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Preparing to Outsource Innovation

by Jackie Maguire, CEO, Coller IP

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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