Understanding Trade Secrets & Confidential Information

Countries – and companies – are collectively losing hundreds of billions of dollars a year through the loss of trade secrets and confidential information, with several Governments moving to make the theft of these assets a criminal offense.  

Today, the theft of these assets is the number one intangible asset risk companies face. However, many Boards and management teams have not yet woken up to the significance this threat poses to their own organization or how prevalent this issue is. 

What exactly are confidential information and trade secrets?

At its simplest level, a trade secret will be one of a small handful of secrets that define a company’s competitive advantage and which if this secret got out, would be extremely detrimental to the company’s position in the market.

To this effect, trade secrets can be described as: 

  • not generally being known outside of an organization;

  • providing an organization with a competitive edge or advantage due to the information not being generally available; and

  • secrets that the organization has taken reasonable steps in order to maintain the secrecy of the information.

Below trade secrets, companies will also have “confidential information” that helps make it unique in the market. If this information was leaked to a competitor or publicly, it would also significantly impact on the company’s business and market position but perhaps not to the extent of a true “trade secret.”

Why are trade secrets and confidential information important?

Today, more than 87% of company value is driven by intangible assets (things like data, brand, content, code, trade secrets and industrial know-how, internet assets, and plant variety rights). These are the primary drivers of a company’s competitive edge and financial performance and research has shown that companies that focus on intangible assets consistently outperform their peers and industry benchmarks.

These assets are critically important, so it therefore stands to reason that they can also be a company’s greatest sources of risk.

Today, the number one intangible asset risk that companies face is that they are constantly leaking key intangible assets, including software code, data, know-how and systems and processes. The primary sources of those leaks are typically customers, suppliers or employees. Loss of this information generally results in the erosion of a company’s competitive edge, margin pressure and ultimately, material value loss.

Don’t give away your ‘secret formula’

For example, consider WD-40 – the spray estimated to be used by more than 80% of Americans. The chemist who invented it, understood he was onto something but that its value lay in keeping the formula secret. Rather than originally applying for a patent, which would have detailed the very information that the company was trying to protect and allowed others to directly copy it once the patent expired, the company instead chose to implement other policies and processes to protect what it had identified as its single most valuable asset and trade secret: the secret formula.

According to many reports, the formula is kept in a bank vault with highly restricted access (which also provides the company with a strong marketing angle). Less than a handful of people within the organization having access to formula and each of these individuals is subject to a strict confidentiality agreement. To further maintain the secrecy of the formula, it is mixed in three different location and then passed on to it manufacturing partners. 

WD-40 – along with companies like Apple, Samsung, Coca-Cola and Dupont – understand the value of their intangible assets and go to great lengths to protect (and leverage) their trade secrets. Think about it, Apple is notorious for the level of secrecy it imposes on employees, customer and suppliers – and it is also constantly in the top 5 most valuable companies globally – coincidence?

Know where your value lies

Some companies however don’t manage confidential information well at all. We recently worked with a hardware company that asked us to help it review its policies after it was badly burnt by the loss of its confidential information. In this instance, the company had developed a world leading new product category but, being unable to keep up with demand, it outsourced software development to an external supplier. As part of the project, the company provided the full details of the software code and key confidential information to the supplier.

The initial project was delivered on time and within budget by the supplier. When the client re-approached the supplier to use them for the next product iteration they had disappeared. Fast-forward six-months and the supplier reappeared as a competitor utilizing the intangible assets it had been sent to spring board ahead of its former client.  The supplier was able to grab a majority market share at a direct cost to the hardware company of $150M.

Unfortunately for this hardware company, the damage was irreversible. We could only work to prevent this situation happening to it again in the future. $150 million is a big number: again to put that into perspective that is roughly 2½ tons of gold – about the same amount you can load onto a pick-up truck. Would you guard that much gold carefully? This company didn’t and it cost them dearly.

Understand where your leaks are likely to come from

According to research by Code 42 in its Data Exposure Report, 72 percent of CEOs, 71 percent of CMOs and 49 percent of business leaders admit to taking intangible assets (including information, ideas, intellectual property and data) with them from previous employers, when they move to a new organization.  The reason given for this was that 79 percent of the CEOs and 65 percent of the business leaders surveyed saw their work as belonging to them – even though the policies typically said otherwise.  Ouch. 

But it’s not just former employees who may be the source of a leak. If policies and procedures aren’t established to protect a company’s most valuable data, then the potential of this information being either accidentally or intentionally shared with third-parties is heightened.

We see this scenario play out every day and sadly, once an intangible asset is lost, it is virtually impossible to “unring the bell” – the confidential information is no longer confidential, it’s just “information” out in the wild.

Take steps to mitigate risk

While the theft and leakage of trade secrets and confidential information is the number one intangible asset risk faced today, there are steps companies can take to mitigate this risk.  The exact steps will depend on the organization and the nature of the asset, but should at least include:  

  1. Identifying what intangible assets you own and their value;  

  2. Defining which assets are should be classified as trade secrets, confidential information and general data/information; and

  3. Taking steps to ensure these assets don't leak outside of the company, including: 

    • Instituting policies and processes to proactively protect and monitor key trade secrets, know-how and critical confidential information (both internally and with external contacts);

    • Ensuring ownership of these assets is asserted and that information is only shared with stakeholders on a “need-to-know” basis; and

    • Educating employees on the importance and value of confidential information as a strategic asset for the company.

By understanding what assets you own and their value, it becomes easier to rank the importance of each, which will allow you to focus attention on those assets which truly have an impact on your company’s success.