Offshore Outsourcing: Big Savings, Big Risk
U.S. companies continue a pell-mell rush into offshore outsourcing of software development. Those that haven't stopped to look at global intellectual property law are in for a big surprise.
By Michael Fitzgerald
November 01, 2003
The StingOn a typically steamy New Delhi day in late August 2002, Nenette Day walked into the Ashoka, one of the city's best hotels, for a meeting with Shekhar Verma. Verma had been fired from his job at Geometric Software Solutions Ltd. (GSSL), an outsourcer based in Bombay. He claimed to have the source code for SolidWorks Plus's 3-D computer-aided design package, which GSSL was debugging. Verma had contacted a number of SolidWorks' competitors and offered to sell them the source code. Day, an American, had taken the bait and flown to New Delhi. After confirming that what Verma possessed was indeed SolidWorks' source code, Day began negotiating on price, eventually bargaining him down to $200,000 for the code. The deal struck, Day got up and left the room. Then agents from India's Central Bureau of Intelligence (CBI) swept in and arrested Verma. Day was not arrested
The arrest led to the first prosecutorial filing for outsourcing-related intellectual property (IP) theft in India, in a case that may come to trial before year's end. Given that software outsourcing was a multibillion-dollar business in India last year, the trial will draw close scrutiny from both sides of the world. Sound like an open-and-shut case? Day herself is not nearly so confident. "With no case precedents, the reality is we have no idea how this plays out under their law," she says. Day also says that Verma made two small mistakes (she declines to specify them) without which he could have already gotten off scot-free, and that after a full week in India working with the prosecutors this fall, Day still doesn't understand the applicability of at least one of the critical charges.
Intellectual property, if stolen, "is a genie that can't be put back in the bottle," says Day. Currently, she says, "there is really no law to protect American companies' intellectual property."
U.S. companies need to think seriously about what that means. Consulting company McKinsey estimates that by 2010, the U.S. IT industry will save $390 billion through offshore outsourcing of software development. But it also opens up new channels of industrial espionage in bitterly poor nations that often don't have laws protecting foreign companies and rarely enforce whatever laws may exist. India, obviously eager to protect its national income from outsourcing, is scrambling to demonstrate that it takes foreign intellectual property seriously. Some observers say that other countries vying for outsourcing dollars are even worse when it comes to providing legal protection for intellectual property. Court cases are still relatively hard to find, but that's about to change. Smart companies need to reexamine their outsourcing contracts and make sure that they aren't at risk of becoming the test cases.The JungleIt would be wildly speculative to suggest that the SolidWorks case will even slow the bullet train that is offshore outsourcing of software development. The National Association of Software & Service Companies (Nasscom) alone expects its outsourcing business in India will increase by 26 percent to 28 percent this year (Gartner predicts even faster growth for higher-level business process outsourcing worldwide). India's IT sector exported $10 billion worth of goods and services last year, and projects it will reach $21 billion to $24 billion in 2008. Meanwhile, Forrester Research estimates that in the next 12 years, 3.3 million IT jobs will leave the United States and go overseas. These trends won't reverse because of one case of an employee gone bad. "This is dealing with a rogue employee who left and stole information. That happens everywhere," says William B. Bierce, partner in Bierce & Kenerson, a New York law firm specializing in outsourcing and international business law.