Ip issues in global software outsourcing

MEMOIRE DE RECHERCHE
2011/2012

NOM et PRENOM de l’auteur 1: SATHE Vaibhav Vishwanath, E113001

SUJET DU MEMOIRE

Intellectual Property Issues in Global Software Outsourcing
Development of framework analyzing critical factors that impact intellectual property
transfers 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.

Affidavit

I the undersigned, SATHE Vaibhav Vishwanath, E113001, certify on the honor that I have
not plagiarized the paper enclosed, which means that I am the only author of all the sentences
this text is composed of. Any sentence from a different author than me was written in
quotation marks, with explicit indication of its source. I am aware that by contravening to the
present rule, I break the recognised academic principles and I expose myself to the sanctions
the disciplinary committee will decide on.
I also confirm this work has never been submitted during studies prior to ESCP Europe. If
this 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

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 Europe

Langue de la thèse: Anglais

© 2012. ESCP Europe. Tous droits réservés.

Contents
Introduction ................................................................................................................................ 1
Distributed Delivery Models...................................................................................................... 3
Business Implications ............................................................................................................ 3
Outsourcing Levels ................................................................................................................ 4
Software Development........................................................................................................... 5
Outsourcing Contracts ........................................................................................................... 7
Intellectual Property ................................................................................................................... 9
IP in Products ......................................................................................................................... 9
IP in Services ....................................................................................................................... 11
Trainings .............................................................................................................................. 11
Management of IP ................................................................................................................ 12
Legal 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] ............................ 19
Client-Vendor Relationship ..................................................................................................... 21
Trust ..................................................................................................................................... 21
Verification .......................................................................................................................... 22
Other Aspects of Interaction ................................................................................................ 23
Corporate Strategy ................................................................................................................... 26
IP due diligence.................................................................................................................... 26
Business Intelligence ........................................................................................................... 27
Research Methodology ............................................................................................................ 31
Problem Definition............................................................................................................... 31
Variables Extracted .............................................................................................................. 33
Survey Design ...................................................................................................................... 34
Survey Responses ................................................................................................................ 35
Factor Analysis Configuration ............................................................................................. 38
Factor Analysis Results........................................................................................................ 39
Conclusion ............................................................................................................................... 44
Managerial Implications ...................................................................................................... 44
Limitations and Future Scope .............................................................................................. 45
References ................................................................................................................................ 47
Appendix-I: SPSS Outputs ...................................................................................................... 50

Executive Summary

The objective of this study was to identify factors that affect Intellectual property

Transfer in global software outsourcing scenario. The study also aimed at establishing

relative importance of these factors based on variance in expert opinion.

The report begins with overview of software outsourcing and offshoring models. It

explains managerial implications and benefits vs. risks involved. After discussing types of

contracts in outsourcing, the scenario with software is specifically discussed. The term

Intellectual property is then defined with its application with respect to both software product

and service sectors. Then the report establishes IP management approach. We then proceed

with brief discussion on legal background and framework and establish how it varies in

critical countries like USA, EU and India from software outsourcing point of view. A sample

case study elaborating importance of legal understanding and intricacies of contract is also

discussed.

Report then proceeds with defining role of trust between partners and discussed

various aspects of interaction between employees of two organization. Report discussed

various factors that impact the communication and possible impact on smooth IP transfers

between the partners. Report then discusses aspects from corporate strategy and defines role

of corporate intelligence, IP due diligence in safeguarding company’s interests regards to

intellectual property.

After compiling list of all important variables, a primary expert survey was conducted

in order to derive underlying factors using statistical summarization techniques. A

summarization exercise reduced 39 variables into 13 factors among three aspects – Legal,

Human Resources and Corporate Strategy. The explained variability helps companies decide

the priority of the factors.

Intellectual Property Issues in Global Software Outsourcing 1

Introduction

Business landscape is changing at dramatically high speed today, thanks to modern

technological developments especially in communication and computation areas.

Competition has naturally exploded in its dynamic environment as traditional barriers have

weakened and new opportunities have risen. This has created need of absolute efficiency in

business environment. Companies have started focusing on their core competencies

entrusting other activities to vendors specializing in those. That’s why we can see that in

today’s businesses activities like recruitment, IT infrastructure & maintenance, internal

payroll & accounting, supply of raw material are increasingly done by contractors. This

allows 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 like

iPhone and iPad employing around 60,000 employees worldwide. But it has outsourced the

task of manufacturing to Taiwan based Foxconn Group which employees over 800,000 in its

factories which manufacture several hundred millions of these devices every year. Then

Apple has contracted large oceanic freight services which ship these devices to retail shops

owned by Apple or partners across the globe. Naturally, a computer company Apple has no

expertise in running hardware manufacturing plants, worker management, operational

management and transport. By negotiating best prices in advance, Apple can delegate these

tasks to vendors which have expertise and ability to deliver as per mobile manufactures

design requirements. This frees up large amount of Apple resources which are dedicated to

activities like designing new devices, develop software and applications, run marketing

campaigns and manage relationships with carriers, retailers and partners. From competition

standpoint, these activities matter to the company and not way in which it is manufactured or

transported. Apple registers hundreds of patents while designing these devices. But, when


Foxconn or any other supplier manufactures these devices based on these technologies, can

we believe that they learn nothing about it? Isn’t it possible that outsourcing vendors and

employees get massive knowledge of specifications, techniques and know-how of making

these devices? While company focusses on core expertise for competitive reasons, the ways

employed pose risk that the same technology, same intellectual capital can fall into hands of

competitor. It is known that Foxconn not only manufactures Apple handsets but also has

large manufacturing contracts from Apple contractors namely, Samsung, Motorola, Microsoft

and Nokia. So, how does Apple trust Foxconn with its ultimate intellectual secret? What are

benefits companies get by outsourcing? How do companies protect knowledge leaks from

their employees? Do inter-company contracts play any role? Do governments ensure such

intellectual property is protected by laws in respective countries? Do benefits of outsourcing

outweigh all the risks?

In this thesis, we will try to look at global outsourcing of software projects and

identify how companies create, identify, protect and transfer their intellectual capital. We will

identify benefits and risks in outsourcing. We will also look at various forms of project

delivery including outsourcing and offshoring. From literature survey we will identify various

variables that affect intellectual property protection in global outsourcing scenario. The

literature will include books, published journal papers, case studies and articles published in

relevant area. We will conduct expert survey in order to gather opinions of people with

regards to importance of the variables. We will then run exploratory factor analysis to

summarize these variables and identify factors that affect IP protection. We will look from

both sides of clients and vendors. This study will be useful to companies worldwide which

are considering outsourcing of software products to take precautions while structuring the

outsourcing contracts.


Distributed Delivery Models

Introduction

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 is

not necessarily outside country of origin of the firm. Offshoring means getting done certain

tasks outside country of origin. Offshoring need not involve outsourcing as company itself

may open subsidiary in a foreign country. Business strategy generally includes combination

of both outsourcing and offshoring. Nearshoring means offshoring business activities to a

country which is closer to country of origin on parameters like geographical distance, culture,

language etc. This reduces significant number of management challenges encountered

otherwise in offshore team management. Multisourcing means a business strategy which is a

blend of internal and multiple external sources in order to optimize available resources.

Onshore Offshore

Insource Same firm/same country Same firm/different country

Outsource Different firm/same country Different firm/different country

Figure 1 Delivery Models

Business Implications
[2]
A variety of reasons may exist for outsourcing based on case to case . The most

critical benefit is cost savings due to economies of scale or geographical location. Next

incentive of outsourcing is translation of fixed costs to variable costs. It reduces initial

investment and instead firm makes payments on contract basis at regular intervals. Another

benefit 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 in

variability of resources to address immediate or short time requirements of number of

resources or particular expertise. Outsourcing or offshoring can also result in improving


efficiency of organization due to better relocation of resources. Offshoring provides

opportunities to tap into global talent pool, many times at cheaper cost. The flexibility gained

by organization is critical in today’s delicate condition in terms of competition or economic

outlook.

However, Outsourcing is like a double edged sword. While there are many benefits as

explained above, it also has several risks involved. In the past, profit making enterprises have

operated 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 to

become more transparent. They have several trusted partnerships where partners have greater

visibility into internal details of organization. Among other issues is the high rate of failure of

marriage of two organizations due to variety of differences like organizational and national

cultures, business priorities and operational methods. In each business scenario, company has

to identify a win-win situation among all partners which include suppliers, clients and

contractors. 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 level

is low-wage human capital involving unskilled or manual labor. A second level of

outsourcing involves outsourcing of standardized production tasks, a typical semi-skilled

factory labor, which adds limited value but at lower cost. A third level involves knowledge

based outsourcing which includes educated workforce in science & technology working in

state-of-art R&D facilities. The knowledge based outsourcing involves multiple stages. On

one 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


generation products. The intellectual capital at stake increases exponentially as you move

from lower stage to upper.

Figure 2 Interactions among stakeholders in typical outsourcing scenario

Software Development

On global scale, software development is both outsourced and offshored, primarily for

cost competitiveness. The inefficiencies in labor markets in matured economies like high

costs of living and legal requirements on benefits, working hours and holidays result in much

higher human resource costs. This forms fundamental costing for software development. But

then how do distributed teams coordinate on delivering software globally? The global fiber

optic network which powers the Internet is the fundamental enabler for this phenomenon. In

addition to improvised communication network, other factors which contribute are higher

availability of skilled, educated and English speaking workforce in developing countries like

India, China, Mexico and South East Asia. Overall, software development factors in third

stage of skilled knowledge based layer of outsourcing levels. Based on requirements of

businesses it spreads across all stages in the third layer from basic level data entry operators

to cutting edge research in areas related to computer science and information technology.


Typical term used for this sector is IT/ITES which comprises of Information Technology and

Information 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 software

applications and computer hardware. While ITES is defined as a form of outsourced service

which includes industries like banking, insurance, telecommunications which includes use of

modern 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. This

industry is typically considered highly fragmented as top 4 companies control only around

12% of market. The outsourced services comprise around 48% of total IT industry which is

roughly a 500 billion dollar industry globally. The IT industry divisions as defined by

Datamonitor 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 software

products 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.


Examples are again products like Microsoft Windows or Office in which a lot of contractors

are involved in development or testing activities. On other hand, when applications or

services are deployed using existing product, these are for sole use of client. Examples are

integration and customization of ERP like SAP for use of organization like AT&T by vendor

like IBM. Depending upon business model, a variety of ownership patterns may exist in such

business models. The bulk of outsourcing projects consist of second type i.e. development of

applications and services for purpose of running business operations of client.

Outsourcing Contracts

Typically firms participating in an outsourcing relationship sign contracts that define

terms 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 in

legal structures of individual home countries of the participating companies. Hence, it is

important 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,


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.


Intellectual Property

World IP Organization [8] defines Intellectual Property (IP) as legal rights which result

from intellectual activity in the industrial, scientific, literary and artistic fields. IP rights

provide moral and economic right to the creator over his creation. It helps in establishing

trade of IP with fair pricing where IP can be put to use in social and commercial development

where original creators are justly compensated. Some of the common ways in which state

governs IP are trademarks, copyright and patents. Although there is great amount of

heterogeneity in legislations and enforcement levels across countries. It is considered that in

matured markets of North America and Western Europe, the Intellectual Property laws are

more matured compared to emerging economies like India and China where these are in

nascent stage. However, enforcements of these laws have remained a continuous challenge

for companies across the globe.

IP in Products

In this section we will discuss typical intellectual property that gets exposed in

software outsourcing contracts. As defined by A. Story [9], the software is of two fundamental

types with respect to intellectual property protection. First is Proprietary Software, in which

software code is under private ownership of creator which can be individual developer or the

company employing the developer. We will see in next section how employers govern IP

created by their employees. Most common example of proprietary software is software

product 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) Excerpt

SCOPE OF LICENSE. The software is licensed, not sold. This agreement only gives you some rights to use the
features included in the software edition you licensed. Microsoft reserves all other rights. Unless applicable
law gives you more rights despite this limitation, you may use the software only as expressly permitted in this
agreement. In doing so, you must comply with any technical limitations in the software that only allow you to
use it in certain ways. You may not -
 Work around any technical limitations in the software;


 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 GNU

General Public License, which is structured exactly reverse as that of Microsoft’s EULA. The

software source code is open and users can modify, redistribute, copy or use it for personal or

commercial use. Modified GNUs allow users to sell additional features built on top of

FLOSS based software frameworks for commercial purposes. There are many companies like

IBM which are building large scale commercial software on platforms like Java or Linux

which are Open Source Software.

As we discussed in previous section on software development delivery models, the IP

exposed in two models of product development vs. service development can be as follows. In

product development, the company which is proprietary owner of product invests a lot in

R&D efforts, typically in new features, algorithms. Typically a large number of patents are

registered across countries to protect this information. Vendors working on these products in

development, testing or deployment phases, depending upon their involvement, get exposed

to this intellectual information. Vendors involved belong to software companies typically not

competing with client itself. But same company can serve client’s competitors. The same

person may be working for competing company in the future. The humans can’t be ramped

down. So, although the actual source code is protected by patents and copyrights, the

knowledge gained by person in terms of ideas and processes stays with him permanently. The

same risk exists for permanent employees of client. But, considering attrition rate higher with

contractors than product firms themselves, the risk of leakage of such information is high

when it comes to involvement of vendors (outsourced contractors).


IP in Services

In custom application or services developed, although there is less involvement of

research protected by patents, the code developed is intellectual property of vendors. But in

such contracts, it’s not the code that is critical IP. It is knowledge of business processes of

clients that vendors gain in order to develop software for them. A company typically

maintains a lot of information on business processes, suppliers, channels, margins, distributor

contracts and pricing secret as it gains competitive advantage out of it. As part of software

development, vendor gains deep insight into these processes. This is the real IP exposed to

outsiders. In fact, such knowledge is hard to quantify and hence difficult to protect even with

copyright or patent laws. Similar risks exist due to attrition of vendor resources to competing

organization.

But, in software industry new business models are evolving, where vendor providing

service to traditional customers can retain the IP rights i.e. Contractors will not make

software 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 the

vendors renting these services to their clients rather than selling their software. Google rents

various enterprise services like Gmail, Google Docs where enterprises have to pay per usage

to the Google. But they don’t have to worry about hosting and storing these services large

data centers. In this model, various APIs are designed by the vendor, which need to be

consumed by client side software in order to consume the services. While, APIs are largely in

public domain thereby reducing IP risks of vendors, integrating vendors still are exposed to

client’s business processes and internal data.

Trainings

Employees are provided various trainings which are related or unrelated to work they

do. This is futuristic investment that employers do in their employees. It includes a variety of


internal and external trainings, certifications and mentorship programs. The knowledge

gained by individual is part of organization’s intellectual capital. In order to gain contracts in

outsourcing world, employers require their workforce trained in appropriate areas. Even

sometimes client firms provide trainings to contractors in order to ramp them up on the

project work they are doing. The knowledge always stays with person and benefits his

throughout 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 continuous

exposure of IP due to larger partner involvement in their value chain. IP Management is

defined as Identification, Protection and Exploitation of the intellectual assets of the

organization.

In software development, the code is open to those who work on it. And this code

forms major component of IP assets of the company. So, from corporate strategy point of

view, it is important that company identifies its short term and long term goals. Then it

should identify what is the key intellectual asset it has/need in order to achieve them. Then

the strategies to protect those assets are needed to be devised. In order to balance company’s

other goals, there will be need to exploit and expose these assets to various partners involved

in delivery chain. So, based on nature of engagement, the company should review

periodically 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 through

assemblies, which are binary versions of the working code. This means that code is not

visible to users. This is typical method used by proprietary software. But, there are ways to

reverse engineer those assemblies and generate equivalent code segments that perform the

binary tasks. If we apply principles of VRIO (Valuable, Rare, Not Imitable, Exploitable by


organization), then we can hardly classify code as Not Imitable. There are many alternative

ways to make it look different than original but performing same function. This is the easiest

way adopted to work around patents and copyrights. That’s why over period of time, the IP

assets 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


Legal Framework

In this section, we will take overview of Intellectual Property laws in some leading

countries in software world. We will also look at contract laws between partner companies

and employer-employee contracts.

IP Laws in the world

Due to large concentration of software companies, United States has been leading in

creating legal framework for protection of intellectual property. The laws exist at both federal

and individual state level. They deal with trademarks, copyright, patents, trade secrets and

other 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 keep

information secret. By registering patent, the entire technical information is revealed. In

world of software, it is relatively easy for organizations to make certain replacements in

approach and bypass patents in order to copy features in competing products. Typical

example is Apple has hundreds of patens on capacitive touch screen. But, patents limit the

idea 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 proprietary

information that generates economic advantage for particular business. The organization does

not disclose it anywhere and continues to receive benefits till it remains secret. Economic

Espionage Act of 1996, by Federal government passed under National Information

Infrastructure Protection Act of 1996 provides protection for trade secrets of organization

which covers prohibition of usage of trade secret and its usage or inclusion in any product for

economic benefit of any entity other than owner. This specially covers for use of trade secrets

of US based companies for benefit of foreign entities. Economic Espionage Act as equated

trade secret threat with threat to the national security of United States. From global

outsourcing scenario, this is important legal framework.


European Union, largest economic entity in the world, controls patents in the territory

governed through European Patent Office. It was established through conventions and treaties

at European or International levels like Strasbourg Convention 1963, European Patent

Convention 1973, London Agreement 2008, Patent Law Treaty and WTO agreements. EU

member states may or may not govern patents in their respective treaties. But, EU patent

override 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 New

York. He copied and printed source code of algorithm used by bank with intention to sell it to

competing hedge fund. On basis of evidence from video surveillance and print logs, FBI

agents arrested him the day it was detected. Accused was convicted and sentenced to penalty

applicable under law. However, in European Union, criminal law is not applied immediately

in such cases. Also the investigating agencies lack resources and experience to investigate

such cases of electronic trade secret theft. This means that Samarth if had done this crime

sitting in Paris HQ of Société Générale, might have walked free after being detected for such

a crime.

Situation in developing world is far worse. India, which is largest country hosting IT

services 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 Intellectual

Property (TRIP) and has enacted certain IP laws through new acts or amendments to existing

laws. These include laws related to patents and copyrights. However, Indian legal framework

does not define the term “trade secret”. There are no text or reference cases available with the

courts. However, the Indian Contract Law Section 27 provides a sort of remedy to

organizations. We will see in detail in next section on contract laws.


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 copyright

law 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 per

international treaties like TRIPS, 1995) defines ownership of copyright as to the person who

is the author/creator/causer of it. Causer is the term used specifically for computer generated

work including literary, dramatic, musical or artistic work. Note that person who operates the

computer 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. It

stays with the author, who caused the computerized work to be created. A computer

programming is defined by this law under literary work and hence, the programmer (the one

who conceptualizes and writes or develops code which composes into working software

program) 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 of

copyright of such work, if it relates to function of the employer as defined unless contrary is

defined in employment contract. This means that company (employer) is default owner of

copyright and employment contracts can override it if necessary. This leaves out case of

outsourcing. The outsourcing relationship is not an employee-employer relationship and

hence is not covered by clauses above. We will look at interesting case regarding outsourcing

later in this section.

Contract Laws

United States Contract Law varies depending on respective states. However, in

general, there are provisions made which allow two parties to sign confidentiality or non-

disclosure agreements. These agreements are typically used to protect information disclosed


as part of proposed negotiation or business deal, which may or may not work out. The

contract is expected to call out items marked as confidential, duration for which information

is to be undisclosed. Contract Law prevents certain information that cannot be included in

such contract. This includes information received by receiver (created or obtained from third

party rightfully) before seller disclosed it, information commonly known in industry or in

public 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 like

Economic Espionage Law.
[18]
European Union Contract Law generally requires an explicit declaration of

confidentiality in the contract. In addition, it says that certain information remains

confidential even if explicit declaration is not made. Further, EU Contract law adds that

certain information like trade secrets or know-how if disclosed during negotiation phase of

contract, the other party can neither disclose nor use the information for its own use, should

the contract is not formed as result of negotiation.

Employment Contracts

Typically, employers sign contracts with their employees upon joining. As we have

seen, the provisions in contract laws across countries allow enforcing confidentiality clauses

regards to information that employees get access to as part of their job. Such contracts are

used in order to prevent employees from competing with employer or work for competitor of

employer. This may also involve clauses like non-compete clause, where employees are

forbidden from competing or working for competitor for certain period even after their

employment ends with first employer.

In India, the section 27 of the Indian Contract Act, 1872 states that agreements in the

restraint of trade are void [17]. Indian Act prohibits employers to restrict use of skills, aptitude

and general technical knowledge by employees in competition with employer during period


of employment. So, wider than necessary restrictions may invalidate the employment contract

itself. This means that the employer if finds that employee is likely to misuse the information

he has received as part of employment agreement, then employer is entitled to injunction to

prevent such use. It is very limited remedy to employers to protect their trade secrets

compared to Economic Espionage Act of the United States. Moreover, if the act is committed

in past then employer is only eligible for damages and no criminal action can be initiated

against employee. The act also does not provide explicit protection to employers in case of

revelation 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


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 development

company. Gemalto Terminals Pvt. Ltd. (former Schlumberger company, hereafter referred as

Gemalto) provides computer hardware terminals for retail establishments. Gemalto does not

have any expertise in software development. So, it engaged Pine Labs multiple times to write

software applications and backend systems for multiple of clients. Gemalto received contract

from IOCL (Indian Oil Corporation Ltd.) card fleet program in 2004. It hired services of Pine

Labs to develop software for same. Later on in 2009 Gemalto received another contract for

cards from HPCL (Hindustan Petroleum Corporation Ltd.). Gemalto approached Pine Labs

for this sub-contract, however negotiations did not work out. As a result, Gemalto awarded

the contract to other sub-contractor named M/S QCI Technologies Pvt. Ltd. (hereafter

referred as QCI). As part of system design, the software for HPCL would require to interact

with existing IOCL system. Gemalto asked Pine Labs to hand over the source code to QCI in

order 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 both

companies that Pine Labs has been compensated fairly by Gemalto and thereby does not

claim any right over the software code developed for use of Gemalto. Therefore, Gemalto’s


understanding was that it owns the source code rights of all the software developed by Pine

Labs under contracts with Gemalto. However, the agreement did not mention the time period

and 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 Copyright

Act states that the copyrights of the given program code are vested with the employee as

default unless contrary statement is agreed upon in the contract of employment. Since Indian

Copyright Act does not specifically provide guidelines in case of outsourcing contracts, the

same employment contract provisions can be used. Section 18 of the Copyright Act specifies

that copyright can be assigned to other owner, wholly or partially in terms of duration and/or

territorial limits. So, honorable court determined that outsourcing contract comes under

Section 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 of

copyright only for 5 years. Moreover, assignment of copyright code may not permit further

redistribution 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 was

determined to be Pine Labs.

This case highlights legal complexities in outsourcing of intellectual property like

software code. In case of outsourcing across countries, applicability of laws for such disputes

is another issue as the laws vary greatly across geographies. It is therefore important that the

contract calls out duration, territorial limits and redistribution rights for source code

copyrights. Also, the contract should specify the country laws which will be applicable in

case of any disputes.


Client-Vendor Relationship

Clients and Vendors are both independent companies operating in different PESTEL

environment. The relationship between these companies may well extend beyond particular

contract. In this section, we will look into various factors (non-contractual or legal) which

define 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/verification

on intellectual property management in client-vendor relationship. In this section we will

study 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 and

Communication. Communication is said to be more formal, while former is regarded as

informal and unstructured which helps in building knowledge and trust in business

relationship. In section on distributed delivery models, we have already explained the

outsourcing model of interactions which are between employees of vendor and employees of

client. While inter-company communication is more formal in terms of MoUs and

agreements, we can easily imagine that when it drills down to individual employee level, the

interaction among them is more informal and the amount of friendliness in this interaction

increases over time as the trust increases. This is typical human psychological behavior. The

authors further classify the trust into two types – Competence Trust i.e. the trust that the

vendor is capable of delivering on its promises and Goodwill Trust i.e. the trust that vendor is

performing the tasks in ethical and professional intentions. While authors confine their

analysis as one way i.e. Client expectations from vendors, we would like to highlight that this

relationship should be viewed bidirectional. As we have already established that it’s not only

client’s IP which is at stake but vendor’s IP also matters significantly in outsourcing


relationships in software development industry. Moreover, with the fact that software vendors

are 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 in

favor of vendor than the client.

Authors conclude that trust has 3 important dimensions which should be taken into

account - they are Quantity, Scope and Mode of communication. Please refer to appendix for

list of survey questions related to these dimensions.

Verification

As authors suggest, verification can be classified into two forms. First is External

Control, which is a more formal engagement. It involves reporting of elements for oversight

purpose. This reporting or audit can be related to inputs, processes and outcomes. In the case

of Software Development, the outcomes are very subjective or unstructured i.e. difficult to

measure. However, typical variances tracked are schedule and budget. Typically outsourcing

contract defines the reporting items, methodology and items. This step is useful in tracking

inventory of intellectual assets which may mean design documentation, reusable components,

interfaces, modules etc. from software design point of view. Client can get direct idea into

progress made by the vendor through these reporting.

Second form of verification is Internal Control or self-verification. In outsourcing

contract, if the client sets expectations beforehand and vendor assures to deliver on certain

SLAs, tracking responsibility of client reduces. But, this accountability to perform on

vendor’s side results in processes of control for internal point of view. Typical

documentation, 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 not

in any employment agreement with the client, they are subject to change their jobs at their

free will. Even in typical outsourcing engagements, vendor companies keep their workforce


highly 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 already

established, not all the intellectual property can be recorded in form of documentation. So, in

such cases of employee attrition a large portion of their knowledge is lost each year and

companies 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 work

for 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 can

seek injunction against this hiring. This results in loss of IP (typically unsecured), valuable

know-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 offshore

executives learn the English language, they may not be versed in the quirky phrases and local

dialects which make English difficult to comprehend.

The geographic proximity helps in certain ways. First, it facilitates easy hassle-free

travel and enables face-to-face communication more frequently than in case of remote

offshoring. It is opinion of experts in software industry that personal communication is more

effective than digitally enabled communication (video conferencing) in case of knowledge

transfers. Second, the geographic proximity ensures temporal closeness i.e. time zones are

closer. West Coast of U.S. and India have time zonal difference of nearly 12 hours. In order

to work together, the team located across continents need to work long hours to achieve

overlap. It also provides relatively shorter bandwidth for such meetings compared to

possibility of accessing full working hours of employees. Working in shifts or overtime has

its own costs in personal life of employee as well as to business.


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 they

customize some policies to local culture in order to accommodate legal and social

requirements. It results in conflicts on two fronts. First is Inter-subsidiary cultural difference.

Second is organization-national culture difference. Hofstede proposed framework to evaluate

organizational cultures and national cultures, called as cultural dimension theory. He

proposed this theory as result of study done in IBM Corp. As result of Hofstede’s work

followed up by renowned psychologist, we can define following cultural dimensions that

impact 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. Restraint

These dimensions are largely responsible for different legal frameworks and differences in

interpretations of individual’s rights. E.g. People in U.S. consider software piracy as criminal

offence at par with physical thefts and are punishable by law there. But in countries like

China and India, the recognition of intangibles (software) vs. tangibles differs greatly. Similar

is the case with idea of patents, copyrights and any other protection given globally to

intangibles. Though under international treaties, the law makes piracy punishable offense, the

enforcement has largely remained non-existent as authorities are not exception to these

cultural dimensions. The culture, therefore, appears critical obstacle in stringent

implementation of Intellectual Property laws. Cultural differences also result in affecting


team dynamics and therefore may affect knowledge transfers. It also requires companies to

provide additional trainings to their global employees, which means additional costs.

Some researchers have coined the term “Nearshoring” which means outsourcing to

the 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 software

outsourcing decisions. Hence, it may not prove strategic.


Corporate Strategy

There are risks involved in outsourcing. Companies pursue outsourcing only when

they conclude that benefits outweigh the risks involved. Hence, from strategic point of view

the outsourcing is crucial decision and requires companies to perform more due diligence

before pursuing this route. In this section, we will restrict the discussion to those aspects

which deal with intellectual property issues. Strategic decision holds more significant from

outsourcer’s point of view than vendors’. For vendors, it is their normal business process to

seek out new clients and new businesses. So, the risks involved are well understood by

management of vendor and they are well prepared on both managerial and legal front to

handle these challenges. Opposite is true for small and medium companies which seek

outsourcing 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 partly

outsource the IT services. From strategic point of view it is important what to outsource and

what 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 to

perform IP Audit or Due Diligence check before making IP transfers or sharing with the

outsourcee.

An IP Audit is defined as systematic review of IP assets created, owned, used or

acquired by the business. The key purpose is to identify under-utilized IP assets, identify

threats 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 which

company can rip benefits, extent of use, importance and estimated present value of monetary

benefits. Such audit will enable company to classify the Intellectual Assets involved in

various buckets on different parameters and help formulize policies on what to outsource and


what 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 mergers

and 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 vary

largely based on ability of the receiver to exploit it. It is therefore critical that company has


sufficient intelligence on the contracting partner it is going to tie up with. This is applicable

for both outsourcee as well as outsourcer.

1. Outsourcer’s competitors

First, it is important to gather information on business relationships between the

partner company you are seeking and your business competitors. If exists, then the company

must make certain disclosures on nature of business transactions and measures taken to

protect the IP of customers so that party can decide if it can proceed with relationship. Many

large IT organizations like IBM, HP serve large number of clients, many of them fierce

competitors of each other. It is also possible that same facility of outsourcee at single location

is serving multiple competitors. However, these companies are known to implement stringent

measures to protect mutual exclusiveness of such business practices through protected bays,

physical security, access control and providing awareness trainings to employees to prevent

them 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 company

along with businesses of subsidiaries and parents to determine if there are conflicts of interest

exist with business model of prospective partners. Many times outsourcee organizations are

part of large conglomerate. In that case, outsourcer will need to evaluate if outsourcee is not

benefited due to potential exposure of any of IP assets. Indian IT giant Wipro Ltd. is large

conglomerate with businesses apart from IT outsourcing in PC Original Equipment

Manufacturer, cosmetics and electrical equipment. A client like Lenovo which is large PC

OEM, may not possibly prefer to outsource services relating to its core business as there is

possible case of conflict of interest as it competes with other business (PC) of Wipro

conglomerate.

3. Outsourcee and outsourcer’s customers


As companies outsource IT services to outsourcee vendors, it’s not just their IP that is

exposed. But many times it involves confidential data of their customers. Hence, based on

kind of customer data that may be possibly exposed the conflict of interest needs to be

evaluated. Microsoft Corp. is not in business of PC manufacturing. But it is vendor to all PC

businesses in the world which involves selling Windows operating system. Since, Microsoft

is a large company, not all the divisions are involved in Windows sales. HCL Infosystems is

another Indian IT major which is also top PC OEM in India. Microsoft’s those divisions

which deal with PC business cannot possibly outsource to HCL as that would expose data of

other customers like Dell or HP which are competitors of HCL. Also, in OEM business

Microsoft and HCL have customer-buyer relationship. In same business, establishing parallel

partner relationship clearly creates possible opportunity for exploitation of each other’s IP.

However, unrelated divisions of Microsoft like Database Product Development can establish

outsourcing relationship with HCL without any conflict of interest.

4. Corporate Governance

To ensure proper protection and respect of partner’s IP, it is important that

prospective partners rate high on modern corporate governance. It involves maturity of

internal security processes, financial and other statutory disclosures and fair business

practices.

5. Feedback from clients

When establishing relationship with outsourcee first time, it is recommended to seek

feedback from other clients. For marketing purpose, outsourcee will be making a lot of claims

in its bids or proposals. Hence, checking the reputation of firm on fulfilling the promises may

be helpful in analyzing the vendor.

6. Financial Strength


Generally outsourcing relationships are established between partners which have

similar relative size in their respective industries. It is unlikely that large organizations like

GE 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 to

deliver on long term contracts. Moreover, large companies also provide large and long-term

contracts and do not like to see disruptions in outsourcee operations due to consolidation

activities like mergers and acquisitions, which are more prevalent in small and medium size

companies.

IP due diligence and corporate intelligence on prospective partners help companies to

take decision on which products they can outsource and to whom. It is critical decision in

strategic outsourcing.


Research Methodology

We have now reached the final stage of this research work. So far we have reviewed

several articles and papers in order to establish various factors that impact the intellectual

property transfer in global outsourcing scenario. Now in this section, we will design

framework that captures the inputs from secondary literature survey along with exploratory

analysis based on expert survey conducted on initial list of variables in order to summarize

them 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 survey

3. 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 have

implications on the intellectual property transfers between involving partners. From the

survey 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 of

factors. We have no theory or hypothesis in place with respect to these factors and their


relation. Let’s assume that there are n such variables - x1, x2, x3…..xn. Let there be m

underlying factors f1, f2, f3,….fm. We will be conducting survey of N number of person to

obtain 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 represent

factor 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,i

Therefore, a generic matrix based model can be defined as:

X = µI + LF + ε

Where, 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. We

therefore, can summarize the problem definition as follows –

“Identify underlying factors that impact intellectual property transfer in global

software outsourcing scenario based on observable variables based on the feedback of the

experts 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 data

reduction will be applied for variables under these categories separately.


Variables Extracted

Based on the secondary research (literature review) done in this report, following 39

variables 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


VAR00037 Market reputation/Feedback from others about your partner
VAR00038 Financial strength of partner
VAR00039 Political, Economical and Social conditions in partner's country(s) of operation

Survey Design

In order to reduce these variables using Exploratory Factor Analysis (EFA) method, a

primary 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 profile

information was captured. It included user’s role whether outsourcer (client/customer) or

outsourcee (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 in

identifying factor weightages, but it may be used for qualitative analysis of the data. It also

indicates diversity of responses gathered.

Questionnaire:

A survey questionnaire was designed with one question corresponding to each of the

39 variables. The questions were not organized as per sections of analysis to eliminate any

inherent bias. Rather questions were combined based on topics like contract, training,

communication etc. Audience was asked to rate importance of the variable as output. All

questions were positive in nature i.e. higher importance of presence of variable will always be

indicated by 7 for from intellectual property impact, while 1 would indicate no or lesser

importance of particular variable.

Specific Questions:

Only 1 specific question was asked – “According to you, which of the following is the

correct representation of IP exposure risk in software outsourcing?” The intention is to


measure perception of IP issues faced by vendors or clients among audience. We will discuss

qualitatively these responses in later section.

Scale:

All responses were gathered on Likert’s 7 point scale from “Not Important” to “Very

Important”. All questions had same response scale, so no standardization of responses was

required. Among Likert’s scales, 5-point and 7-point are considered most accurate and

reliable as they represent adequate intervals from both user distinguishability point of view as

well as statistical significance. However, though there is no conclusive evidence, many

psychometricians recommend 7-point scale over 5-point in obtaining observation scores for

exploratory 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 and

descriptive analysis of audience profile.

Sampling Method:

It was decided to conduct the survey as Expert survey. The method used was

Snowball sampling which is non-probability sampling method. Invitations were sent out to

known practitioners in software outsourcing or offshoring model. The audience involved

professionals on both client as well as vendor side. Individuals were also asked to forward

invitations to people they know who have experience in managing outsourced projects from

either side. We have received considerable number of responses from such secondary level of

contacts.

The survey was setup using user-friendly UI of the surveymonkey.com and was

administered online. The target audience was contacted using personal email invitations with

standard 1 reminder 2 days prior to deadline using messaging on their social networking

(Facebook) profile.


A total of 35 participants undertook the survey. Out of those responses a total of 28

responses were considered valid after eliminating inconsistent and incomplete responses. In

following 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 audience

comes 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 graphical

diagrams.

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


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 in

software outsourcing. Since the survey was within expert audience, everyone agrees that

there are considerable IP risks involved in software outsourcing. However, most believe that

client is more susceptible. But convincing number of individuals consent to our opinion that


both client and vendor face equal risks with respect to IP in software outsourcing. The minor

variations may be accorded to different scenarios like type of outsourcing, types of

companies involved and different level of involvement of participant with respect to given

software 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 of

Management Lucknow which is made available to students for academic purposes. The tool

supports out-of-box functionality for statistical analysis using Factor reduction method. This

helps summarizing large factors into more compact components. The tool also supports

Varimax rotation.

Statistical Analysis Package IBM SPSS v16.0

Descriptives 1. Kaiser-Meyer-Olkin Measure

2. Bartlett’s Test of Sphericity

Extraction Method Principle Component Extraction

Factor Extraction Criteria Eigen Value > 1.0

Rotation Method Varimax rotation with Kaiser Normalization

Interpretation Method Identify loading >= 0.5 in rotated component

matrix

Following are various details regards to Exploratory Factor Analysis method

conducted.

Descriptives:

We will use following descriptives to check validity of factor reduction analysis.


(1) Kaiser-Meyer-Olkin Measure (KMO) of sampling adequacy: This measures

partial correlations between variables. If > 0.5, it indicates that the given sample is sufficient

for factor reduction. Otherwise, it may indicate that the factor analysis is satisfactory.

(2) Bartlett’s Test of Sphericity: The null hypothesis that factors are uncorrelated

must 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 strong

correlation among themselves, hence factor analysis can be conducted.

Extraction Method:

The motive is to extract minimum number of factors that explain variation. Hence, we

will 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 those

factors 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 use

orthogonal rotation. The particular method used here is Varimax rotation with Kaiser

Normalization.

Interpretation Method:

We will interpret loading of variables on factor using rotated component matrix. We

will follow general thumb rule of identifying loadings which are >=0.5. In some cases, where

variable did not load on any factor, we have taken factor loadings which are close to 0.5, due

to inadequacy of sample size.

Factor Analysis Results

The 3 sections – Legal, Human Resource Practices and Organizational Strategy are

not factors but aspects of organizational operations. Hence, factor analysis was performed


separately for each section. There is sufficient literature available to say that these three

aspects are independent. This would avoid any random pattern to emerge among variables

from different sections. Let’s look at EFA results one-by-one.

Legal Aspects:

SSPS Output

Descriptive Value Remark

KMO sampling adequacy 0.607 Sample sufficient for factor analysis

Barlett’s Test of sphericity sig. 0.000 Null Hypothesis rejected, Factor Analysis possible

a
Rotated Component Matrix
Component
Variables 1 2 3
IP asset identification in contract .099 -.095 .894
IP asset valuation in contract .261 .042 .879
Single language contract .577 .279 .292
Dispute jurisdiction .956 .089 .078
Applicable law in dispute .950 .033 .085
Licensing terms - rights, geographies and time .759 -.047 .313
knowledge of Patent, Copyright, Non-disclosure/Confidentiality Laws -.172 .915 .195
knowledge of Non-disclosure/IP annexure signed in employment contract .118 .945 -.029
knowledge of IP laws in home country .390 .804 -.305
knowledge of IP laws in Country of origin of partner .668 .614 -.149
Extraction 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-


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 contract

Human Resource Aspects:

SSPS Output




a
Component
Variables
1 2 3 4 5
Establishing communication protocol with partner and train employees .624 -.062 .359 .039 -.438
Employee Training on what all constitutes as IP assets .880 .213 -.186 .005 .059
Employee Training on Strategic importance of those IP assets .879 .228 -.172 .082 -.001
National cultural dimensions: similarities and differences between .839 -.030 .268 .069 .009
client/vendor
More number of messages exchanged -.043 .290 .893 -.002 .173
More time spent in communication .052 .312 .781 .041 .180
Communication between employees at multiple levels .055 .702 .416 .327 .124
Communication between employees from different functions .201 .803 .236 -.152 -.205
Proactive sharing of information required to perform task .094 .809 .159 .137 .262
Face-to-face communication .337 .391 .157 -.258 .588
Informal/personal communication Incl. Facebook, Google Chat, LinkedIn -.141 -.021 .299 .092 .879
Trust on capability of other partner on delivering on promises .026 .074 .188 .911 -.081
Trust on ethical and professional behavior of other partner .107 .042 -.129 .933 .063
Extraction 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
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, LinkedIn

Corporate Strategic Aspects:

SSPS Output




a
Component
Variables
1 2 3 4 5
Recording IP in desired format (documentation, diagrams, KM systems) .164 .269 .001 -.145 .780
Market reputation of partner company .701 .333 .356 -.292 .068
Internal Project Progress Reporting, Review and Tracking (Within firm) .255 .252 .111 .863 .058
Periodical Project Progress Reporting, Review and Tracking with/to/for the .330 .209 .203 .797 .140
client
Perform regular IP Audit (assets, life, benefits, importance) .163 .179 .763 .146 .248

Ip issues in global software outsourcing

Ip issues in global software outsourcing

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