Lowering intellectual property (IP) risk when outsourcing manufacturing

June 28, 2007

The benefits of outsource contract manufacturing and globalization are significant. However, with these benefits comes the risk of company executives losing intellectual property (IP) - often the most valuable asset of any product-based organization.

This increased risk is because contract manufacturing or product design firms may:

• not fully understand IP, and the importance of IP rights
• be unclear with regards to your company's position regarding IP
• begin to understand your company's technology as well as you do
• develop invention(s) around your company's technology space
• not have an incentive to assist with IP issues around this invention
• reveal your company's proprietary information to please other customers they perform work for
• not have loyalty to your organization

Organizations can lower IP risk when partnering with contract manufactures or product designers. Specifically, to lower IP risk associated with these outsourcing activities, companies should:

1. Firewall key product or process areas
2. Strategically identify where to outsource
3. Extract and file IP before outsourcing
4. Establish jointly-developed IP ownership and confidentiality requirements with contract manufacturing or product design firms before engagement
5. Extract and file IP during and after outsourcing
6. Outsource strategically to multiple contract manufacturing or product design firms to reduce potential for knowledge transfer
7. Reduce possibility of contract manufacturers or product designers working with competitors

Firewall key product or process areas

The most important decision an organization might make during a contract manufacturing or product design engagement is deciding what not to outsource. In many instances, these critical areas should be ‘firewalled' from contract manufacturers and product designers and performed, in-house, despite additional costs. Identifying such areas requires organizations to carefully break-down products or processes into component parts and firewall component areas from contract manufacturers or product designers that:

• add the most value to a product or process;
• significantly differentiate the product or process; and
• cannot be reverse engineered

Manufacturing of product areas that do not meet the above requirements can be outsourced with relatively low risk. Understanding this critical issue will also help direct future invention efforts to purposefully develop products with a significant amount of components that can be outsourced at low risk. For example, organizations should:

• purposefully develop non-reverse ‘engineerable' component areas that can be manufactured and easily introduced into outsourced components
• separate and/or run key algorithms or software from on-shore servers; and/or
• add ‘tracers' to monitor copying (such as a non-functional component intentionally added to a device which creates no real value add in doing so, this provides a way for actual IP owners to then identify a specific compound or component added for the sole purpose of monitoring unauthorized duplication)

Strategically identify where to outsource

IP registration should not only be filed in geographic locations or destinations where companies sell and use their technology, but also in areas where they currently, or potentially, would enter into contract manufacturing or product design partnerships.

    

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