How to protect IP while outsourcing embedded software and electronics design

This article article was initially published in The Outsourcing Journal. It answers one of the main questions related to IT-outsourcing: how to keep your commercial secrets safe? The author explains which valuable information are hidden inside products for the electronics market, reviewing the development process step-by-step. As a result, you will learn how to detect the most significant IP within each project and provide it with an extra protection.

by Vitali‎ Mozolevski,
Tech Director of Promwad Electronics Design House

What does a new product consist from for the consumer electronics market? Typically, it is a software and a hardware device: an electronic circuit board, components, embedded operating system, a user interface, enclosure etc.

We will see what kind of valuable information is hidden inside products for the electronics market, examining step-by-step, the process of development, production and delivery of a new device, up to its after-sales service.

From the owner’s point of view of the of the electronic product, a reader can evaluate the following list of nine points and decide how important each stage is for a particular project to be successful. This kind of evaluation will allow you to put correct priorities and pay a special attention to the development and to the protection of the most valuable stage.

1. Technical study of the idea

Usually, the starting point of the entire project is the idea of a new device. It is important to understand what the main value: is it the original idea of the product itself or the plans of production and promotion (for example, the information is that sales will be conducted in an untypical market or the data about manufacturing technology of this particular product that allows to reach the less production cost and become a market leader)?

The cost of the idea itself is not usually high unless it is a know-how based on many years of scientific research in a specific field.

For the idea of an electronic device to become a valuable resource, it takes technical expertise and feasibility analysis; only after that all information will be gathered into requirements specification and a business plan, the important confidential documents which have to be accessible only for a limited circle of trusted people.

At the same time, the idea itself can be openly discussed with potential investors and business partners. But it is not always obvious, and many young entrepreneurs are afraid to share this information considering that an investor can use it to build the product or the service himself.

2. Hardware

The next step is hardware development: component selection, PCB design, and tracing for specific requirements of the structure. At this stage, the main value is in the implementation of specific design solutions: in the description of the circuitry and PCB design of the device, and in the selected list of required electronic components.

Typically, in the development of modern electronics, standard solutions are applied, which are used in millions of other types of devices around the world: the circuitry, the architecture of components connection, etc. In certain products, all hardware can be based on standard solutions.

For example, a qualified engineer can repeat a cell phone circuitry (the value of this project amounts 2-3 man-months), but he will not be able to establish the production and assembly technology, nor get unique components specifically designed for this phone at the same cost. Thus, he will not be able to copy the product as it is.

3. Software

At this stage, an operating system will be chosen and the software of the device will be developed, including drivers, quality control tests for production, user software, etc.

The amount of software in total development costs constantly rises, it is a global tendency, while labor costs are reduced by using ready solutions with open source. The programmer’s job is more and more reduced with integration and optimization. Thus, the uniqueness of the software is reduced. It can be expressed only in some specific elements, for example, in a unique power saving algorithms, voice processing, noise reduction, etc. These are the very elements needed to pay particular attention to from the  protection point of view - everything else has a much lower value.

4. User interface and enclosure design

When a product gets its own enclosure and graphic interface to communicate with a user, to the list of intellectual property units architecture, a user interface, the structure and 3D design of the enclosure are added, because all that describes and percepts the product.

Visual elements of electronic devices are copied from popular solutions existing in the market. In this case, they do not need special copyright protection.

However, if a product has certain unique visual features, this information has to be saved in secret until the first announcement of the product release, when this information becomes public.

5. List the licenses needed to be purchased

An owner of a future product can obtain various licenses. For example, he can sign contracts to use certain audio /video formats (mp3, AAC, MPEG 4, Dolby etc.).

Those licenses will then reflect the future cost of the product. If we speak about public technologies, the license purchasing conditions will likely be the same for all market participants. However, if within the project it is possible to obtain an exclusive license or to get special conditions from the licensor, then these contractual conditions can adversely affect the functionality and / or the cost of the final product, ensuring its uniqueness and extra protection.

6. Components

Electronic components and other parts create the cost of the device, its quality, delivery terms and warranty obligations. All those thing together influence the competitiveness of a product.
One of the key criteria of success of the entire project is BOM optimization, and development of a partnership with distributors play a special role. Developers of a device together with the distributors make up a list of potential replacements to reduce the cost of the final product or to improve its technical features.

The results of this phase are that the product owner gets contracts with specific delivery terms and exclusive prices for processors, memory chips and other important components of the device. Typically, there is a lot of work behind each such contract: negotiating experience, the reputation of the company, results of cooperation with global technology vendors, etc.

The value of these contractual conditions becomes evident during the production phase, because at the design stage only general conditions are usually specified, or the work is limited by the choosing key components suppliers.

7. Production of a device

Typically, choosing a specific manufacturer takes place during the development process. Such precaution allows to take into account technological possibilities and requirements of the manufacturer, as well as adding the cost of its services into the project budget.

As a result, the owner of the device gets a list of specific contractors who have certain technologies to manufacture electronics and enclosure parts, as well as information about where and how assembly and packaging of the finished device will be conducted. The most valuable information at this stage is the selected technology, costs, quality, and timeframes.

8. Entering the market and sales start

The project comes to its final straightaway: the preordered goods are shipped, and the new device is delivered to retail networks.

Of course, the marketing plan is being made during the process of concept development. It is difficult to overestimate the importance of this document because the same product can either win the market or fail because of promotion approaches.

At this stage the product owner has a delivery set made with the technology for mass production: it is a ready device in its original package with instructions, set of cables and other necessary accessories.

Also, a valuable component of the project is the information about plans and regions of sales; that includes analysis of markets and potential suppliers, signed supply contracts, transfer of exclusive sales rights, approved price of the product, a list of related products and services.

9. Technical support

The list of costs of the project also includes after-sales service organization of the device, and that, in its turn, affects the price of the product and its attractiveness for customers. At the stage of the technical support organization, a list of events and conditions that are available to the end user (warranty, technical support, etc.) appears.

Thus, if we make a diagram of the project costs to develop a product for the market of electronics taking into account development, manufacture and sales, we can make two conditional diagrams for different types of electronic devices:

(1) A high technology device for industrial applications

(2) A device for the mass consumer market

Diagrams: the distribution of costs to implement the development, manufacture, and sales of measuring scientific equipment (with the production batch of 1 to 10 pieces) and for a smartphone designed for mass consumer market of electronics (with the production batch of 1 million pieces).

In the first example the main value of the product is in the development, and in the second one, the main value is in promotion and sales. Of course, those figures will considerably vary depending on features of a specific project. It is extremely difficult to get information about someone else's products in details because it is a commercial secret. Analysts in the field of information technology can operate only with available public data, by getting insider reports, and by conducting their own research as well.

For example, analytical company IHS publishes annual calculations of the costs for electronic components, used to assemble new Apple devices. So the analysis results show that the hardware platform of Apple Watch made only 24% of the announced retail cost of this new product. Assembly and testing costs made $ 2.5. The total production cost made $83.7. Consequently, the rest $265.3 is included in profit, costs for marketing, software development, and in a number of other related expenses that we have described in this article.

The main conclusion that we can make upon this example and our list consisting of 9 paragraphs is that the product owner has to acknowledge the value of each stage of his project, and, first of all, he has to focus his attention on his key competence (it has the highest priority of protection). All the rest can be given to outsourcing.

So if you create a unique technology device in a limited batch, the most valuable information on the project is most of all the name of the customer and the scientific component of a device. If you operate in the mass consumer market, your ace could be a unique sales plan and an attractive design. If you design electronic products for industry, the key elements of the project may be the price, reliability and maintainability of your device.

Competent control of the information that external teams get and reasonable delineation of tasks for specialized executors can significantly reduce the risks. Do not be afraid of leaks at the secondary stages of the project, which make a small part of your personal diagram of your intellectual property.

About the author

The author of this article is Vitali‎ Mozolevski, a co-owner and Tech Director of Promwad Electronics Design House. His company helps its customers to design new products for the global electronics market, offering such services as industrial design, hardware and software development, testing, prototyping and mass production support.

Over eleven years, Promwad has implemented over 200 projects for customers from the EU, the USA, Russia and Canada. The company’s official partners are Texas Instruments, Marvell, STMicroelectronics, Fujitsu and Analog Devices. Offices of Promwad are located in Vilnius (Lithuania) and in Minsk (Belarus).

You can reach Vitaly or forward your request to our tech experts by the contacts below.