Contractor IPRs in Codevelopment Projects

1
Contractor IPRs in Co-development Projects

• Stephen Carson
• George John
• presented at
• Product Development Management Association
• Minneapolis, MN April 2006
• Assistant Professor of Marketing, University of
  Utah
• Pillsbury-Gerot Chair in Marketing, University
  of Minnesota

Download paper and slides from http//gjohn.csom.u
mn.edu
2
Background

• Engaging suppliers on RDE tasks to develop new
  products is a growing practice (E.g. Dahan and
  Hauser, 2001 review)
• Categories of engagements include
• co-equals (Cummins ties up with Donaldson on
  diesel engine particulate emission control share
  costs)
• client-sponsored (Cummins initiates, sponsors and
  pays Donaldson to develop a particulate emission
  control component for Cummins)
• My focus is the latter type of project

3
Background

• Client-sponsored projects typically
• 1. involve suppliers with special skills (client
  cannot take it in-house)
• 2. tasks include creative content (client cannot
  control work processes)
• 3. revisions are commonplace (client cannot
  spec everything into an RFP)
• 4. client is exposed to risk

4
Background

• Certain contract features are expected and
  understood from past work
• incomplete contracts large gaps filled in as
  work progresses
• soft pricing terms
• Distribution of intellectual property rights
  (IPRs) are not well explained by
• work for hire tradition makes buyer default
  owner
• shop rights tradition gives suppliers some IPRs

5
Goal of Research

• How to get at the right distribution of IPRs
• Case Example Wedding photos
• client sponsored project
• involves special skills of supplier
• creative task
• revisions to plans are common
• client is exposed to risk
• Photographer is default IPR owner. Is this good?

6
A Stylized Model

• Initial period Buyer engages supplier on client
  sponsored task.
• Reimburses supplier for costs as incurred
• Follow-on period Tasks are observable, not
  verifiable, so opportunistic renegotiation is
  likely
• Completeness of initial specifications is h
• C is the cost of project (including supplier
  margin and possible opportunistic overages)
• Some fraction (?) of the IPRs are granted to
  contractor
• S(w) benefit to contractor of completion
• d is the value to contractor of IPRs outside of
  project
• B(w,d) benefit of client of completion
• k is the fraction of clients investment lost
  if project is not completed

7
Sequence of Stylized Events

• The cost C is sunk in the initial period
• With probability ?, revisions do not occur in
  period 2. The completed project yields client and
  contractor, B and S respectively.
• With probability (1-?), revisions occur, and
  opportunistic renegotiations occur with revised
  payoffs to client and supplier
• If a complete breakdown occurs, contractor covers
  cost, but client loses the exposed fraction of
  their investment.
• Anticipating these events, client chooses level
  of IPRs to grant to contractor so that its
  profits are maximized.
• Balance between motivating supplier and giving
  away the farm.

8
Results from Stylized Model

• Right amount of IPRs going to contractor are
  greater when
• Clients exposure is greater (from a breakdown)
• Revisions to initial plans are more likely
• IPRs have broader uses outside intended use for
  project
• Opportunistic renegotiation are more intense
  when
• Clients exposure is greater (from a breakdown)
• Revisions to initial plans are more likely
• Contractors are granted fewer IPRs

9
Model vs real world
We identified 5 highest 2-digit SICs on
RD/sales then identified highest 3-digit SICs
on contracted RDE within each 2-digit SIC
Industry SIC contracting RDE Drugs
Medicines 283 36.68   Motor Vehicles
Equipment 371 27.85   Optical, Surgical
Photo Instruments 384-387 27.64   Communication
Equipment 366 27.64   Aircraft
Missiles 372, 376 20.83
10
Survey Data Collection
Sampling frame of RD managers from these
firms Asked to choose most familiar project with
contractor on a cost plus contract. Response
rates Of 2,600 original names 635 names not
valid 670 of remainder not reachable 226 of
remainder reached, but unable to identify RDE
project 496 of remainder identified project, but
did not outsource 405 mailed questionnaires 147
usable questionnaires meeting criteria
11
Results from Data Analysis

• Properly designed contracts give contractors more
  IPRs for projects where
• Client exposure is greater
• Project IPRs have significant value outside
  intended scope

12
Conclusions
Goldilocks theory of IPRs Granting contractors
too much increases opportunistic renegotiation,
but too little yields low quality work. Right
balance between exposure of client and autonomy
of contractor for creative tasks How? 1. For
broader technical projects, provide more IPRs and
vice versa. 2. Choose suppliers with more
outside interests and connections. This makes
IPRs more valuable to them Back to the wedding
photographer .