Strategy for maintaining proprietary information in R&D outsourcing

9 Jul 2010 Sandeep Mehta

R&D management journal has laid out an interesting strategy for managing Information leakage in innovation outsourcing:

This paper studies an R&D outsourcing contract between a firm and a contractor, considering the possibility that in the interim stage, the contractor might sell the innovation to a rival firm. Our result points out that due to the competition in the interim stage, the reward needed to prevent leakage will be pushed up to the extent that a profitable leakage-free contract does not exist. This result will also apply to cases considering revenue-sharing schemes and a disclosure punishment for commercial theft. 

Take away in this case is that the before the R&D matures and revenue sharing begins, the contractor has an incentive to maximize revenues by “leaking” the information.  Rewards and or punishment for leaks need to be higher during the R&D phase and can be moderated at manufacturing stage.

Then, we demonstrate that in a competitive mechanism where the R&D firm hires two contractors together with a relative performance scheme, the disclosure punishment might help and there exists a perfect Bayesian Nash equilibrium where the probability of information leakage is lower and the equilibrium reward is also cheaper than hiring one contractor.

This is very interesting.  If we have two contractors than probability of leakage is lower! Sounds counter intuitive on the surface, but clearly there is some logic to it – if rivalry can work in internal R&D teams, it could help with external collaborators as well.  May be R&D managers can consider Coloplast’s approach?

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