Risky Business
But companies considering offshoring any R&D work need to consider the potential hurdles. As with any business processes handled in foreign countries, there will likely be language and cultural barriers to overcome.
Another concern is having adequate protection of intellectual property (IP) — a major component of R&D efforts. Companies need to determine how they will safeguard IP and make ownership rights clear in contracts with outsourcing providers and other partners. There are also security implications with sharing research data and trade secrets electronically. “
The big challenge is the IP issue — will the IP of the U.S. firm be safe?” Balachandra says. “India has better IP protection than China. From a strategic perspective, there is another challenge. Will the U.S. firm lose its ability to innovate if most of its R&D is done offshore? Does this mean that the U.S. firm should send out only those activities that are not strategically important? These are serious issues that need to be looked at.”
Labor issues are another concern. While countries such as India have large numbers of highly skilled engineers and other knowledge workers who are eager to work on the latest technologies and products, the attrition rate tends to be higher in other countries than in the U.S.A., says Paul Schmidt, a partner who heads the global service delivery practice at TPI Inc., The Woodlands, TX.
Companies that outsource work overseas can expect to see a relatively high rate of turnover among workers on a given R&D project. That could create some risks in terms of shared trade secrets and intellectual property. One constant concern for corporate customers is the prospect of a competitor hiring its supplier’s most talented R&D engineers. Employment contracts are not exactly ironclad.
Companies considering offshoring R&D must also put processes in place to ensure that product development cycle times are fast enough, says Schmidt. That includes making sure hand offs from one entity to the next are done in a smooth and timely manner. Incentives are often a part of agreements, too.
JMD Manufacturing sometimes encounters delays in getting responses from the people involved in development projects in India, Bhatia says, largely because the Indian service providers are becoming increasingly busy working for different clients. “We have to keep them focused,” he says. JMD has implemented technologies such as instant messaging, video conferencing and voice over IP telephony to help improve communications between its U.S. office and the service providers offshore, as well as keep costs down.
Another potential problem with offshoring R&D is the political backlash and negative publicity that might result. “R&D doesn’t really employ many people, so on the one hand it probably doesn’t get noticed so much, as far as eliminating jobs in the U.S.A.,” says Rabin. “But on the other hand, in many cases people feel that the U.S.A. is supposed to retain [R&D] for competitive reasons.”
The cost of R&D outsourcing might be another hurdle for some. While pricing models are essentially the same for R&D outsourcing as with other types of service engagements, the cost of R&D services tends to be higher. “
Margins are [higher] for R&D services because there is a different set of resources that command higher prices,” says TPI’s Schmidt. The people who work on R&D projects generally have more specific skills and background such as wireless communications, Java development, or industry-specific knowledge.
Janakiraman of MindTree says the company offers a variety of pricing models including charging clients on a fixed-price or time and material basis. “There are few product developments done on a risk-reward model that has an element of IP co-ownership, and [those are] priced with clear objectives of timeline, performance, bonus and penalties,” he says.
Because the R&D services work is more specialized, Janakiraman says, they are normally priced 15%–25% higher than application development, depending on the complexity of the work and scarcity of skills.
But the higher fees apparently aren’t keeping businesses from shifting much of their R&D work to offshore providers. “Companies are developing full-blown products out of India,” says Vamsee Tirukkala, co-founder and EVP, Zinnov LLC, a Bangalore-based firm that helps clients with offshoring activities. “
Some startup [and] mid-sized companies have their entire engineering teams in India,” Vamsee says. “Companies are leveraging vendors for doing specialized tasks or noncritical/monotonous activities. [Some] are building centers of excellence for vertical domains in their India centers.”
Despite the apparent management challenges offshore R&D is a compelling business proposition that an increasing number of corporate customers will find impossible to resist in the remainder of the decade. Not every project will succeed. Cautionary tales will abound, but paying close attention to best practices in governance may make all the difference between success and failure. n
