Outsourcing, In-Sourcing and Intellectual Property

This post was first published on November 03, 2014.


An article published in The Hindu on October 24, 2014, talks about the silent in-sourcing movement in Multi-National Companies. Organisations such as General Motors, focussing on in-sourcing IT operations during the last three years, and Astra Zeneca, setting up a captive unit in Chennai to move a large portion of global IT operations, have been cited in the news report as examples to highlight the growing in-sourcing phenomenon. One of the reasons cited in the article for such a trend is to safeguard high value Intellectual Property of the in-sourcing companies. Taking the statement at face value and assuming that there is IP at stake in out-sourcing the same, could there be anything with respect to IP, that might be encouraging this trend?

Though the decreasing trust of foreign companies in the Indian IP system might be a reason, on the face of it, it is remote and extrapolated. Besides, the level of confidence in a country’s IP system is a subjective determination, largely influenced by a company’s, or a sector’s, business interests. So, I am consciously staying away from taking this path.

Now, what else could be causing this trend? The reason cited is protecting high value IP. This, not so indirectly, implies that high value IP is not safe, if IT operations are out-sourced, vis-a-vis, them being in-sourced. Two possibilities can lead to this conclusion, both of which I have addressed and rebutted here.

a. Inability to protect the outsourcing company’s confidential information, know-how, and most importantly, knowledge of the field, vertical, sector or the company.

A quick peek at Indian law with respect to confidential information and trade secrets, based on case law (this being primarily common law based) would lead one to the conclusion that there is nothing wrong with the law. The law is as good as it is in other common law countries. Furthermore, except in cases where employee-livelihood is involved (non-compete situations), appropriate remedies have always been available and exercised. This is despite the challenges of capturing knowledge and know how that forms part of transactions, and placing them in compartments of confidential information and trade secrets.

Now, moving to business, the instances of confidential information or trade secret misappropriation have been very few, and largely negligible. Businesses have worked out models ranging from Chinese walls to dedicated, segregated centres to stringent legal instruments and security measures to handle confidentiality issues, which have not only worked well, but have also proved to be very efficient in safeguarding an outsourcing company’s information. Many companies even sign agreements directly with employees in dedicated centres, and assume great control over resources, thus making many outsourced IT projects virtual captive units. In such a scenario, it seems unlikely that confidentiality issues may be the reason for the perceived in-sourcing trend.

b. Issues with respect to protection and ownership of IP of an outsourcing company.

Assuming that the outsourcing company is not a software company, its IP can be divided into two basic categories: Core IP – Directly relevant to business, and Peripheral IP – IP related to its IT operations, not core to business. For example in an automobile company, creations relating to the functioning of the automobile would be core IP and creations with respect to the company’s IT operations would be peripheral IP. Seen from this perspective, by outsourcing IT operations, a company is not putting its high value IP at stake.

Having said that, one may argue that by outsourcing its IT operations, a company which pervades every operation of an organisation would be exposing its Core IP to the service provider. This surely is a possibility, especially if system administration, security operations etc., are outsourced. The service provider, in such a case, would have access to even the Core IP of the company. But, does mere access mean a risk of IP loss. It can be so with respect to unprotectable IP, IP pre-protection or in the process of protection etc.

The said risk, in the normal course, is handled through stringent and restrictive contractual provisions and independent monitoring / watch. All outsourcing contracts have provisions vesting all ownership in the outsourcing company and levying heavy warranty and indemnity onus on the service provider. Service providers often take liability insurance and sign open ended indemnity provisions.

In the said backdrop, would in-sourcing solve the problem? It surely does not, especially if the company is looking at a captive unit in India. Most challenges are common for both dedicated centres and captive units, and considering the rate of attrition, where employees move from captive units to IT service providers, the IP problems, if any, persist.

Why, then, are companies tending towards in-sourcing, and is this really a phenomenon? Though protecting IP is being cited as a reason, it seems that the decision to in-source is largely a cost and control decision. And, I don’t think there is a trend of in-sourcing.

Source: here

Image: from here