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Intellectual property theft: the unspoken unknown of offshoring

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Domestic and international outsourcing, the latter now known as offshoring in the US and also as nearshoring in Europe, is a subject I follow closely for its impacts on supply chain risk, intellectual property theft, risk pricing, and certain counterthreat needs.

What I find remarkably absent in the general discussion of job and economic loss to the country's nationals being outsourced, and economic gain to the outsourcing domestic firms and to the outsourcing destination, is the virtual absence of the impact of intellectual property (IP) theft on the outsourcing firms and, ultimately, the national economy of those firms.

For those firms sufficiently advanced to look beyond mere supply chain 'cost at tier' so that they look at the troika of cost, time, and risk, the risk focus is devoted to business interruptions to timely delivery and component quality, and not IP theft. Thus I read with dismay the otherwise fine writing of Forrester's John McCarthy on offshoring. IP theft is effectively not in attendance.

And it is not, I believe, that McCarthy is unaware of risk and security issues as he made an extremely thoughtful presentation to the SafeNet 2000 security summit well before 11 September that holds up well today, laying out a tiering of personal privacy, the desire of businesses to gravitation to regulation in order to achieve stability, and a phasing of "government intervention into security and privacy online." Yet, I feel that McCarthy today stops short of the total offshoring threat when he says that" companies, for the most part, face the same security issues whether managing data with local employees or overseas workers."

While I submit that there are added, but addressable, risks in employing foreign nationals and foreign firms, the larger risk is the placing of critical IP resources in an offshore environment where they are vastly more susceptible to exploitation by one or more collectors -- often many collectors from the same entity each intent on gaining specific bits of corporate information. The risk is effectively present in varying degrees for US offshoring in India, China, Korea, Russia, Belarus, or European nearshoring to the Czech Republic, Poland, Hungary, the Baltic states, Morocco and Tunisia.

It is that IP theft risk that is not being addressed, and it applies to both the venture capital (VC) community and established firms. We regularly address three categories of exploit:

  • Pricing model compromise, i.e., loss of market pricing advantages by whatever means at one or more tier points in the supply chain, often at multiple points in the same tier or location
  • Data citadels, i.e., targets of immense attractiveness to IP collectors, e.g., R&D centers or data centers 
  • Human resources "turnover," i.e., collectors rotate in with legitimate job applicants to acquire specific data and then move on

At the VC level, investors are driving their stable of firms to create product and to produce revenue without sufficient consideration to risk. Risk assessment is very low on their horizon. Private conversations reveal that VCs preach the mantra to their portfolio companies, for example: "Outsource hardware development and manufacturing to China or become uncompetitive." Most VC conferences conducted today direct firms to go low cost without an understanding of the risks to the underlying assets.

Some VCs have already taken the next step of forming development groups in Asia precisely to serve their entire stable of firms. In so doing the VCs have put a target-rich environment under one roof. Unlike established industrial firms that already have revenue streams and so will soften the immediate impact of foreign commercial IP harvesting, VCs have little of value in their stable of firms save their intellectual capital. The same problem affects established firms as they locate R&D facilities offshore, often at the demand of the host country to be able to do business there. Both larger firms and VC stables are moving their assets to low (direct) cost sites but high (total) risk areas.

Threats are often obscure and indirect. For example, we have observed rampant IP theft by one nation in particular both in-country and in adjacent countries where it has either penetrated or bought stakes in local firms with ties to US firms.

In each case, firms are putting their leading edge designs in an environment where diversion is almost assured. Without appropriate, early -- earlier the better -- countermeasures that both protect the asset and minimize adverse impact to the firm's relationship with the host government, it becomes a matter of not if, not when, but how often. That is an element of offshoring that I submit is being greatly ignored and underpriced to our economic peril.

Tough talk on offshoring
By Ed Frauenheim
CNET News.com
August 9, 2004, 10:54 AM PT

'Nearshore'--the new offshore?
By Andy McCue
Silicon.com
August 6, 2004, 10:08 AM PT

Near-Term Growth Of Offshoring Accelerating
by John C. McCarthy
Forrester Research
May 14, 2004

3.3 Million US Services Jobs To Go Offshore
by John C. McCarthy
Forrester Research
November 11, 2002

Gordon Housworth



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