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Time after time companies doing business in emerging economies have weathered criticism for poor environment and labour practices. Over the last decade, many multinationals have addressed these issues in their supply chains with varying degrees of success. But there's another issue causing to companies to face great risk, especially to topline revenue: intellectual property theft.
Losing control of proprietary information can have devastating effects on company reputation and profits. In some cases, such as those involving substandard knock-offs, intellectual property theft can also pose health and safety concerns for consumers, and the associated liability risk.
A report by the Stanford Initiative for the Study of Supply Chain Responsibility (SISSCR), suggests that companies can use the same thinking they have applied to protect against social and environmental risk in supply chains to help protect against intellectual property (IP) risk.
Multinationals should consider how to supplement the use of contracts and legal remedies with a new business-oriented approach. In other words, instead of being punitive and reactive toward IP violations, companies can achieve more by being proactive and creating incentives for good IP management.
Here are some specific steps businesses can take to better safeguard IP that have proven effective in addressing other supply chain issues:
Create cross-divisional teams
Create a cross-divisional IP protection team that includes top executives and incorporates responsible IP practices, internally and across the supply chain. The German engineering and electronics giant Siemens has taken this approach by establishing a central corporate IP department, which coordinates the company's IP strategy, policies and protection procedures, and customises the overarching approach to meet the specific needs of each of the firm's 15 business divisions.
Establish visibility into IP practices and potential problems
Build IP risk into due diligence of supply chain members and potential business partners, and continue monitoring IP protection among suppliers.
Companies such as Microsoft have started to incorporate IP protection into their supplier scorecards. Doing so helps to build alignment between sourcing and compliance functions inside the company. It also leads to clearer, more consistent communications with supply chain companies.
Prevention and response
Multinationals can help their suppliers and business partners develop their IP protection by providing training, which identifies risk factors and shares best practice. Companies in developing economies are recognising that maintaining high standards, whether in safety, labour practices, quality or IP protection, can provide a competitive advantage. In the short-term, suppliers can be encouraged to comply with incentives, such as public recognition or the promise of a long-term relationship with the buying company.
Beyond having IT security systems in place to deter cyber theft, companies need to limit access to trade secrets and other critical information, making it available to employees and supply chain partners on a need to know basis. An array of tools makes this possible, including encryption of confidential information. Electronic documents can be created so that they exist only for a limited amount of time, can only be accessed with a special code, and are restricted from being saved, forwarded, or printed.
Finally, in the event of an IP infringement, the company may or may not take legal action, but it should conduct a full investigation of what caused the leak, build a corrective plan and follow up to verify its implementation. When the infringement takes place at a supplier site, it can be valuable to involve the supplier in this process. Sometimes MNCs may prefer to forgo the legal route all together, and focus instead solely on corrective action.
This was the case with a global consumer electronics company, which discovered in 2010 that its largest licensed distributor was selling knockoffs of its product to retailers, mixed in with the real product. Even though legal action was warranted, it was not an attractive option for multiple reasons. Instead, the company implemented new procedures to prevent counterfeits, resulting in complete elimination of the problem within a year, while maintaining good business relations with the distributor.
Involving the supplier in the process, foregoing legal action and focusing solely on corrective efforts might be the most advantageous response in the long term.
Moving away from an audit-focused or contracts-only approach to more preventive measures allows businesses to protect intellectual property along the entire supply chain, increases transparency and fosters a culture of compliance that benefits all.
Hau L Lee is the Thoma professor of operations, information and technology at the Stanford Graduate School of Business. Pamela Passman is president and chief executive of the Center for Responsible Enterprise and Trade, a non-profit organization working with companies to protect intellectual property and prevent corruption.
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