the largest company in terms of market share, followed by HP and Accenture. Thisindustry is typically considered highly fragmented as top 4 companies control only around12% of market. The outsourced services comprise around 48% of total IT industry which isroughly a 500 billion dollar industry globally. The IT industry divisions as defined byDatamonitor are as below. Global IT Industry Data Processing and IT Consulting & other Outsourcing Market services Electronic Data IT & System Integration Processing (EDP) services Information Technology IT Consulting Outsourcing (ITO) Business Process Information Management Outsourcing (BPO) Services Figure 3 Organization of IT Industry A typical outsourcing of software development may involve making of softwareproducts or use of software products to make applications. When software products are made,the intention of company is to sell them further in the market to monetize the investment.
  12. 12. Intellectual Property Issues in Global Software Outsourcing 7Examples are again products like Microsoft Windows or Office in which a lot of contractorsare involved in development or testing activities. On other hand, when applications orservices are deployed using existing product, these are for sole use of client. Examples areintegration and customization of ERP like SAP for use of organization like AT&T by vendorlike IBM. Depending upon business model, a variety of ownership patterns may exist in suchbusiness models. The bulk of outsourcing projects consist of second type i.e. development ofapplications and services for purpose of running business operations of client.Outsourcing Contracts Typically firms participating in an outsourcing relationship sign contracts that defineterms of engagement, quality parameters of expected output and penalties in violation of the [22]terms . Since the contracts are typically international, they are subject to differences inlegal structures of individual home countries of the participating companies. Hence, it isimportant that certain factors like following are agreed upon. 1. The contract is signed in only one language. This copy is considered as master for all disputes. Other translated versions can be made available. This ensures that interpretations don’t change due to translation issues. 2. The jurisdiction under which any dispute will be subject to is agreed in advance. 3. Ownership of intellectual property including geographies, rights and period is mentioned. 4. Appropriate License of intellectual property owned by vendor but used in making the product which is generally owned by the client. Typically Outsourcing Contracts can be categorized into 4 types [23]. 1. Time and Material Contracts: Customer pays accepted hourly rate per resource. Typically used when vendor company does not own the full delivery and is only providing manpower to client,
  13. 13. Intellectual Property Issues in Global Software Outsourcing 8 which is executing the project. Also, it is used in full vendor-owned models when it is difficult to pre-estimate the cost of deliverables. The resources are billed/invoiced to client on month or quarter basis. 2. Fixed Price Contracts: When cost of deliverables can be accurately estimated, clients pay a fixed amount for pre-defined requirements to be delivered in given time with given quality. Either side needs to compensate the other for any variations in original conditions on their part. The number of resources used by vendor is not concern of the client. 3. Revenue Share Contracts: These are partnership contracts, where clients won’t pay vendor for making the product. But, instead it will promise a certain share in sales. While a vendor has significant risks in this model, if the potential product succeeds, then it would get higher returns than it would have got in case of Fixed Price contracts. 4. Hybrid Contracts: Hybrid contracts are those in which combinations of above models are used to hedge the risk on either party.
  14. 14. Intellectual Property Issues in Global Software Outsourcing 9 Intellectual Property World IP Organization [8] defines Intellectual Property (IP) as legal rights which resultfrom intellectual activity in the industrial, scientific, literary and artistic fields. IP rightsprovide moral and economic right to the creator over his creation. It helps in establishingtrade of IP with fair pricing where IP can be put to use in social and commercial developmentwhere original creators are justly compensated. Some of the common ways in which stategoverns IP are trademarks, copyright and patents. Although there is great amount ofheterogeneity in legislations and enforcement levels across countries. It is considered that inmatured markets of North America and Western Europe, the Intellectual Property laws aremore matured compared to emerging economies like India and China where these are innascent stage. However, enforcements of these laws have remained a continuous challengefor companies across the globe.IP in Products In this section we will discuss typical intellectual property that gets exposed insoftware outsourcing contracts. As defined by A. Story [9], the software is of two fundamentaltypes with respect to intellectual property protection. First is Proprietary Software, in whichsoftware code is under private ownership of creator which can be individual developer or thecompany employing the developer. We will see in next section how employers govern IPcreated by their employees. Most common example of proprietary software is softwareproduct like Microsoft Windows. Such software is never sold to end consumer, but licensed.Read excerpt from Microsoft Windows EULA [10].Microsoft Windows 7 Professional End User License Agreement (EULA) ExcerptSCOPE OF LICENSE. The software is licensed, not sold. This agreement only gives you some rights to use thefeatures included in the software edition you licensed. Microsoft reserves all other rights. Unless applicablelaw gives you more rights despite this limitation, you may use the software only as expressly permitted in thisagreement. In doing so, you must comply with any technical limitations in the software that only allow you touse it in certain ways. You may not - Work around any technical limitations in the software;
  15. 15. Intellectual Property Issues in Global Software Outsourcing 10 Reverse engineer, decompile or disassemble the software, except and only to the extent that applicable law expressly permits, despite this limitation; Use components of the software to run applications not running on the software; Make more copies of the software than specified in this agreement or allowed by applicable law, despite this limitation; Publish the software for others to copy; Rent, lease or lend the software; or Use the software for commercial software hosting services. Second type of software is commonly known as FLOSS which stands for [9]Free/Liberal/Open Source Software . Generally such software is governed by GNUGeneral Public License, which is structured exactly reverse as that of Microsoft’s EULA. Thesoftware source code is open and users can modify, redistribute, copy or use it for personal orcommercial use. Modified GNUs allow users to sell additional features built on top ofFLOSS based software frameworks for commercial purposes. There are many companies likeIBM which are building large scale commercial software on platforms like Java or Linuxwhich are Open Source Software. As we discussed in previous section on software development delivery models, the IPexposed in two models of product development vs. service development can be as follows. Inproduct development, the company which is proprietary owner of product invests a lot inR&D efforts, typically in new features, algorithms. Typically a large number of patents areregistered across countries to protect this information. Vendors working on these products indevelopment, testing or deployment phases, depending upon their involvement, get exposedto this intellectual information. Vendors involved belong to software companies typically notcompeting with client itself. But same company can serve client’s competitors. The sameperson may be working for competing company in the future. The humans can’t be rampeddown. So, although the actual source code is protected by patents and copyrights, theknowledge gained by person in terms of ideas and processes stays with him permanently. Thesame risk exists for permanent employees of client. But, considering attrition rate higher withcontractors than product firms themselves, the risk of leakage of such information is highwhen it comes to involvement of vendors (outsourced contractors).
  16. 16. Intellectual Property Issues in Global Software Outsourcing 11IP in Services In custom application or services developed, although there is less involvement ofresearch protected by patents, the code developed is intellectual property of vendors. But insuch contracts, it’s not the code that is critical IP. It is knowledge of business processes ofclients that vendors gain in order to develop software for them. A company typicallymaintains a lot of information on business processes, suppliers, channels, margins, distributorcontracts and pricing secret as it gains competitive advantage out of it. As part of softwaredevelopment, vendor gains deep insight into these processes. This is the real IP exposed tooutsiders. In fact, such knowledge is hard to quantify and hence difficult to protect even withcopyright or patent laws. Similar risks exist due to attrition of vendor resources to competingorganization. But, in software industry new business models are evolving, where vendor providingservice to traditional customers can retain the IP rights i.e. Contractors will not makesoftware on demand for the client which is owned by client but managed by vendor. Now,evolving models of cloud computing and Software as a Service (SaaS) [11] are resulting in thevendors renting these services to their clients rather than selling their software. Google rentsvarious enterprise services like Gmail, Google Docs where enterprises have to pay per usageto the Google. But they don’t have to worry about hosting and storing these services largedata centers. In this model, various APIs are designed by the vendor, which need to beconsumed by client side software in order to consume the services. While, APIs are largely inpublic domain thereby reducing IP risks of vendors, integrating vendors still are exposed toclient’s business processes and internal data.Trainings Employees are provided various trainings which are related or unrelated to work theydo. This is futuristic investment that employers do in their employees. It includes a variety of
  17. 17. Intellectual Property Issues in Global Software Outsourcing 12internal and external trainings, certifications and mentorship programs. The knowledgegained by individual is part of organization’s intellectual capital. In order to gain contracts inoutsourcing world, employers require their workforce trained in appropriate areas. Evensometimes client firms provide trainings to contractors in order to ramp them up on theproject work they are doing. The knowledge always stays with person and benefits histhroughout the career, but it comes at cost of one of the companies he worked with.Management of IP What do we mean by management of IP? Global organizations are in continuousexposure of IP due to larger partner involvement in their value chain. IP Management isdefined as Identification, Protection and Exploitation of the intellectual assets of theorganization. In software development, the code is open to those who work on it. And this codeforms major component of IP assets of the company. So, from corporate strategy point ofview, it is important that company identifies its short term and long term goals. Then itshould identify what is the key intellectual asset it has/need in order to achieve them. Thenthe strategies to protect those assets are needed to be devised. In order to balance company’sother goals, there will be need to exploit and expose these assets to various partners involvedin delivery chain. So, based on nature of engagement, the company should reviewperiodically its strategy with respect to protection and enhancement of those IP assets.Accordingly, such changes should be made. Important point to note here is that software is generally protected throughassemblies, which are binary versions of the working code. This means that code is notvisible to users. This is typical method used by proprietary software. But, there are ways toreverse engineer those assemblies and generate equivalent code segments that perform thebinary tasks. If we apply principles of VRIO (Valuable, Rare, Not Imitable, Exploitable by
  18. 18. Intellectual Property Issues in Global Software Outsourcing 13organization), then we can hardly classify code as Not Imitable. There are many alternativeways to make it look different than original but performing same function. This is the easiestway adopted to work around patents and copyrights. That’s why over period of time, the IPassets of software firm deteriorate. Figure 4 IP Management Workflow: Software Development*Source: Based on figure from Govt. of Australia’s guide for IP [25], Modified for Software Development
  19. 19. Intellectual Property Issues in Global Software Outsourcing 14 Legal Framework In this section, we will take overview of Intellectual Property laws in some leadingcountries in software world. We will also look at contract laws between partner companiesand employer-employee contracts.IP Laws in the world Due to large concentration of software companies, United States has been leading increating legal framework for protection of intellectual property. The laws exist at both federaland individual state level. They deal with trademarks, copyright, patents, trade secrets andother aspects of intellectual property [12]. A patent is traditional way of protecting inventions[14] . But a patent restricts use by inventor to gain economic benefit. But it does not keepinformation secret. By registering patent, the entire technical information is revealed. Inworld of software, it is relatively easy for organizations to make certain replacements inapproach and bypass patents in order to copy features in competing products. Typicalexample is Apple has hundreds of patens on capacitive touch screen. But, patents limit theidea to design of screen. All competitors have come up with capacitive touch screens in their [13]devices by twisting certain design methods. But Trade secret is defined as the proprietaryinformation that generates economic advantage for particular business. The organization doesnot disclose it anywhere and continues to receive benefits till it remains secret. EconomicEspionage Act of 1996, by Federal government passed under National InformationInfrastructure Protection Act of 1996 provides protection for trade secrets of organizationwhich covers prohibition of usage of trade secret and its usage or inclusion in any product foreconomic benefit of any entity other than owner. This specially covers for use of trade secretsof US based companies for benefit of foreign entities. Economic Espionage Act as equatedtrade secret threat with threat to the national security of United States. From globaloutsourcing scenario, this is important legal framework.
  20. 20. Intellectual Property Issues in Global Software Outsourcing 15 European Union, largest economic entity in the world, controls patents in the territorygoverned through European Patent Office. It was established through conventions and treatiesat European or International levels like Strasbourg Convention 1963, European PatentConvention 1973, London Agreement 2008, Patent Law Treaty and WTO agreements. EUmember states may or may not govern patents in their respective treaties. But, EU patentoverride patents issued by member states. European Union is however criticized for weaker [15]laws on trade secret protection as compared to United States. As described by DeMarco ,let’s look at case of Samarth Agrawal who worked for French bank Société Générale in NewYork. He copied and printed source code of algorithm used by bank with intention to sell it tocompeting hedge fund. On basis of evidence from video surveillance and print logs, FBIagents arrested him the day it was detected. Accused was convicted and sentenced to penaltyapplicable under law. However, in European Union, criminal law is not applied immediatelyin such cases. Also the investigating agencies lack resources and experience to investigatesuch cases of electronic trade secret theft. This means that Samarth if had done this crimesitting in Paris HQ of Société Générale, might have walked free after being detected for sucha crime. Situation in developing world is far worse. India, which is largest country hosting ITservices outsourcing projects outside United States, there are no laws defining term trade [16]secret . India is signatory on WTO’s agreement on Trade Related Aspects of IntellectualProperty (TRIP) and has enacted certain IP laws through new acts or amendments to existinglaws. These include laws related to patents and copyrights. However, Indian legal frameworkdoes not define the term “trade secret”. There are no text or reference cases available with thecourts. However, the Indian Contract Law Section 27 provides a sort of remedy toorganizations. We will see in detail in next section on contract laws.
  21. 21. Intellectual Property Issues in Global Software Outsourcing 16 Typically, from software development point of view, the IP laws related to patent,copyright and trade secrets are the most important ones. We need to take a note of copyrightlaw and how the copyright law and contract law work together. The copyright is typically [19]owned by the author himself. In India, the Copyright Act, 1957 (amended as perinternational treaties like TRIPS, 1995) defines ownership of copyright as to the person whois the author/creator/causer of it. Causer is the term used specifically for computer generatedwork including literary, dramatic, musical or artistic work. Note that person who operates thecomputer is not the copyright owner. E.g. If author of book is getting his work computerized,the person typing the book, thereby creating computerized copy is not entitled to copyright. Itstays with the author, who caused the computerized work to be created. A computerprogramming is defined by this law under literary work and hence, the programmer (the onewho conceptualizes and writes or develops code which composes into working softwareprogram) is entitled to the copyright. This however is overridden by employment contract.The Copyright Law specifies (Clause 17.a) that when a person develops literary work(programming included) as part of employment contract, the employer is first owner ofcopyright of such work, if it relates to function of the employer as defined unless contrary isdefined in employment contract. This means that company (employer) is default owner ofcopyright and employment contracts can override it if necessary. This leaves out case ofoutsourcing. The outsourcing relationship is not an employee-employer relationship andhence is not covered by clauses above. We will look at interesting case regarding outsourcinglater in this section.Contract Laws United States Contract Law varies depending on respective states. However, ingeneral, there are provisions made which allow two parties to sign confidentiality or non-disclosure agreements. These agreements are typically used to protect information disclosed
  22. 22. Intellectual Property Issues in Global Software Outsourcing 17as part of proposed negotiation or business deal, which may or may not work out. Thecontract is expected to call out items marked as confidential, duration for which informationis to be undisclosed. Contract Law prevents certain information that cannot be included insuch contract. This includes information received by receiver (created or obtained from thirdparty rightfully) before seller disclosed it, information commonly known in industry or inpublic domain and potential anti-national or information including activities deemed illegal.If such information includes trade secret then it is also governed by specific laws likeEconomic Espionage Law. [18] European Union Contract Law generally requires an explicit declaration ofconfidentiality in the contract. In addition, it says that certain information remainsconfidential even if explicit declaration is not made. Further, EU Contract law adds thatcertain information like trade secrets or know-how if disclosed during negotiation phase ofcontract, the other party can neither disclose nor use the information for its own use, shouldthe contract is not formed as result of negotiation.Employment Contracts Typically, employers sign contracts with their employees upon joining. As we haveseen, the provisions in contract laws across countries allow enforcing confidentiality clausesregards to information that employees get access to as part of their job. Such contracts areused in order to prevent employees from competing with employer or work for competitor ofemployer. This may also involve clauses like non-compete clause, where employees areforbidden from competing or working for competitor for certain period even after theiremployment ends with first employer. In India, the section 27 of the Indian Contract Act, 1872 states that agreements in therestraint of trade are void [17]. Indian Act prohibits employers to restrict use of skills, aptitudeand general technical knowledge by employees in competition with employer during period
  23. 23. Intellectual Property Issues in Global Software Outsourcing 18of employment. So, wider than necessary restrictions may invalidate the employment contractitself. This means that the employer if finds that employee is likely to misuse the informationhe has received as part of employment agreement, then employer is entitled to injunction toprevent such use. It is very limited remedy to employers to protect their trade secretscompared to Economic Espionage Act of the United States. Moreover, if the act is committedin past then employer is only eligible for damages and no criminal action can be initiatedagainst employee. The act also does not provide explicit protection to employers in case ofrevelation of such information by employees after their period of employment. Following are key aspects of employment contracts regards to intellectual property.[21]1. Pre-employment Intellectual Property of Employee: Employer does not get entitlement to any IP earned by employee prior to joining even in business areas related. The employment contract must call out the list in case employer seeks use of such IP through employment and should disclose how assignment of rights happen and who gets rights in case employee leaves the company in future. However, in absence of any specific clause, if any employee incorporates his own intellectual property into product owned by employer, then the employer receives non-exclusive, perpetual, royalty-free, worldwide, make-modify-copy-sell access to said IP.2. IP generated during employment: Intellectual Property generated by employee can include patents, copyrights and other information not covered by either. Patents and copyrights are governed by their respective laws. However, by default, laws in some countries like India grant copyright to employee (author). In such scenarios, the employment contract must include that the employee agrees to transfer rights to all such IP to the employer. Items not covered by Patent and
  24. 24. Intellectual Property Issues in Global Software Outsourcing 19 Copyright laws are solely governed by non-disclosure and confidentiality agreements under Contract Law.3. Recording of IP generated by employee: There are no laws which specify recording of IP. Hence, the employment contract should include that employee is required to comply with company requirement of up-to-date recording of IP in forms like designs, KM systems, notes & documentation. The company remains sole owner of such recordings after employee quits the job.Case Study: Pine Labs vs. Gemalto Terminals, High Court of Delhi [20] Pine Labs Pvt. Ltd. (hereafter referred as Pine Labs) is a software developmentcompany. Gemalto Terminals Pvt. Ltd. (former Schlumberger company, hereafter referred asGemalto) provides computer hardware terminals for retail establishments. Gemalto does nothave any expertise in software development. So, it engaged Pine Labs multiple times to writesoftware applications and backend systems for multiple of clients. Gemalto received contractfrom IOCL (Indian Oil Corporation Ltd.) card fleet program in 2004. It hired services of PineLabs to develop software for same. Later on in 2009 Gemalto received another contract forcards from HPCL (Hindustan Petroleum Corporation Ltd.). Gemalto approached Pine Labsfor this sub-contract, however negotiations did not work out. As a result, Gemalto awardedthe contract to other sub-contractor named M/S QCI Technologies Pvt. Ltd. (hereafterreferred as QCI). As part of system design, the software for HPCL would require to interactwith existing IOCL system. Gemalto asked Pine Labs to hand over the source code to QCI inorder to facilitate that. Pine Labs and Gemalto had signed Master Agreement for Development and Services(MSA). As part of agreement and subsequent correspondence it was agreed upon by bothcompanies that Pine Labs has been compensated fairly by Gemalto and thereby does notclaim any right over the software code developed for use of Gemalto. Therefore, Gemalto’s
  25. 25. Intellectual Property Issues in Global Software Outsourcing 20understanding was that it owns the source code rights of all the software developed by PineLabs under contracts with Gemalto. However, the agreement did not mention the time periodand territorial limits of the copyright claim. As per section 19 of Indian Copyright Act,default period was 5 years and default territorial limits as India. Section 17 of the CopyrightAct states that the copyrights of the given program code are vested with the employee asdefault unless contrary statement is agreed upon in the contract of employment. Since IndianCopyright Act does not specifically provide guidelines in case of outsourcing contracts, thesame employment contract provisions can be used. Section 18 of the Copyright Act specifiesthat copyright can be assigned to other owner, wholly or partially in terms of duration and/orterritorial limits. So, honorable court determined that outsourcing contract comes underSection 18 which determines Assignment of copyright and not first ownership. Therefore,court determined that due to no mention of duration, Gemalto was entitled to assignment ofcopyright only for 5 years. Moreover, assignment of copyright code may not permit furtherredistribution of the code unless specifically mentioned by the contract of assignment. Hence,since the HPCL program request was after 5 years, the rightful owner of the source code wasdetermined to be Pine Labs. This case highlights legal complexities in outsourcing of intellectual property likesoftware code. In case of outsourcing across countries, applicability of laws for such disputesis another issue as the laws vary greatly across geographies. It is therefore important that thecontract calls out duration, territorial limits and redistribution rights for source codecopyrights. Also, the contract should specify the country laws which will be applicable incase of any disputes.
  26. 26. Intellectual Property Issues in Global Software Outsourcing 21 Client-Vendor Relationship Clients and Vendors are both independent companies operating in different PESTELenvironment. The relationship between these companies may well extend beyond particularcontract. In this section, we will look into various factors (non-contractual or legal) whichdefine this relationship and any impact they have on the IP exposure risk. Roy and Sivakumar[24] in their paper empirically test impact of factors like trust and external controls/verificationon intellectual property management in client-vendor relationship. In this section we willstudy impact of various aspects of this relationship on management of IP i.e. Identification,Sharing, Protection, Enhancement, Transfer and Surrender.Trust Authors add interesting dimension by distinguishing between Interactions andCommunication. Communication is said to be more formal, while former is regarded asinformal and unstructured which helps in building knowledge and trust in businessrelationship. In section on distributed delivery models, we have already explained theoutsourcing model of interactions which are between employees of vendor and employees ofclient. While inter-company communication is more formal in terms of MoUs andagreements, we can easily imagine that when it drills down to individual employee level, theinteraction among them is more informal and the amount of friendliness in this interactionincreases over time as the trust increases. This is typical human psychological behavior. Theauthors further classify the trust into two types – Competence Trust i.e. the trust that thevendor is capable of delivering on its promises and Goodwill Trust i.e. the trust that vendor isperforming the tasks in ethical and professional intentions. While authors confine theiranalysis as one way i.e. Client expectations from vendors, we would like to highlight that thisrelationship should be viewed bidirectional. As we have already established that it’s not onlyclient’s IP which is at stake but vendor’s IP also matters significantly in outsourcing
  27. 27. Intellectual Property Issues in Global Software Outsourcing 22relationships in software development industry. Moreover, with the fact that software vendorsare also large size companies, in many cases much bigger than their average client size (e.g.IBM, Hewlett Packard, Accenture etc.), which naturally tilts bargaining power balance infavor of vendor than the client. Authors conclude that trust has 3 important dimensions which should be taken intoaccount - they are Quantity, Scope and Mode of communication. Please refer to appendix forlist of survey questions related to these dimensions.Verification As authors suggest, verification can be classified into two forms. First is ExternalControl, which is a more formal engagement. It involves reporting of elements for oversightpurpose. This reporting or audit can be related to inputs, processes and outcomes. In the caseof Software Development, the outcomes are very subjective or unstructured i.e. difficult tomeasure. However, typical variances tracked are schedule and budget. Typically outsourcingcontract defines the reporting items, methodology and items. This step is useful in trackinginventory of intellectual assets which may mean design documentation, reusable components,interfaces, modules etc. from software design point of view. Client can get direct idea intoprogress made by the vendor through these reporting. Second form of verification is Internal Control or self-verification. In outsourcingcontract, if the client sets expectations beforehand and vendor assures to deliver on certainSLAs, tracking responsibility of client reduces. But, this accountability to perform onvendor’s side results in processes of control for internal point of view. Typicaldocumentation, status reporting, checkpoint meetings are some of the popular ways. We need to note one important factor i.e. attrition. Since, employees of vendor are notin any employment agreement with the client, they are subject to change their jobs at theirfree will. Even in typical outsourcing engagements, vendor companies keep their workforce
  28. 28. Intellectual Property Issues in Global Software Outsourcing 23highly mobile and rotate them through their entire portfolio. In country like India, where IT [30]industry is facing over 20% attrition each year, this problem is significant . As alreadyestablished, not all the intellectual property can be recorded in form of documentation. So, insuch cases of employee attrition a large portion of their knowledge is lost each year andcompanies need to spend extra resources to make up for those. Attrition impacts the vendor-client relationship significantly. There is also chance that the employees of vendor may workfor competitors of client after they leave their position with vendor organization. Since,employees of vendor sign no agreement with client, there is practically no way the client canseek injunction against this hiring. This results in loss of IP (typically unsecured), valuableknow-how and skillset for the client.Other Aspects of Interaction The language plays critical role in conveying thoughts therefore impact understanding [26]and transfer of Intellectual Property to large extent. As Gasparro says, even if offshoreexecutives learn the English language, they may not be versed in the quirky phrases and localdialects which make English difficult to comprehend. The geographic proximity helps in certain ways. First, it facilitates easy hassle-freetravel and enables face-to-face communication more frequently than in case of remoteoffshoring. It is opinion of experts in software industry that personal communication is moreeffective than digitally enabled communication (video conferencing) in case of knowledgetransfers. Second, the geographic proximity ensures temporal closeness i.e. time zones arecloser. West Coast of U.S. and India have time zonal difference of nearly 12 hours. In orderto work together, the team located across continents need to work long hours to achieveoverlap. It also provides relatively shorter bandwidth for such meetings compared topossibility of accessing full working hours of employees. Working in shifts or overtime hasits own costs in personal life of employee as well as to business.
  29. 29. Intellectual Property Issues in Global Software Outsourcing 24 In today’s era of multinationals, the unique issue of conflict of cultures has arisen.MNCs typically maintain consistent culture across countries of operations. Sometimes theycustomize some policies to local culture in order to accommodate legal and socialrequirements. It results in conflicts on two fronts. First is Inter-subsidiary cultural difference.Second is organization-national culture difference. Hofstede proposed framework to evaluateorganizational cultures and national cultures, called as cultural dimension theory. Heproposed this theory as result of study done in IBM Corp. As result of Hofstede’s workfollowed up by renowned psychologist, we can define following cultural dimensions thatimpact organizational cultures. 1. Power Distance Index, 2. Individualism vs. Collectivism, 3. Uncertainty Avoidance Index, 4. Masculinity vs. Femininity, 5. Long term orientation, and 6. Indulgence vs. RestraintThese dimensions are largely responsible for different legal frameworks and differences ininterpretations of individual’s rights. E.g. People in U.S. consider software piracy as criminaloffence at par with physical thefts and are punishable by law there. But in countries likeChina and India, the recognition of intangibles (software) vs. tangibles differs greatly. Similaris the case with idea of patents, copyrights and any other protection given globally tointangibles. Though under international treaties, the law makes piracy punishable offense, theenforcement has largely remained non-existent as authorities are not exception to thesecultural dimensions. The culture, therefore, appears critical obstacle in stringentimplementation of Intellectual Property laws. Cultural differences also result in affecting
  30. 30. Intellectual Property Issues in Global Software Outsourcing 25team dynamics and therefore may affect knowledge transfers. It also requires companies toprovide additional trainings to their global employees, which means additional costs. Some researchers have coined the term “Nearshoring” which means outsourcing tothe country sharing borders or having proximity on one or more dimensions like linguistic, [27]geographic, cultural, political, temporal (time zone), economic or historical . However,such nearshoring may not satisfy skill or cost benefits typically associated with softwareoutsourcing decisions. Hence, it may not prove strategic.
  31. 31. Intellectual Property Issues in Global Software Outsourcing 26 Corporate Strategy There are risks involved in outsourcing. Companies pursue outsourcing only whenthey conclude that benefits outweigh the risks involved. Hence, from strategic point of viewthe outsourcing is crucial decision and requires companies to perform more due diligencebefore pursuing this route. In this section, we will restrict the discussion to those aspectswhich deal with intellectual property issues. Strategic decision holds more significant fromoutsourcer’s point of view than vendors’. For vendors, it is their normal business process toseek out new clients and new businesses. So, the risks involved are well understood bymanagement of vendor and they are well prepared on both managerial and legal front tohandle these challenges. Opposite is true for small and medium companies which seekoutsourcing of part of their business from cost saving point of view.IP due diligence There are multiple companies which run their own IT organizations and partlyoutsource the IT services. From strategic point of view it is important what to outsource andwhat not to. The key principle of management control is “If you can’t measure it, you can’t [29]manage it.” In order to effectively manage the IP assets, it is therefore important toperform IP Audit or Due Diligence check before making IP transfers or sharing with theoutsourcee. An IP Audit is defined as systematic review of IP assets created, owned, used oracquired by the business. The key purpose is to identify under-utilized IP assets, identifythreats to company’s future cash flows and enable business planners to devise informed [29]strategies . Typically the IP audit tracks various internal IP assets, their life over whichcompany can rip benefits, extent of use, importance and estimated present value of monetarybenefits. Such audit will enable company to classify the Intellectual Assets involved invarious buckets on different parameters and help formulize policies on what to outsource and
  32. 32. Intellectual Property Issues in Global Software Outsourcing 27what not to. Generally IP audits are performed by internal experts or independent consultants.These are non-statutory audits and require no disclosure. IP due diligence can be performed during various business transactions like mergersand acquisitions, negotiating license or franchise agreement, sell of trademark or copyright,or outsourcing. From outsourcer’s point of view, following due diligence items are important[28] . 1. Discuss fully with your IP professional what it is that you think you are getting out of the transaction. 2. Enlist the protections along with their scope – operations, geographies and time 3. Understand your obligations to the outsourcee. 4. Understand in which geographies and timeline the outsourcee will transfer, use or modify the IP assets.From outsourcee’s point of view following due diligence checklist is important. 1. Obtain full detailed information on exposed IPs from outsourcer along with possible protections. 2. List the operations that may be possibly performed on those IPs – transfer, share, modify, use. Discuss the possible impact of those changes on protections already in place. Clarify the licensing rights you receive. 3. Ensure that for all the shared IPs, the outsourcer has full ownership rights to distribute those across geographies of operations or the areas in which such IP will be subjected to use or change, as applicable. 4. Identify if any of those IPs are subject to litigation or infringement suits.Business Intelligence The possible misuse of IP transfers requires motive. Risks involved in IP transfer varylargely based on ability of the receiver to exploit it. It is therefore critical that company has
  33. 33. Intellectual Property Issues in Global Software Outsourcing 28sufficient intelligence on the contracting partner it is going to tie up with. This is applicablefor both outsourcee as well as outsourcer. 1. Outsourcer’s competitors First, it is important to gather information on business relationships between thepartner company you are seeking and your business competitors. If exists, then the companymust make certain disclosures on nature of business transactions and measures taken toprotect the IP of customers so that party can decide if it can proceed with relationship. Manylarge IT organizations like IBM, HP serve large number of clients, many of them fiercecompetitors of each other. It is also possible that same facility of outsourcee at single locationis serving multiple competitors. However, these companies are known to implement stringentmeasures to protect mutual exclusiveness of such business practices through protected bays,physical security, access control and providing awareness trainings to employees to preventthem disclosing details to other employees working on different client projects. 2. Outsourcee’s other businesses It is also important to understand information about other businesses of companyalong with businesses of subsidiaries and parents to determine if there are conflicts of interestexist with business model of prospective partners. Many times outsourcee organizations arepart of large conglomerate. In that case, outsourcer will need to evaluate if outsourcee is notbenefited due to potential exposure of any of IP assets. Indian IT giant Wipro Ltd. is largeconglomerate with businesses apart from IT outsourcing in PC Original EquipmentManufacturer, cosmetics and electrical equipment. A client like Lenovo which is large PCOEM, may not possibly prefer to outsource services relating to its core business as there ispossible case of conflict of interest as it competes with other business (PC) of Wiproconglomerate. 3. Outsourcee and outsourcer’s customers
  34. 34. Intellectual Property Issues in Global Software Outsourcing 29 As companies outsource IT services to outsourcee vendors, it’s not just their IP that isexposed. But many times it involves confidential data of their customers. Hence, based onkind of customer data that may be possibly exposed the conflict of interest needs to beevaluated. Microsoft Corp. is not in business of PC manufacturing. But it is vendor to all PCbusinesses in the world which involves selling Windows operating system. Since, Microsoftis a large company, not all the divisions are involved in Windows sales. HCL Infosystems isanother Indian IT major which is also top PC OEM in India. Microsoft’s those divisionswhich deal with PC business cannot possibly outsource to HCL as that would expose data ofother customers like Dell or HP which are competitors of HCL. Also, in OEM businessMicrosoft and HCL have customer-buyer relationship. In same business, establishing parallelpartner relationship clearly creates possible opportunity for exploitation of each other’s IP.However, unrelated divisions of Microsoft like Database Product Development can establishoutsourcing relationship with HCL without any conflict of interest. 4. Corporate Governance To ensure proper protection and respect of partner’s IP, it is important thatprospective partners rate high on modern corporate governance. It involves maturity ofinternal security processes, financial and other statutory disclosures and fair businesspractices. 5. Feedback from clients When establishing relationship with outsourcee first time, it is recommended to seekfeedback from other clients. For marketing purpose, outsourcee will be making a lot of claimsin its bids or proposals. Hence, checking the reputation of firm on fulfilling the promises maybe helpful in analyzing the vendor. 6. Financial Strength
  35. 35. Intellectual Property Issues in Global Software Outsourcing 30 Generally outsourcing relationships are established between partners which havesimilar relative size in their respective industries. It is unlikely that large organizations likeGE would create outsourcing relationship with a startup unless it is seeking particular skillset.This is primarily due to confidence in conducting large projects, financial stability required todeliver on long term contracts. Moreover, large companies also provide large and long-termcontracts and do not like to see disruptions in outsourcee operations due to consolidationactivities like mergers and acquisitions, which are more prevalent in small and medium sizecompanies. IP due diligence and corporate intelligence on prospective partners help companies totake decision on which products they can outsource and to whom. It is critical decision instrategic outsourcing.
  36. 36. Intellectual Property Issues in Global Software Outsourcing 31 Research Methodology We have now reached the final stage of this research work. So far we have reviewedseveral articles and papers in order to establish various factors that impact the intellectualproperty transfer in global outsourcing scenario. Now in this section, we will designframework that captures the inputs from secondary literature survey along with exploratoryanalysis based on expert survey conducted on initial list of variables in order to summarizethem with resulting factors. In this section, we will discuss each step in detail. The step-by-step research methodology is as follows:1. Establish research problem definition.2. Identify variables impacting intellectual property transfer in global software outsourcing through secondary research i.e. literature survey3. Conduct primary research i.e. expert survey in order to gather opinion on extracted list of variables.4. Use statistical summarization technique like perform Exploratory Factor Analysis in order to reduce these variables and extract critical factors that explain the variance.5. Prepare model indicating critical factors impacting intellectual property transfer in global software outsourcing.Problem Definition We are aware of the phenomenon that global software outsourcing will haveimplications on the intellectual property transfers between involving partners. From thesurvey of literature we can enlist various observable variables that can imply these issues.However, we are not aware of underlying factors with which these variables are interrelated. Based on mathematical model in Wikipedia, let’s build model applicable in this [31]scenario . We assume that any indicator (variable) may be associated with any number offactors. We have no theory or hypothesis in place with respect to these factors and their
  37. 37. Intellectual Property Issues in Global Software Outsourcing 32relation. Let’s assume that there are n such variables - x1, x2, x3…..xn. Let there be munderlying factors f1, f2, f3,….fm. We will be conducting survey of N number of person toobtain scores for n variables. Therefore xi,j represents score of jth person against variable xi.Let µ1, µ2,… µn be means of all observed values of variables x1, x2,….xn. Let li,k representfactor loadings for ith variable for kth factor. Hence l1,2 will represent factor loading of xi on f2.We can define mathematical model for ith response of variable x1 as: x1,i = µ1 + l1,1*f1 + l1,2*f2 + . . . + l1,m*fm + ε1,iTherefore, a generic matrix based model can be defined as: X = µI + LF + εWhere, I is identity matrix of order 1 x N. X is matrix of observable random variables of order n x N µ is column matrix of means of all n variables of order n x 1 L is factor loading matrix of order n x m F is underlying factor matrix of order m x N ε is variance unexplained by factors or error in observation We have now established the fundamental mathematical model of factor analysis. Wetherefore, can summarize the problem definition as follows – “Identify underlying factors that impact intellectual property transfer in globalsoftware outsourcing scenario based on observable variables based on the feedback of theexperts in the related field.” In this research we will perform factor analysis independently for three aspects –Legal, Human Resource and Strategic, which are mutually exclusive of each other. The datareduction will be applied for variables under these categories separately.
  38. 38. Intellectual Property Issues in Global Software Outsourcing 33Variables Extracted Based on the secondary research (literature review) done in this report, following 39variables have been identified. These variables are classified into three aspects – Legal,Human Resource and Strategic, in line with the organization of the report. Section Variable ID Variable Description VAR00001 IP asset identification in contract VAR00002 IP asset valuation in contract VAR00003 Single language contract VAR00004 Dispute jurisdiction VAR00005 Applicable law in dispute Legal VAR00006 Licensing terms - rights, geographies and time VAR00007 knowledge of Patent, Copyright, Non-disclosure/Confidentiality Laws VAR00008 knowledge of Non-disclosure/IP annexure signed in employment contract VAR00009 knowledge of IP laws in home country VAR00010 knowledge of IP laws in Country of origin of partner VAR00011 Establishing communication protocol with partner and train employees VAR00012 Employee Training on what all constitutes as IP assets VAR00013 Employee Training on Strategic importance of those IP assets VAR00014 National cultural dimensions: similarities and differences between client/vendor VAR00015 More number of messages exchanged VAR00016 More time spent in communication Human VAR00017 Communication between employees at multiple levels Resources VAR00018 Communication between employees from different functions VAR00019 Proactive sharing of information required to perform task VAR00020 Face-to-face communication VAR00021 Informal/personal communication Incl. Facebook, Google Chat, LinkedIn VAR00022 Trust on capability of other partner on delivering on promises VAR00023 Trust on ethical and professional behavior of other partner VAR00024 Recording IP in desired format (documentation, diagrams, KM systems) VAR00025 Market reputation of partner company VAR00026 Internal Project Progress Reporting, Review and Tracking (Within firm) VAR00027 Periodical Project Progress Reporting, Review and Tracking with/to/for the client VAR00028 Perform regular IP Audit (assets, life, benefits, importance) VAR00029 Engage IP experts (internal or external consultants) Strategic VAR00030 Classify IP assets based on value and importance VAR00031 Evaluate potential assets exposed using IP due diligence checklist VAR00032 Organizational policy on what to outsource VAR00033 Business relationship of partner with your competitors VAR00034 Other businesses of your partner (Possible Conflict of Interest) VAR00035 Relationship between partner and your customers VAR00036 Corporate Governance policies of partner
  39. 39. Intellectual Property Issues in Global Software Outsourcing 34 VAR00037 Market reputation/Feedback from others about your partner VAR00038 Financial strength of partner VAR00039 Political, Economical and Social conditions in partners country(s) of operationSurvey Design In order to reduce these variables using Exploratory Factor Analysis (EFA) method, aprimary research survey was conducted.Survey Nature: An anonymous survey was created. No personally identifiable content was captured.Apart from responses to specific questionnaire described below, some additional profileinformation was captured. It included user’s role whether outsourcer (client/customer) oroutsourcee (vendor or contractor). Position title and work experience in years was also asked.Also the geographical location of user was captured. This data has no direct role inidentifying factor weightages, but it may be used for qualitative analysis of the data. It alsoindicates diversity of responses gathered.Questionnaire: A survey questionnaire was designed with one question corresponding to each of the39 variables. The questions were not organized as per sections of analysis to eliminate anyinherent bias. Rather questions were combined based on topics like contract, training,communication etc. Audience was asked to rate importance of the variable as output. Allquestions were positive in nature i.e. higher importance of presence of variable will always beindicated by 7 for from intellectual property impact, while 1 would indicate no or lesserimportance of particular variable.Specific Questions: Only 1 specific question was asked – “According to you, which of the following is thecorrect representation of IP exposure risk in software outsourcing?” The intention is to
  40. 40. Intellectual Property Issues in Global Software Outsourcing 35measure perception of IP issues faced by vendors or clients among audience. We will discussqualitatively these responses in later section.Scale: All responses were gathered on Likert’s 7 point scale from “Not Important” to “VeryImportant”. All questions had same response scale, so no standardization of responses wasrequired. Among Likert’s scales, 5-point and 7-point are considered most accurate andreliable as they represent adequate intervals from both user distinguishability point of view aswell as statistical significance. However, though there is no conclusive evidence, manypsychometricians recommend 7-point scale over 5-point in obtaining observation scores forexploratory factor analysis. Hence, the 7-point Likert scale is used in this survey.Survey Responses In this section we will discuss sampling method employed in conducting survey anddescriptive analysis of audience profile.Sampling Method: It was decided to conduct the survey as Expert survey. The method used wasSnowball sampling which is non-probability sampling method. Invitations were sent out toknown practitioners in software outsourcing or offshoring model. The audience involvedprofessionals on both client as well as vendor side. Individuals were also asked to forwardinvitations to people they know who have experience in managing outsourced projects fromeither side. We have received considerable number of responses from such secondary level ofcontacts. The survey was setup using user-friendly UI of the surveymonkey.com and wasadministered online. The target audience was contacted using personal email invitations withstandard 1 reminder 2 days prior to deadline using messaging on their social networking(Facebook) profile.
  41. 41. Intellectual Property Issues in Global Software Outsourcing 36 A total of 35 participants undertook the survey. Out of those responses a total of 28responses were considered valid after eliminating inconsistent and incomplete responses. Infollowing section we will discuss brief profile of the audience.Participant Profile: Overall audience represents diverse set of individuals from both sides of outsourcing,in various positions and with wider work experience range. Although majority audiencecomes from India, there was decent representation from matured markets like North America,Hong Kong and Western Europe. The audience profile is discussed with help of graphicaldiagrams. 10 Outsourcee (Vendor / Contractor) 18 Outsourcer (Client / Customer) Figure 5 Participant Statistics by Role 3 7 People Managers 8 Developers Consultants/Analysts 10 Test/Support Figure 6 Participant Statistics by Position
  42. 42. Intellectual Property Issues in Global Software Outsourcing 37 4 5 Upto 2 years 6 Upto 5 years Upto 8 years 13 8+ years Figure 7 Participant Statistics by Related Work Experience 2 1 6 India North America 19 Hong Kong/Singapore Western Europe Figure 8 Participant Statistics by Work Location Client has more risks 2 4 13 Client and vendor have equal risks 9 Only client IP is exposed Vendor has more risks Figure 9 Participants’ perception of IP risks Above diagram represents the participants’ perception on IP risks involved insoftware outsourcing. Since the survey was within expert audience, everyone agrees thatthere are considerable IP risks involved in software outsourcing. However, most believe thatclient is more susceptible. But convincing number of individuals consent to our opinion that
  43. 43. Intellectual Property Issues in Global Software Outsourcing 38both client and vendor face equal risks with respect to IP in software outsourcing. The minorvariations may be accorded to different scenarios like type of outsourcing, types ofcompanies involved and different level of involvement of participant with respect to givensoftware project. The opinion on risks is not subject to further analysis as part of this study.Factor Analysis Configuration Software used for analysis was IBM SPSS version 16.0 licensed to Indian Institute ofManagement Lucknow which is made available to students for academic purposes. The toolsupports out-of-box functionality for statistical analysis using Factor reduction method. Thishelps summarizing large factors into more compact components. The tool also supportsVarimax rotation.Statistical Analysis Package IBM SPSS v16.0Descriptives 1. Kaiser-Meyer-Olkin Measure 2. Bartlett’s Test of SphericityExtraction Method Principle Component ExtractionFactor Extraction Criteria Eigen Value > 1.0Rotation Method Varimax rotation with Kaiser NormalizationInterpretation Method Identify loading >= 0.5 in rotated component matrix Following are various details regards to Exploratory Factor Analysis methodconducted.Descriptives: We will use following descriptives to check validity of factor reduction analysis.
  44. 44. Intellectual Property Issues in Global Software Outsourcing 39 (1) Kaiser-Meyer-Olkin Measure (KMO) of sampling adequacy: This measurespartial correlations between variables. If > 0.5, it indicates that the given sample is sufficientfor factor reduction. Otherwise, it may indicate that the factor analysis is satisfactory. (2) Bartlett’s Test of Sphericity: The null hypothesis that factors are uncorrelatedmust be rejected in order to proceed with the factor analysis. If significance is less than 0.05,it indicates there is sufficient evidence to reject null hypothesis and the factors have strongcorrelation among themselves, hence factor analysis can be conducted.Extraction Method: The motive is to extract minimum number of factors that explain variation. Hence, wewill use Principle Component Method for extraction.No. of factors to be extracted: There is no requirement to extract fixed number of factors. We will extract all thosefactors which have Eigen Value higher than 1.0.Rotation Method: Since we want to reduce number of variables with high loading on a factor, we useorthogonal rotation. The particular method used here is Varimax rotation with KaiserNormalization.Interpretation Method: We will interpret loading of variables on factor using rotated component matrix. Wewill follow general thumb rule of identifying loadings which are >=0.5. In some cases, wherevariable did not load on any factor, we have taken factor loadings which are close to 0.5, dueto inadequacy of sample size.Factor Analysis Results The 3 sections – Legal, Human Resource Practices and Organizational Strategy arenot factors but aspects of organizational operations. Hence, factor analysis was performed
  45. 45. Intellectual Property Issues in Global Software Outsourcing 40separately for each section. There is sufficient literature available to say that these threeaspects are independent. This would avoid any random pattern to emerge among variablesfrom different sections. Let’s look at EFA results one-by-one.Legal Aspects:SSPS OutputDescriptive Value RemarkKMO sampling adequacy 0.607 Sample sufficient for factor analysisBarlett’s Test of sphericity sig. 0.000 Null Hypothesis rejected, Factor Analysis possible a Rotated Component Matrix Component Variables 1 2 3IP asset identification in contract .099 -.095 .894IP asset valuation in contract .261 .042 .879Single language contract .577 .279 .292Dispute jurisdiction .956 .089 .078Applicable law in dispute .950 .033 .085Licensing terms - rights, geographies and time .759 -.047 .313knowledge of Patent, Copyright, Non-disclosure/Confidentiality Laws -.172 .915 .195knowledge of Non-disclosure/IP annexure signed in employment contract .118 .945 -.029knowledge of IP laws in home country .390 .804 -.305knowledge of IP laws in Country of origin of partner .668 .614 -.149Extraction Method: Principal Component Analysis.Rotation Method: Varimax with Kaiser Normalization.Rotation converged in 6 iterations.Interpretation The factors are interpreted as follows- Factor Variance Loadi # Interpretation Explained ng Variables in Factor F1 Legal intricacies of 34.45% 0.577 Single language contract contractual contents 0.956 Dispute jurisdiction 0.95 Applicable law in dispute 0.759 Licensing terms - rights, geographies and time 0.668 Knowledge of IP laws in Country of origin of partner F2 Employee training 28.53% 0.915 knowledge of Patent, Copyright, Non-
  46. 46. Intellectual Property Issues in Global Software Outsourcing 41 on legal matters disclosure/Confidentiality Laws related to IP knowledge of Non-disclosure/IP annexure signed in 0.945 employment contract 0.804 knowledge of IP laws in home country 0.614 knowledge of IP laws in Country of origin of partner F3 Formal IP 19.23% 0.894 IP asset identification in contract assessment 0.879 IP asset valuation in contractHuman Resource Aspects:SSPS OutputDescriptive Value RemarkKMO sampling adequacy 0.545 Sample sufficient for factor analysisBarlett’s Test of sphericity sig. 0.000 Null Hypothesis rejected, Factor Analysis possible a Rotated Component Matrix Component Variables 1 2 3 4 5Establishing communication protocol with partner and train employees .624 -.062 .359 .039 -.438Employee Training on what all constitutes as IP assets .880 .213 -.186 .005 .059Employee Training on Strategic importance of those IP assets .879 .228 -.172 .082 -.001National cultural dimensions: similarities and differences between .839 -.030 .268 .069 .009client/vendorMore number of messages exchanged -.043 .290 .893 -.002 .173More time spent in communication .052 .312 .781 .041 .180Communication between employees at multiple levels .055 .702 .416 .327 .124Communication between employees from different functions .201 .803 .236 -.152 -.205Proactive sharing of information required to perform task .094 .809 .159 .137 .262Face-to-face communication .337 .391 .157 -.258 .588Informal/personal communication Incl. Facebook, Google Chat, LinkedIn -.141 -.021 .299 .092 .879Trust on capability of other partner on delivering on promises .026 .074 .188 .911 -.081Trust on ethical and professional behavior of other partner .107 .042 -.129 .933 .063Extraction Method: Principal Component Analysis.Rotation Method: Varimax with Kaiser Normalization.Rotation converged in 6 iterations.Interpretation The factors are interpreted as follows-
  47. 47. Intellectual Property Issues in Global Software Outsourcing 42 Factor Variance Loadi # Interpretation Explained ng Variables in Factor F4 Employee training 21.88% Establishing communication protocol with partner on soft skills and 0.624 and train employees awareness of IP 0.88 Employee Training on what all constitutes as IP assets Employee Training on Strategic importance of those 0.879 IP assets National cultural dimensions: similarities and 0.839 differences between client/vendor F5 Holistic and 17.20% Communication between employees at multiple proactive 0.702 levels communication Communication between employees from different 0.803 functions Proactive sharing of information required to perform 0.809 task F6 Frequent contact 16.09% 0.893 More number of messages exchanged 0.781 More time spent in communication F7 Trusted relationship 14.91% Trust on capability of other partner on delivering on between partners 0.588 promises Trust on ethical and professional behavior of other 0.879 partner F8 Encourage informal 11.65% 0.911 Face-to-face communication contact Informal/personal communication Incl. Facebook, 0.933 Google Chat, LinkedInCorporate Strategic Aspects:SSPS OutputDescriptive Value RemarkKMO sampling adequacy 0.587 Sample sufficient for factor analysisBarlett’s Test of sphericity sig. 0.000 Null Hypothesis rejected, Factor Analysis possible a Rotated Component Matrix Component Variables 1 2 3 4 5Recording IP in desired format (documentation, diagrams, KM systems) .164 .269 .001 -.145 .780Market reputation of partner company .701 .333 .356 -.292 .068Internal Project Progress Reporting, Review and Tracking (Within firm) .255 .252 .111 .863 .058Periodical Project Progress Reporting, Review and Tracking with/to/for the .330 .209 .203 .797 .140clientPerform regular IP Audit (assets, life, benefits, importance) .163 .179 .763 .146 .248

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