At a high-level, Intellectual Property (IP) is a fairly easy concept to grasp. Anything created via intellectual activity can be considered IP. And that IP is an asset owned and controlled by the person that creates it. 

Ownership of IP assets can be sold, licensed or retained as its creator chooses. IP comes in many forms including artwork, written works, inventions, designs and even software.

IP governance can be complex and varies according to the type of asset, protection mechanism (like a copyright, for instance), and its country of origin. Frankly, it would require much more than this blog to address the subject fully. But not to worry, we’ll limit our focus here to software IP and what it means for your business.

The Basics of Software IP

IP may seem esoteric, perhaps even irrelevant. But software IP ownership can impact on your business in a big way. To better understand the influence of software IP, consider this brief historical analogy.

When manufacturing was king, a company’s “means of production” was their factory and equipment. Not owning these key assets posed a serious risk to the business and ceded a dangerous level of control. Should they lose access to their means of production, the company was out of business.

Today, software is often a company’s primary means of production, so relinquishing IP ownership is just as risky as a manufacturer renting their building and equipment back in the day. Without your software, your business could grind to a halt.

Licensing proprietary software to run your business is like a manufacturer renting its factory and tools, and trusting they won’t lose their lease should their landlord get a better offer.

By licensing rather than owning your critical software IP, you place your fate in the hands of proprietary software vendors. Since their interests may not align with yours, you’re putting your business at risk.

Fortunately, it’s a risk you can avoid if you know how. With that in mind, here are some fundamentals of software IP that you should know.

Foreground IP Vs. Background IP

It’s important to know that IP applies differently to custom software developed for hire as opposed to proprietary, packaged software licensed to users.

Custom software is covered by Foreground IP while Background IP applies to proprietary software.

Foreground IP – Custom software developed for a specific project and customer is considered Foreground IP. It arises out of a research or development project and the rights to Foreground IP are typically assigned to the client by contractual agreement prior to the start of the project.

As the client, your IP rights confer ownership of the finished, compiled software as well as associated work products like source code. 

Background IP – Background IP applies to pre-existing software applications. Vendors that develop applications and then license them to multiple customers have Background IP rights. They control who can use their software and how. Their rights are defined and enforced through a Software License Agreement (SLA).

A breach of any of the terms of an SLA is a violation of a vendor’s Background IP and often results in negative repercussions to software users. Specific breaches range from unauthorized use to non-payment of fees, and are tied to specific remedies the vendor can apply to enforce its background IP rights. These remedies can be drastic and may include the legal right to repossess software or lock users out.

You Don’t “Own” Proprietary Software

It’s not uncommon for users of proprietary software to say they “own” it, or that they “purchased” it.  But those are misconceptions or misnomers.

What they “own” is a restricted license to use software subject to the rules formalized in the SLA. Licensed software isn’t owned by customers — it’s rented.

Software licensing vs. ownership is much like renting an apartment as opposed to buying a house. If an apartment dweller doesn’t pay the rent or throws a wild party, they may get locked out of their place. If a software licensor doesn’t pay their fees or breaches the SLA, they could get locked out of their software.

Proprietary Software IP Explained

As a licensor of proprietary software, you have no ownership rights whatsoever. And depending on the terms of your SLA, you may also have very little control.

• Your usage is limited only to the rights granted to you by the SLA. You may be allowed only a specified number of users, for instance, or install a specified number of copies or locations. (although with cloud software or SaaS, this is less relevant).
• Some parts of an SLA are standard and straightforward boilerplate. But SLAs may also include a myriad of other clauses that are harder to understand and slanted in favor of the vendor – they can be a little tricky.
• SLAs can be full of impenetrable legalese and hidden gotchas that you might not agree to if you were aware of them. Like vendors having the right to sunset software with little forewarning, for instance.
• It’s often a good idea to have SLAs reviewed by an attorney to protect the interests of your company.

Custom Software IP Explained

Unlike proprietary software, custom software IP is usually owned and not licensed. As part of the custom development agreement, IP ownership typically goes to the business that contracted and paid for it.

Foreground IP ownership and control are usually assigned to you with no restrictions on usage or modification. You own your software rather than license it and that brings real benefits to you.

Benefits of Software IP Ownership

By now, you’ve already gotten the picture that there are many benefits to owning your own software IP. Some are financial, while others are more about taking control over the technology that you depend on to run your business.

Freedom from ongoing – or surprise – fees

Proprietary software vendors are notorious for constantly finding new ways to extract money from their customers. Among the more predictable licensing costs are steep maintenance fees (with periodic increases).

Additional fees can include charges for customization, fees for additional users or instances, consulting, training, and even access to APIs. Some vendors go so far as to forbid customers from contracting with independent consultants or trainers that are not employees of that vendor.

When you are the IP owner, your fees are predictable and controlled. After initial development costs, you may have support fees, but that is likely the extent of it. 

Custom development has a reputation for high upfront costs. And viewed narrowly, that can be true in some instances. But because follow-on costs for custom software are largely eliminated, it has a lower Total Cost of Ownership (TCO).

Custom software has a lower TCO, making it a better value as lower initial costs of proprietary software are easily offset by ongoing fees that pile up over time. 

No usage restrictions

When you own your own software IP, you won’t bump into restrictions on usage. Proprietary SLAs typically limit the number of users on a system, and may also restrict the number of instances, authorized geographies, and even integrations. When you own your IP, there are no set limits on who can use your software. That’s up to you.

Control over your development roadmap

You have complete control over your development roadmap when you own the IP. You can precisely tailor your software to your business, including the features you need and excluding the ones you don’t. And you can do it on your timeframe – no waiting for a vendor to get around to a new feature or function.

And you won’t ever have to settle for software that does 80% of what you need or adapt your business processes to software that isn’t a perfect fit. 

Protection from M&A surprises

Vendors often get merged or sold, and as a consequence suddenly change their product strategy to your disadvantage. When that happens, you could be in for a nasty surprise.

Depending on the terms of the SLA, a vendor may be able to take drastic actions like sun setting your software with little warning, and leave you with little recourse. When you own your software IP, you are immune to the fallout from vendor M&A.

What to Expect From a Development Partner

A premier development partner will support and protect your ownership of any IP they develop on your behalf. They’ll clearly stipulate your IP ownership rights in your development agreement and/or Statement of Work. And they’ll be transparent regarding optional technical support plans, as well as potential future upgrades or follow-on development phases including associated costs. 

In Summary

As a business owner or manager, it pays to know the basics of software IP.  You should understand the differences between foreground and background IP and what they each mean for your business. And you should understand the advantages of owning your software IP so you can make the best decisions for your business.

Pell Software is a Proven Development Partner

Pell Software is a premier software development firm with expertise in all aspects of custom software development. We’ve worked with companies of all sizes and types, ranging from startups and SMBs to national companies in a wide range of industries. 

We combine state-of-the-art technical capabilities with astute business insights to deliver solutions precisely engineered for your organization. So we know how to develop custom software to help you take back control and ensure your focus is on meeting your business objectives while driving growth and increasing profitability. And we never retain ownership of the IP we create. We develop it, but you own it.