IP Protection is like playing Poker (mostly)

What I am really trying to say is when it comes to manufacturing offshore there is a lot to be said for the impression you give to the supplier.

The analogy here is your IP, this is what both players are actually playing for. Customer for protection of his IP, Regular patron (Supplier) for being able to steal the IP for his own use. The quality of the cards received by the Supplier is representative of how he sees the market value of your IP for his own purposes and how much he is willing to put on the game in order to win.

So imagine a some customers in a casino. They walk into the Poker room and there is a table with a dealer and 1 patron (who appears to be a regular to this table). This table only has 2 seats so each customer plays 1 on 1 with the regular patron (who has a sizeable mountain of chips in front of him).

Customer 1 sits down. He places $10 on the table and asks the dealer for chips. The dealer replies there is a $50 minimum to play. Customer 1 digs deep into his pocket fumbles out some notes an coins and manages to make up the $50 for chips. He bets his entire mound of chips on a single hand. The dealer deals the first 2 cards, Customer 1 gets an Ace (getting excited) followed by a 10. He slams the 2 cards down on the table and exclaims "Blackjack!". The Dealer proceeds to explain to him that the game is actually Poker ad requires 5 cards. The regular over the other side of the table is seeing that this Customer has no experience in the game and is not prepared to play for higher stakes if required. 5 cards are dealt to each player. The regular bets $1000 and Customer 1 promptly folds and walks out the door.

Customer 1 represents a complete novice to the industry, he has no NDA, is not even sure what an NDA is supposed to be. Has done no research into the subject and has handed over his IP promptly to the first supplier he made contact with. Basically there is no protection and the supplier is free to do as he wants. The only saving grace would be if the supplier decides to take pity on Customer 1 and allow him to leave with his dignity by folding his own hand.

Customer 2 sits down, he has a few chips already and appears to at least know the rules of the game, Still he has quite a small mound of chips compared to the Regular. He bets the minimum and ups the ante a bit as cards are dealt. The Regular is only slightly concerned as he knows he has more than sufficient chips to force Customer 2 out should he get a reasonable hand. The supplier gets 3 Aces in his hand. Good enough to take a chance. The regular bets $2000 and Customer 1 complains on the unfairness of the situation but eventually folds and walks out the door.

Customer 2 has some knowledge. He has gotten an NDA in place but it is only in English and does not accurately reflect the true trading name of the supplier. The supplier has a little apprehension in stealing the IP, checks with legal who advises him the NDA will be impossible to enforce in their country because it does not reflect the true trading name of the company. Knowing this the supplier weighs up the pros and cons of his intended actions and proceeds to steal the IP.

Customer 3 sits down, he has a reasonable mound of chips (although some are from his home poker game that he has added to the pile to give a better impression) and appears to be well conversed in the game. The regular eyes him with some degree of trepidation, this could be a serious opposition to him winning. The regular gets a small straight (4,5,6,7,8) and knows it is a very good hand but is a bit concerned with how to proceed knowing his opposition is at least prepared. He makes a bet of $1000 which Customer 3 promptly raises to $1500. The Regular re-checks his cards and the mound of chips in front of Customer 3. A bit nervous he raises to $4000. Customer 3 then hits the situation where he is now cutting into the fake chips he has brought from home. He cannot match the bet and walks out.

Customer 3 knows what he is doing, but is a little low on resources to follow through. He has NDAs in both English and the Supplier's language, has taken the time to research and insert the true trading details of the supplier into the NDAs and understands the process of litigation should the supplier dishonour his agreement. The problem he has is that the litigation process from another country is expensive and he lacks the resources to follow through. He gets his product into manufacture but this has obviously cause great financial stress and as a result h has had to cease follow-up visits to the supplier, payments are late or extended for services. The supplier starts to see that the Customer may be struggling and figures that although this customer has all the relevant procedures in place, the likelihood of him being able to do anything against an infringement on the NDAs is low. Seeing the high potential value of the product the supplier decides to take the risk and find out his assumptions were correct.

Customer 4 sits down, he has a good mound of chips and appears to be well a seasoned player in the game. He also has an accomplice standing beside him apparently handing out advice. The regular is more than a little concerned here with playing against this seasoned professional. The cards are played and the regular receives a mid flush (6,7,8,9,10 of the same suit) a very good hand but still beatable. He bets $4000 which is promptly match by Customer 4 who did not even flinch at the amount. This makes the regular nervous. Either Customer 4 has great cards or he has the intention to push the Regular out of the game. Additionally the "advisor" appears to be giving regular strong tips to Customer 4 which (possibly by intention) are easily overheard by the Regular. Weighing his options and comparing the mounds of chips he decides that although he has a great hand, it is not worth the risk and folds.

Customer 4 knows the situation well, or he has employed / engaged someone who does. He has bilingual NDAs in place and the company appears strong. Every attempt to cheat Customer 4 by the supplier is met with immediate and decisive action. The financial situation with Customer 4 is sufficient at least to maintain the appearance of being solvent, accounts are paid on time and either himself or the advisor conducts regular site audits. The supplier sees this as someone with experience in the outsourcing / offshoring industry and assumes that the risk to attempt to infringe on the NDA and contract is probably not worth the potential repercussions regardless of the quality of the product. The fact that Customer 4 engages in regular and random site audits also makes fraudulent activity difficult as there is the possibility that copies of Customer 4's product will be on the line during an audit.

Customer 5 (final customer) sits down, assesses the past history of the first 3 players. He decides that his financial resources are not sufficient to bluff the Regular patron. He demands a game change to BlackJack, the Regular patron can follow him or not. Either situation is acceptable. Sitting at the new blackjack table he receives his cards (Q, K). He splits the card and the dealer deals on top of the 2 piles, both piles receive an unbeatable total of 21. He walks out of the casino unchallenged with his winnings.

Customer 5 knows the risks are high and that if put in the situation he will likely not have the financial resources to proceed with litigation so he decides to employ an new approach. He splits his IP between 2 supplier so that neither has sufficient information to replicate the product in its entirety and market competing products. Finalisation is done either by a separate entity or one of the 2 suppliers without them having transparency to the details of the manufacture of the other parts. While there is limited risk of IP fraud by either supplier, the value they would obtain from manufacturing a copy of a partial product is so small that is is not worth chancing litigation.

So next time you are considering offshoring decide whether you are represented by Customer 1-4 above or if you want to play a different game with better odds.


Brian Le Mon

Principal Consultant at GBOS

Offshore manufacturing has become the only option for many Australian industries competing in the global economy – but thorough preparation is essential. Inconsistent quality and unreliable delivery are just two of the potential hazards awaiting companies that go into this major exercise inadequately prepared. If you’re considering offshore manufacturing, or you’re not satisfied with an existing offshore manufacturing partner, then GBOS can guide you through the minefield.

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