Ozer Teitelbaum, Co-Founder and Partner, TnT IP, LLC
Across C-suites in corporations in all corners of the industrial world, executives routinely study their balance sheets for ways to improve bottom line performance. Frequently, product rationalization is contemplated as are strategies to lower research, development and engineering costs. At times, the drive to improve profitability may overlook key intellectual property considerations.
One trend in enhancing bottom line performance has been to outsource research, development and engineering. Outsourcing models including RD&E has become a trending practice as early as the 1980s. Though RD&E outsourcing may ebb and flow due to variables including currency exchange, taxes, governmental polices and events like Brexit, the drive to operationally lower cost without sacrificing innovation and product development has its roots in the competitive marketplace. Traditional technology companies like Ericsson, Alcatel Lucent, Nokia, Siemens and Philips have historically had a comparably high RD&E spend. As companies like Apple and Google continue to successfully attract investmentwith a comparatively lower RD&E spend, pressure has been applied over recent years to the traditional technology companies to respond. Some of these companies have found ways to reduce their RD&E spendthrough various forms of outsourcing.
"The most common path for procuring RD&E is by means of one-on-one outsourcing"
The most common path for procuring RD&E is by means of one-on-one outsourcing. One-on-one outsourcing is usually practiced by companies that need RD&E complementary to their key strengths and core technology. This strategy however poses the real risk of a dysfunctional dependency on outside RD&E resources without the benefit of integrating the know how gained over the course of the engagementinternally. Moreover, by losing control of fundamental know how, an organizationmay likely forfeit itscompetitive advantage- the death knell of any business strategy. To preserve the status quo, the party contemplating such an arrangement must build in contractual terms with the outsourcing RD&E entity that make the resource exclusive and so as to preserve trade secrets and know how. Securing and protecting intellectual property such as patents is another important means to preserve control.
Another option is where internal RD&E functions are decidedly spun out and turned into independent entities for providing the same or similar services to the former parent. Here, RD&E results are typically reserved in an exclusive manner forthe client. Similar services however may also be provided to other clients but often with the restriction that the other clienta are not a competitors of the former parent.
To ensure that an RD&E outsourcing plan is successfully implemented, contractual considerations might include the scope and terms of a technology and patent licensing grant from the outsourcing organization (i.e., outsourcer) to the entity performing the outsourced work (i.e., outsourcee). Here, the outsourcer might consider some reservation of what and how it shares with the outsourcee. To maintain and preserve control, the outsourcer may wish to secure grant back rights to improve their know how made by the outsourcee. Another consideration that should be contemplated is audit rights to ensure compliance with any grant back provision.
Presuming the outsourcer has planned strategically ahead by securing patent protection in the relevant jurisdictions where the outsourced work is to be implemented, a license with termination provisions may also be included.Possessing patent rights also improves the outsourcer’s ability to implement contractual terms that discern what is important for the outsourcer and what rights the outsourcee may obtain with respect to its work. With the increase value attributed to intellectual property in today’s markets, outsourcees may be less willing to take on outsourced RD&E work at a reasonable cost without obtaining some rights.
If the above strategies have not been properly contemplated before initiating an RD&E outsourcing plan, it is imperative that an intellectual property inventory be performed with a competitive analysis. This process would involve a third party study of end to end know how and technology. In so doing, the outsourcer will have a requisite risk assessment before completing an outsourcing plan while also availing it self of the immediate exercise of remedial steps.