A trade secret is both an important intangible asset that an enterprise owns and a powerful market competition “weapon”. How a business manages its trade secrets is an indicator of the enterprise’s overall management competency and core competitiveness. Our primary research confirms that protecting and managing trade secrets has become one of the key tasks for enterprise leaders.
Common questions asked by business operators are (1) how risks can be analyzed, and (2) how protective mechanisms can be established. Similarly, leaders are interested in (3) how trade secret metadata should be classified and (4) how management mechanisms processes, and systems can be integrated accurately and efficiently. This paper, divided into two parts, responds to these increasingly relevant questions for modern enterprises. In particular, the paper focuses on best practice trade secret protection, combining theory with practice.
The first part of this paper uses sci-tech innovation enterprises as an example. It shows how risk points need to be analyzed by starting from the enterprise scenarios of trade secrets’ risk prevention and management.
1. The Importance of Trade Secret Protection for Sci-Tech Innovation Enterprises
With the rapid development of science and technology and the rapid flow of sci-tech talents, trade secret disputes frequently occur when sci-tech innovation enterprises conduct external technical cooperation or technology licensing or after core technical personnel leave the company. The challenges faced by sci-tech innovation enterprises during research and development (‘R&D’) activities highlight the need for sophisticated trade secret protection systems.
In terms of enterprise attributes, sci-tech innovation enterprises typically have fast business development and rapid product upgrading. These focuses mean the firms have a high demand for rapidly acquired talent and must be able to quickly extract intellectual content and create an environment conducive to creativity, all while achieving high-speed product duplication. Reverse engineering and benchmarking are methods commonly used in the technical development process of such enterprises to seek breakthroughs, grasp core technologies to catch up with leading enterprises quickly, achieve the continuous updating of products, and become innovation leaders in China and worldwide.
The trade secrets of such enterprises are formed much earlier than the time their products can realize market value because implementing the latter may take years to generate cash flow. During the process, infringement of trade secrets will not only affect the value of the products but also cause unexpected obstacles to the survival and stable development of the enterprise.
Importantly, trade secrets may be exposed during employee turnover. Enterprise owners, on the one hand, should retain talents and, on the other hand, find ways to respond to the quick absorption of skills by talents. However, it is difficult to differentiate between personnel’s skills and trade secrets in a clear manner. There appears to be no way to initiate the protection of trade secrets because the proportion of R&D personnel is high in sci-tech innovation enterprises, trade secrets are scattered in various forms, and new trade secrets are continuously generated as the enterprise develops.
Despite various difficulties, an increasing number of managers in sci-tech innovation enterprises have developed an awareness of the need to establish a trade secret management system. Moreover, these persons are willing to invest energy and resources into protecting intangible yet highly valuable assets. Nonetheless, such planned protection is not a personal matter for the managers but requires the collaboration of departments and personnel. Furthermore, what must be noted is that the organizational structure of start-up enterprises is sometimes a work in progress. Regarding supporting trade secret management, some start-up enterprises are completely oriented to R&D without fully equipping their legal, intellectual property, human resources, or compliance departments. For example, the legal department is often also responsible for the work of the intellectual property department. There may be only one or two staff members responsible for dealing with the special affairs of hundreds of R&D personnel.
In such circumstances, it is challenging to efficiently establish a sound trade secret management system that is practical in daily operations, nips problems in the bud, ensures traceability and records, and does not restrict sharing and creativity within the organization.
2. Risk Analysis System Involving Three Flows for Trade Secrets
Trade secrets, formed in the production and use processes, generate value only in their flow.
The establishment of trade secret protection and anti-leakage mechanisms begins with identifying what trade secrets are and what their security classifications are.
Trade secrets are generated in business processes, and all business processes can be generally characterized in terms of information flow, talent flow, and physical flow:
These three flows can be used to analyze the business processes. At the same time, key node management measures can be taken based on identified trade secret metadata to enable effective implementation of the established trade secret protection mechanism.
For technology companies, the key to clarifying the generation and use of trade secrets lies in analyzing and focusing on the “information flow” and “talent flow”.
Since people generate information, information flow is closely related to talent flow. When an employee transfers from one project to another or resigns, the confidentiality mechanism related to talent flow should be initiated. Given this, the information flow and talent flow are interlinked.
For information flow, the focus should be placed on the source, namely, locking on the information-generating subject and observing and analyzing the new information generated by this subject in the specific business process and how it is presented on which carriers.
Information flow analysis can proceed from top to bottom, layer by layer. Interactions differ tremendously between enterprises. However, we have summarized the following tips from over ten (10) case interviews. First, identify the department that generates the most potential trade secrets, such as the R&D department, which also interacts frequently with other departments and even has frequent external interactions. Then, analyze what information has been exchanged in the interactions and what risks have been generated internally and externally in the process. This logic can be followed to analyze and identify the layers.
An R&D department may have different project groups, for example, those responsible for algorithms, software engineering, optical lens design, or electromechanical design. A common risk is that despite the division of work and different responsibilities, all project personnel can indiscriminately access all materials; another risk is that R&D personnel need to issue instructions to personnel from other departments, such as the procurement and production departments. In other words, the department’s information is distributed to all other relevant departments.
For information exchanges between departments (within an enterprise), risks can be controlled. However, the situation becomes more complicated if it also involves R&D personnel’s interactions with external suppliers, and so on, owing to objective needs such as product customization. From suppliers’ one-way contact with the R&D department in the early stage to communication with the quality control department, procurement department, and other internal departments at the same time in the middle and later stages, the information distribution range continues to expand; the difficulty of supplier control continues to increase, and if the suppliers are relatively concentrated, enterprises may be overly dependent on a few suppliers and even share the complete set of key information, and trade secret leakage can frequently occur if the confidentiality agreement or confidentiality clause between the two parties is not fully implemented or confidentiality audits of core component suppliers are not regularly conducted.
In addition, the inadequate identification of trade secrets may also lead to risks. For example, when customer service personnel bring a complete product to the customer’s site for debugging, if solutions produced on-site based on actual problems are not fixed, serious consequences may be caused over time.
Focusing on the information flow, a complete risk report can be formed by analyzing the two risks related to improper use of internal and external information and the absence of identification of trade secrets. This report can then be used as the basis for analysis of the specific situations of enterprises’ “information flow” and “talent flow” when systems and mechanisms are developed, and the responsibilities of department heads are defined in the future.
Conclusion
Currently, as enterprises continue to develop innovations and continue to undergo on-going product upgrading, practical management processes and measures are needed so enterprises can clarify the levels of, and implement corresponding protection for, the mass of trade secrets generated in the process. The situation means more detailed requirements for enterprise owners, relevant responsible persons, and even company employees. The second part of this paper further analyzes the identification and protection of trade secrets and provides practical recommendations.
