China Syndrome: Beware of Pirated Software

Today's hottest global markets are steeped in counterfeit IT products. Here's how to minimize your company's exposure.

Edward Macnamara was impressed with the local company he had hired to help open a new office in Beijing. The vendor had offered to install a suite of Microsoft products on the computers right away.

But Macnamara's favorable view quickly turned with the vendor's follow-up question: "Do you want Microsoft today, or do you want to wait for the real thing?"

As chief technology officer at Wilmer Cutler Pickering Hale and Dorr LLP, a law firm based in Boston and Washington, Macnamara had been warned about software piracy. Still, he says, he was surprised by the vendor's brazen behavior.

Experts aren't so shocked, though. They point to statistics that show rampant use of pirated software and counterfeit hardware in the U.S. as well as overseas. The problem is on the rise, as U.S. companies expand operations into countries where illegal use of IT products is widespread and enforcement of intellectual property laws is minimal.

For example, New York-based audit, tax and advisory firm KPMG LLP and the Fremont, Calif.-based Alliance for Gray Market and Counterfeit Abatement (AGMA) recently reported that as much as 10% of all high-tech products sold globally is counterfeit. And the Business Software Alliance (BSA) estimates that one-third of the software in use worldwide is pirated. The Washington-based organization also says that while the U.S. has the lowest piracy rate of any country, it's still a disappointing 21%.

To complicate matters, some of the hottest spots in the global marketplace are the worst offenders.

For example, in China, 90% of software installed on computers is pirated, according to the second annual survey on piracy conducted last year by the BSA and market research firm IDC. Only Vietnam and Ukraine had higher piracy rates, at 92% and 91%, respectively, and more than a dozen other countries had rates of 80% or higher.

Cultural Challenge

According to AGMA and KPMG, China is among the countries where counterfeiting IT products has become a cultural norm. Their report says that "China attracts a huge influx of foreign direct investment resulting in high technology capability with adopted know-how, accessible distribution in densely populated areas and inconsistent regulatory enforcement."

Those factors—coupled with low wages, high unemployment and a largely uneducated workforce—create a favorable setting for counterfeiting, the report says.

The result: In countries like China, "the likelihood of buying counterfeit products is higher—and it might be more acceptable," says Gary Matuszak, global industry leader for electronics, software and services at KPMG.

That's particularly true for companies that employ local workers in their foreign offices, says Avi Barir, vice president of software digital rights management at Aladdin Knowledge Systems Ltd. in Israel.

"The cultures in these countries are such that local employees in [foreign offices of] U.S. companies would act the same as employees in local companies," says Barir, whose company makes products to help manufacturers prevent illegal use of their software.

That means your Chinese workforce may not be culturally attuned to the fact that counterfeiting is not acceptable. But it's essential that your employees here and abroad take the issue very seriously, for financial as well as ethical reasons.

Counterfeiting isn't just about losing a few bucks on bad software or hardware. Counterfeit and pirated products expose companies to worms, viruses and system failures, as well as potential lawsuits for copyright and patent infringements.

Hard to Spot

Aside from software, the products targeted by counterfeiters are often low-cost items that companies buy in high numbers, such as servers, laptops, cell phones, monitors, hard drives and network interface cards.

Counterfeiters often reverse-engineer the items, slap on fake logos and ship them out. Sometimes the quality is poor, but the doctored versions can often fool even tech folks.

Still, industry leaders agree that the problem could be kept in check if global companies put more controls in place to ensure that they and their international counterparts don't buy fakes. They say relatively simple measures could significantly reduce the volume of illegal IT products used in U.S. companies and abroad.

"Certainly, there are things CIOs can watch out for to mitigate, if not prevent, the purchase of counterfeit products," says Matuszak.

Here are some simple procedures that can lower your risk of buying counterfeit IT products.

Educate your workforce about the problem. CIOs need to instruct anyone authorized to buy IT equipment and supplies about how to avoid buying counterfeits.

Establish rules for purchasing hardware and software. For example, Matuszak says, decree that all cell phone purchases be made through the purchasing office by someone who knows how to guarantee that the product is legitimate.

Don't trust unknown vendors. Christian Lau, assistant vice president of IT at Franchise Services Inc. in Mission Viejo, Calif., the parent company of several franchise brands, buys only from an established retailer or directly from the manufacturers. And the company doesn't allow anyone outside the IT department to install software.

"Where you're getting into trouble is when you try to go through [unknown] resellers, or you buy on the used market or the international market, where you don't know the source," says Steve Bandrowczak, CIO at Lenovo Group Ltd. in Purchase, N.Y.

Be suspicious of highly discounted products. "A good price from someone you never heard of is probably a tip-off," says Nick Tidd, president of AGMA and vice president of sales and business compliance at 3Com Corp. in Marlboro, Mass.

Don't pass up a good deal out of fear, though. Tidd and others say there are companies—some of which might not be authorized dealers—that sell legitimate products at steep discounts.

"You can always call on the serial number and see if you're getting something legit," says Randall Palm, chief technology and information security director at the Computing Technology Industry Association Inc. (CompTIA) in Oakbrook Terrace, Ill. "Trust, but verify."

Don't be fooled by the presence of Web sites, business cards and other professional representations. Experts say that gray-market dealers often have all the trappings of legitimacy to allay customers' suspicions.

Ensure that domestic purchasing policies are followed in overseas offices. "I wouldn't go as far as saying everything has to be controlled centrally by purchasing only in the U.S., but you need to educate and follow through to make sure the China-based buyer is buying from an authorized [vendor or manufacturer]," Matuszak says.

Bundle counterfeiting with other security issues. "If you're a CIO, you should have an information security/cybercrime policy in effect," says Frank Taney, chairman of the IT litigation practice group at Buchanan Ingersoll PC, a law firm in Philadelphia.

Foster a culture where counterfeiting and piracy of any kind is not tolerated. Paramount Pictures Corp., for example, requires managers to attend an annual meeting addressing business and ethical practices and to sign a business conduct statement each year, says Ed Trainor, senior vice president of information systems at the Los Angeles-based company and former president of the Society for Information Management. Policies against copyright infringement and illegal copying of materials are among the subjects covered.

There's nothing new about counterfeiting, Taney says, "but it is news to a lot of companies that this is a serious issue that they have to manage."

With counterfeit goods, even cheap ones, he says, "you're really not getting the value you think for your procurement dollars."

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THE WORST OFFENDERS

COUNTRIES WITH THE HIGHEST PIRACY RATES IN 2004:

Vietnam 92%
Ukraine 91%
China 90%
Zimbabwe 90%
Indonesia 87%
Russia 87%
Nigeria 84%
Tunisia 84%
Algeria 83%
Kenya 83%
Paraguay 83%
Pakistan 82%
Bolivia 80%
El Salvador 80%
Nicaragua 80%
Thailand 79%
Venezuela 79%
Guatemala 78%
Dominican Republic 77%
Lebanon 75%

SOURCE: Second Annual BSA and IDC Global Software Piracy Study, May 2005

Pratt is a Computerworld contributing writer in Waltham, Mass. Contact her at marykpratt@verizon.net.

Copyright © 2005 IDG Communications, Inc.

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