The article was updated on January 30, 2024.

As the business world becomes increasingly globalized and digital, outsourcing software development has become commonplace. Surveys show that outside providers handle 31% of IT functions. While relying on external developers can lower expenses and tap into new skills, it also introduces risks around intellectual property protection that businesses must consider seriously.

When you engage an outsourcing partner to build a custom application, your idea, specifications, and end product can be exposed or appropriated. So, how to protect your software Intellectual Property when outsourcing software projects? Understanding IP rights in software development is crucial to safeguarding your idea, innovation, or digital solution. If not appropriately addressed, you can end up with a slick new product but no legal right to distribute, modify, or profit from it.

So, before outsourcing your next software project, make sure you understand the complex issues around intellectual property in software development to avoid unwanted surprises and legal headaches. Our experience and business practices have proven that making IP a priority in any outsourcing negotiation is critical to structuring win-win partnerships without sacrificing ownership or control.

In the article, you can gain simple, clear, and practical recommendations on how to protect the source code ownership and IP rights with a software development contract.

What is Intellectual Property and who owns it?

Intellectual property implies the ideas, innovations, and creative expressions of the human mind. Intellectual Property Rights relate to the lawful rights afforded to creators to protect their inventions and creative works and grant them sole ownership over the use, sale, or licensing of their works.

When developing software, such type of IP as copyrights is most applicable. They safeguard the tangible expression of concepts, such as source code (source code ownership). Copyright holders maintain exclusive control over reproducing, distributing, publicly displaying, or performing the copyrighted work. They can also transfer or sell these rights to other parties.

Who owns the software’s Intellectual Property and copyrights? In fact, IP within the sphere of software development means that those who made any achievements during the working process own the rights to them.

When outsourcing software development, you need to make sure that all the Intellectual Property Rights, your business ideas, and the source code will remain under your sole ownership.

Who can encroach on your IP?

In fact, everyone involved:

• The outsourcing company – Even though you pay for their services, you will not necessarily be the owner, unless it is documented.
• Employees/developers – They have the moral right to own the IP developed in the course of employment, but they can be restricted by legal methods.
• Consultants/Individual contractors – Unless there is a written contract, they may own the IP.

What happens if you neglect the ownership issue?

The consequences may be grave. Neglecting IP risks in software development when outsourcing IT projects can cause serious reputational harm and stunt the growth of your business.

Some of the critical fallouts include the following:

• Extra costs. You’ll have to pay for obtaining the software IP rights more if you delay the question. Plus, the owners can demand additional payment from you.
• Loss of control over critical digital assets. Not having proper ownership rights can prevent you from exploiting, commercializing, and protecting intellectual property. Others may use the IP without your consent.
• Reputational damage. You won’t be able to provide warranties to your customers, which can ruin your reputation and the customer chain.
• Corroded investors’ trust. Investors will demand that you own the intellectual property; otherwise, they may not invest in your company.
• Barriers to growth and innovation. Lacking ownership of software developed and IP rights inhibits your ability to innovate. You won’t be able to freely make changes or additions to the code and systems to improve, expand, or redesign your digital product. Your company’s progress and competitiveness will become limited by what the outsourcing partner is willing to do – at the price they set.

What should you do to protect your IP rights?

STEP 1. Pick the trustworthy software engineering partner for your project

Conduct thorough due diligence to mitigate risks before engaging a software development partner. Look for an established company with a good name and ask about its security policies and employee controls.

More specifically, the ways to protect the Intellectual Property of your software involve the following:

• Evaluation of the vendor’s records regarding client IP protection. Conduct research into any known breaches of clients’ secrets and IP rights.
• Investigation of the security measures the vendor takes to safeguard classified information. Understand their ability to prevent and respond to potential data incidents.
• Analysis of the legislation for software Intellectual Property in home jurisdiction (for international vendors). Clarify available remedies in the event of infringement or breach.
• Confirmation of the project staff. Ensure appropriate contractual terms are in place if external specialists’ involvement is expected.
• Verification of the credentials and authorization of vendor representatives contacted during negotiations. Establish they are duly empowered to bind the organization.
• In-person visit to the partner’s office to evaluate security protocols first-hand and develop trust through direct engagement. However, don’t rely exclusively on testimonials without independent review.

Inquiries that help protect software IP when engaging an outsourcing provider

When considering potential collaboration, it is prudent to understand your future partner’s standard operations. A legitimate organization will be transparent regarding its methodology. Sound practice is what ensures appropriate software Intellectual Property protection.

The following questions/inquiries provide a starting point to evaluate adherence to industry standards of conduct:

• Request information about existing contracts with staff and (sub)contractors and how Intellectual Property rights in software development are protected.
• Ask what PM systems and tools are utilized.
• Find out source code storage locations and backup protocols.
• Understand documentation sharing and collaboration practices among teams.
• Identify policies regarding departing employee access to critical data.
• Ascertain rules for employees’ personal devices and inboxes vs company-authorized resources.
• Obtain details regarding Internet security for onsite and external or remote workers.

STEP 2. Sign an NDA before discussing your ideas

NDA (non-disclosure agreement) means a full confidentiality of whatever you discuss with the company. It is a necessary precaution against the plagiarism of your IP. In our company, for example, NDA is an integral part of the software development contract. However, if your outsourcing company doesn’t offer you this step or even refuses it, then you cannot trust them.

STEP 3. Sign the software development contract

Remember, if it is not just consulting, an NDA is not enough. You must protect the software development intellectual property.

The custom software development contract is the most critical step. The contract can go under many names: Proprietary Rights Agreement, Invention Assignment Agreement, Patents and Inventions Agreement. In any case, the essence of the contract has to be the same. It clearly says who owns the IP and what rights each party has to it.

Of course you do not have to write this agreement from scratch. Simply have your ownership lawyer to make sure the software development contract has been properly worded and has passed a legal review. At Eastern Peak, the customer is the sole owner of a product. Some of the important points included in our standard outsourcing contract are as follows:

• Service delivery and acceptance terms. The service the company provides should be clearly stated and the conditions of the service as well. It prevents further controversies on this matter.
• Ownership. As this is ‘work made for hire’, the client, not the outsourcing company, is considered the author and the owner of work. Note, that it is true only when the defined statute (17 U.S.C. § 101) ‘work made for hire’ is specified in the software development contract.
• Payment terms. Here the payment and its conditions should be included. It will save your time, money and nerves.
• Confidential information. This clause determines the particular pieces of information that has to be kept in secret.
• Disclosure of product. It means that when your cooperation is over, you’ll get designs, drawings, documentation, and all the materials used in the process.
• Warranties. This section of a software development contract usually includes:
  • The performance standard – the obligation to provide a high-quality service.
  • Competitive activities – the company will inform you about any engagement with your competitors.
  • Non-infringement – the company will not infringe and violate the IP rights.

STEP 4: Check employment agreements and consultancy agreements

You can put the requirements to sign those in the main software development contract. This agreement has to include the at-will assignment of all the inventions developed by the employee and the associated IP rights. In addition, there should be an obligation to help protect the ownership rights. It especially concerns the senior executives, because they have more access to confidential information. Usually their employment agreements address IP ownership.

STEP 5: Keep a record

You should keep a written record of who helped develop and create your source code. Watch out for dependencies on 3rd party IPs that were introduced into the code without your knowledge (particularly open source code). The Source Code Ownership Agreement is an additional protection and assurance, which may also be a part of the initial agreement with the company.

STEP 6: Have your lawyer perform an IP audit

If your lawyer keeps track of all the measures to protect your IP ownerships, it will prevent you from missing any details. Always remember to double-check and triple-check.

Oftentimes the question of ownership is neglected until the moment of launching a product. Unfortunately, at this time is too late. Be very careful with IP ownership issues. Only a secure and reliable company will lead your product to success.

How Eastern Peak protects your IP when outsourcing development

Software development with us never compromises your intellectual property. At Eastern Peak, we stick to strict security practices to safeguard your software IP when you hire our team.

Here is what we do to protect your software product IP rights when outsourcing our experts:

• We require all employees to sign NDAs to defend any confidential data shared with us.
• Our developers only access client systems and software through secure connections, and all code and resources are kept within our network.
• We follow a defined software development lifecycle with built-in IP protection points. Before work begins, we specify IP ownership and rights in the outsourcing contract. Your code, designs, data, and other digital assets remain your sole property.
• Our project managers rigorously track software versions, changes, and updates in a centralized system with restricted access. All code, documentation, and related files are backed up in triplicate across separate networks.
• When the project wraps, we conduct a joint IP audit to verify that no protected information leaves our systems. Any temporary access credentials are immediately revoked.

Final advice: How to avoid IP rights traps in software development when outsourcing

So, failing to properly establish IP ownership of custom software during the outsourcing process can have dire consequences. Your proprietary assets can end up in the hands of competitors. If disputes arise, you may face legal battles to regain control of the work you paid to have developed. However, with careful oversight, these risks can be minimized.

In addition to all of the above-specified about how to protect software ownership when outsourcing, we can also provide the following advise:

• Limit access to sensitive data and code.
• Define unambiguous expectations about ownership and avoid vague language that could be misinterpreted.
• Register copyrights and patents when applicable.

By choosing Eastern Peak as your outsourcing partner, you cut development costs, accelerate time-to-market, and confidently scale your team, knowing your product’s IP is safe. Contact us to deliver results without risking your software product’s most valuable assets.

Read also:

• Outsourcing for Startups: Key Reasons and Pitfalls to Avoid
• Managing Large Scale Projects: Best Practices
• Types of Outsourcing: Local, Nearshore and Offshore