Two weeks ago, the New South Wales state government became the third government jurisdiction in Australia – along with the federal government and the Victorian state government – to change the intellectual property rights (IPR) provisions of their IT procurement policies so that ICT suppliers would, as a starting position, retain ownership of the IP for software developed under contract.
This is bad policy. It is far from best practice. It is not in the best interests of citizens. It will not help the local IT industry as a whole. An alternative strategy to the one now being adopted is something that I’ll be exploring very shortly in a separate research note. But what I want to do here is to dissect the logic of the Australian Information Industry Association (AIIA), the industry body that has been at the forefront of lobbying the government for these changes. I would suggest you all pay attention to how this plays out whether you’re private or public sector, in Australia or out. The reason is that the the AIIA’s position on IPR represents the aspirations of the world’s largest, multi-national IT vendors.
While the AIIA’s mission, as stated, is to “lead and represent the ICT industry in Australia,” its board is comprised almost entirely of large multi-national providers like Intel, Google, Microsoft, EMC and CSC (Gartner has the only non-IT vendor board seat). Several of AIIA’s board members I know personally. Several I’ve met over the course of my career. The personal integrity and reputation of these individuals is beyond reproach.
But the role of any industry lobby group is to advocate what’s in its member’s best interest. And they do that by trying to convince governments that a special consideration to one segment of society results in a benefit to everyone. This is regularly done by wrapping arguments in the respectable garb of lofty and generally-agreed principles like increased employment or free trade. Of course, that calculus doesn’t always work out as promised. Often, special considerations end up entrenching inefficiencies and limiting competition.
So, what are the arguments the AIIA is using to support their lobbying efforts? Those can all be found in the document “Key Issues with NSW Government’s Procure IT v2.1.3” Sadly, their diagnosis of the problems associated with customers seeking to own intellectual property in newly created items is either misleading, illogical, or demonstrably wrong. Let’s consider each:
AIIA Assertion 1
Development of the local NSW ICT industry will be curtailed. If Government owns the IP in newly created IP then it is „locked up‟ as the Government almost never exploits it. However, if the supplier retains the IP then it is likely to exploit it, and so bring jobs and investment into NSW.
Why This Assertion Is Flawed
If by “locked up” the AIIA means owned by someone else who can determine the conditions of use use then yes, that’s true. And that’s the whole point of intellectual property. It’s property.
If by “exploit” the AIIA means “to seek separate commercial settlements with the IP,” then that might be true – might be. But it’s a nonsense to assert that newly created IP paid for by the government is not exploited. It’s exploited as systems, or parts of systems, that facilitate the operation of government and which provide services for the public good. Furthermore, if the government was paying more attention to the asset value of their IT- related IP then those rights which, by default they want to grant to their suppliers, could form the basis of revenue-generating “user-pays” solutions which can offset the cost of government. This has a clear precedence as many government higher education institutions, for example, have IP departments charted with commercializing the IP coming through their own research efforts. Or consider the success of the CSIRO in securing royalty revenue for their wireless LAN IP.
But the biggest flaw here is the logic that client retention of IP somehow limits suppliers’ ability to exploit IP which brings jobs and investment. First off, it depends what type of IP we’re talking about. When the IP in question is copyright the reality is that client ownership does not inhibit a supplier’s commercial opportunities. They simple take the knowledge and experience that comes from the engagement and apply it to the next client-paid engagement (a point they make in assertion 3) through a distinctly different set of code expressing the algorithms at the heart of the solution. More importantly it must be understood that IP rights today are increasingly being used by the supplier community to limit competition. That is abundantly clear by the raft of patent infringement cases dotting the landscape of the IT industry along with the growing use of non-compete and confidentiality clauses to limit the flow of staff between organizations.
AIIA Assertion 2
If the supplier exploits the IP then the customer is likely to benefit from much reduced support costs, and will have an on-going product development path, which the
customer is not paying for. It is uneconomic to support and further develop custom systems only for a single customer.
Why This Assertion Is Flawed
A classic fallacy of the false dilemma. First we take two positions as given; 1) customers benefit from lower support costs if the supplier maintains it, and 2) it is uneconomic to support and develop systems for a single customer. Then we draw a direct conclusion – support costs go up if IP isn’t managed as collective pool by a vendor. But if either statement isn’t true than neither is the conclusion. And that’s exactly the case here.
First, support costs are not necessarily reduced if the IP is controlled by the vendor. Let’s consider packaged off-the-shelf software – the pinnacle of vendor-controlled IP. Accessing support for most of these products usually requires a maintenance agreement which, theoretically, should go down in price as the user base increases. But exactly the opposite is happening – maintenance fees are going up. The reason is simple – it comes down to exit costs. The cost of moving from one software product to another is often so prohibitive that it creates a micro-monopoly that vendors can exploit. So, in fact, the more IP is controlled by a supplier the higher the long-term support costs can become.
Second, it’s not true that the IP relating to a specific customer’s requirements is developed further by the vendor. In all likelihood, if further development is required it will create a separate services engagement that needs to be paid for again by the client.
AIIA Assertion 3
Many customers insist on “we pay for it therefore we own it” when it comes to ownership of new IP in an engagement. This view ignores the fact that IP creation is an iterative process and a customer often engages a supplier due to the supplier‟s skill and knowledge in an area. The customer is not paying for this development of skill and knowledge over time so cannot be seen to be “paying” for the resulting IP that may be created on an engagement.
Why This Assertion Is Flawed
Let’s agree, for a minute, with the assertion that IP creation is an iterative process. Let’s also assume that those iterations involve the client’s “skill and knowledge in an area.” Shouldn’t that then lead to a sharing of IP assets? Why then does the AIIA lobby for supplier IPR retention as a default position instead of a shared public-private partnership (PPP) model? Yet how many agreements do you see where IT suppliers enter into long-term revenue sharing agreements with their clients from shared IP creation? Those are as rare as the proverbial rocking horse manure.
This argument also conveniently neglects to acknowledge that some projects represent the automation of their customer’s trade secrets. There is no real “iteration” in this scenario – the IP is essentially the customers. Why should any customer – government or private – voluntarily concede the rights to their IP assets simply because they sought the assistance of someone else in codifying the concepts or integrating it with existing systems?
Let’s also call out a little inconvenient truth – by and large, suppliers aren’t paying for the development of skill and knowledge over time either. The skill and knowledge that is required is manifested through the individuals doing the work, not the organisations they work for. How do they acquire that skill and knowledge? Some of it is through the formal training they themselves pay for prior to their employment. The more practical, hands-on knowledge comes through their work on all the engagements other clients are paying their employer for. What this means is that a government client can still achieve it’s goal of fostering IT industry growth while retaining IP rights because these engagements are ultimately growing the knowledge of the people which are its backbone.
If governments really wanted to support the growth of the local industry through an IP strategy, they would move to limit, if not eliminate, non-compete clauses that restrict the free flow of this expertise – like in the State of California. It doesn’t appear, however, that the AIIA is clamouring for that change to be made.
AIIA Assertion 4
It is less risky for the customer. This is because if all customers sought to own the newly created IP inevitably some of the code/documentation that was created in customer A‟s project would be re-used by the supplier at Customer B‟s project thus infringing Customer A‟s IP. This could mean that the customer was prevented from using the deliverables from that supplier (or would have to pay an additional fee). The whole point of engaging a supplier with experience and expecting the supplier to use its pre-existing tool kit is predicated on the premise that the supplier can maintain and onward develop its tool kit at each customer engagement.
Why This Assertion Is Flawed
I’m pretty sure the AIIA is familiar with the concept of “indemnification.” So the scenario that they’ve painted probably isn’t going to happen given that indemnification clauses are common.
The real concern for clients is not a scenario of customer A infringing on customer B’s IP. It’s customer A infringing on vendor A, B or C’s IP. Gartner has been warning clients for years that the IP battles that have been playing out between vendors would start to be extended to the user community. And that is exactly what is happening now. We are seeing vendors with huge patent portfolios seeking cross licensing agreements with end users based on their internal, custom-developed solutions. We are seeing some vendors working through patent aggregation organizations to drive litigation-avoidance licensing deals with customers so they don’t have to deliver the bad news.
The only way for customers to manage this scenario is to start building up their own IP portfolio. It is the only way to either have a meaningful defence position for potential egregious infringement actions or to shape out the best cross-licensing terms should that be necessary. Granting suppliers IP rights by default makes the establishment of an IP portfolio extremely difficult.
AIIA Assertion 5
Many suppliers simply will not bid if there is any doubt as to whether they will retain the IP in the IP that they create.
Why This Assertion Is Flawed
And the problem is, exactly? Successful procurement is not based on how many suppliers bid for your business. It based on whether you find the right supplier based on your business requirements. Retention of key IP assets should be part of the client’s requirements – if the supplier doesn’t like that it’s not the customer’s concern. Additionally, this could be a problem if the demand for services was outstripping supply. But there is a global market for service delivery capability – it’s a buyer’s market.
AIIA Assertion 6
There are almost certainly methods of meeting a customer‟s business requirements through appropriate contract clauses, without assigning IP to the customer.
Why This Assertion Is Seriously Flawed
So why then is it not possible to meet the suppliers commercial requirements, through appropriate contract clauses, while still allowing customers to retain the IP they are paying for? Or, to be more specific, can the AIIA please demonstrate, with facts and figures, exactly where client retention of IP rights has materially constrained the IT industry?
In many cases the underlying IP has no particular value to a customer. But that’s not really the point. If the IP has value in the market it is the responsibility of people overseeing the supplier agreements to assure their organization gets the maximum possible value from the assets they are paying to create.