The Hindu Business Line : Tapping R&D value out of every $

IT was inevitable. R&D, the nerd's destination had it coming. From manufacturing to IT outsourcing to back-office processes to that holy of holies, R&D, competitive pressures inevitably result in outsourcing an activity to someone who knows it better, so a company can focus on its core competence.

But R&D has always been about core competence. Indeed, contract R&D services were about sending out the boring bits, while the blue-eyed boys in R&D developed devices or drugs that would change the world.

It is still a lot about sending out the bits that can be done competently and cheaper and, most importantly, faster by someone else while the company dwells on its core competence.

However, a number of services providers have moved upstream to investing in developing entire devices or designs that are then offered to customers who can add that magic differentiator, etch their brand name on the product and sell it. (See `Sharing the secret' in eWorld dated October 3, 2005.)

In return for the investments, the R&D service providers get licence fees and royalties from customers.

The electronics industry is furthest ahead on the R&D outsourcing curve and competitive and cost pressures have created a breed of R&D service providers that caters to the needs of the industry. Be it consumer electronics, telecom or, now pharma, the need to get more value out of R&D dollars is driving enough Fortune 1000 companies to rethink their R&D strategy, prompting the Indian industry body Nasscom to predict that the market in India will grow from $2.5 billion now to $11 billion in the next five years.

`Lab on hire' - the rising stars

Forrester Research recently identified a new outsourcing model whereby American companies source R&D from India, manufacturing from China, and sell to the world markets.

Wipro's Product Engineering Services (PES) division has been identified as probably the world's largest `lab-on-hire' with its 10,000 engineers and skills spanning telecom, computing, storage and peripherals, consumer electronics, industrial automation, etc.

However, the Bangalore-based company is looking to move into a more strategic partnership role - from doing contract R&D services to becoming partners to its clients in their R&D strategy.

Forrester says it is in a position to do that because of its domain knowledge, technology know-how, investments in process methodologies and regional market insights across Asia, the Americas and Europe. And also because of its investments in reusable intellectual property building blocks such as in WLAN (wireless local area network), IEEE 1394 and system IP 1, including hands-free telephony solutions, video over wireless, Linux-based mobile phones, and digital TV.

At Wipro, the focus is on verticals such as computing, telecom, storage and peripherals, consumer electronics and industrial automation. The company expects semiconductor, telecom and consumer electronics (CE) companies to increasingly outsource their research and development (R&D) to cut time to market.

Ramesh Emani, President, PES, Wipro, says the new 10,000-strong R&D division created by Wipro is poised to see R&D outsourcing from companies looking to get higher value. Several companies that are planning captive R&D centres in India are also open to outsourcing to Wipro, according to him.

The other star on the horizon in India's flourishing R&D services landscape is MindTree.

This company has put together an 800-member R&D service team that it is ramping up to 1,000 people by the end of the year to handle the 70-90 per cent growth it is seeing in the segment.

According to S. Janakiraman, President and CEO, R&D Services, 30 per cent of the company's revenues comes from R&D services.

MindTree caters to large technology product companies in the communication space - wired and wireless; in the storage market, consumer appliance makers such as set top boxes, IPTV, HDTV, etc.

An emerging sector is automotive electronics and software development, validation and verification services to the sector. The traditional market is in computing systems but that is a continuing, not growing market. The new wave is in the semiconductor space, says Janakiraman.

Sasken's Chief Marketing Officer, Swami Krishnan, says the company is totally focussed on telecom as a vertical offering and sees R&D services contributing 85 per cent to revenues. The company has moved from services at the end of the `S' curve, upstream to services in the GSM, GPRS space, to being involved in product realisation in telecom R&D.

"We are moving upstream in the enterprise space, making leading products - we are 5-6 months from creating play that can be licensed to PC OEMs (original equipment manufacturers) that will make PCs ADSL-ready,'' says Krishnan, adding the company has a suite of multimedia applications, wireless modem solutions, protocol stacks and ADSL solutions that would drive growth in the next 12-18 months.

As India emerges as a force in the design space, Wipro, HCL and other large players are billed to bring in $8 billion in R&D revenues in 3-4 years.

`A dollar a minute' imperative

It is a given that cost savings are a part of the equation in the outsourced R&D play. But the compelling factor is the time-to-market for client companies.

Outsourced product development could save a company $2-5 million in costs - the opportunity cost of revenue earnings is really compelling. A product that hits a market even three months earlier could garner higher revenues of up to $80-100 million.

For product companies, time to market is crucial and who is to cavil at potentially higher earnings, even if it means outsourcing design and development work?

Wipro also claims having greater market knowledge, offers reduced investments in quality processes and says its soup-to-nuts type of solutions has found favour with customers.

When a Japanese cell-phone maker sourced MindTree's bluetooth protocol stack, it got its product in the market four months earlier than otherwise. That could mean tens of millions of dollars in revenues from being early to the market, says Janakiraman.

Coming of age

A sign of the maturity that Indian service providers have reached is that they are getting into end-to-end product development. This could be either because a customer asks for it or because the company invests in developing IP and then licenses the design to customers who will also yield it royalties.

Several companies say they are seeing customers who are not technology-capable - their competence is in knowing the market and determining the specifications for a product that will be entirely developed by the supplier.

"We have robust IP practices and even subject ourselves to customer audits, apart from process certifications," says Dr A.L. Rao, COO, Wipro. "The focus for us will be on new product development," says Rao of Wipro, which already has joint product development with customers in the telecom space. There is a joint risk-reward nature to the relationship, involving investments by Wipro that will yield incentives from product success.

A Swedish company in the satellite handset business had a device that weighed several kilograms and that was used at sea, and by war correspondents. MindTree says it has done a complete product development incorporating new features, reducing it to the size of a cell-phone and incorporating client satellite protocols.

"We developed this product from scratch and have introduced our Bluetooth IP to the device," which now has a cell-phone-type of user interface. The product belongs to the end client but the inputs have been from multiple sources, he emphasises.

Pharma opportunity

TCS says it is expecting to reap the benefits of investments it made in R&D in the healthcare sector. According to Joseph Mathai, Executive Vice-President, TCS, and Executive Director Tata Research, Development and Design Centre, TCS enters into partnership R&D where both entities share IP.

The company's bioinformatics centre in Hyderabad provides services in the early stage of drug discovery work - creating a lot of IP and new technologies. The tools that TCS develops for internal consumption will then be productised and licensed to customers. TCS' collaborative R&D efforts will benefit from investments it made in bioinformatics and life sciences — and is on the verge of creating a market opportunity very soon.

"We have generated IP and tools that will serve pharma customers in the Europe and the US as pharma companies automate their drug discovery work. We will create an outsourcing market out of this," proprietary technology, says Mathai. TCS will target pharma companies and drug intermediaries, start with smaller engagements that will `sooner rather than later' translate into large projects, he says. "There is a big acceleration and we see more demand and opportunities in this business," says Mathai.

What's on the shopping list?

Even as corporate R&D budgets tighten, companies are especially wary of talking about outsourcing R&D, even if they are.

The same competitive scenario that drives them to outsource design also leads them to be close-mouthed about such sourcing.

They prefer to set up captive offshore R&D centres and tighter R&D budgets will mean hiring will increase in locations such as India. Many large corporates have their captive R&D outfits in India - about half of the 1.5 lakh R&D workers are captive while the third-party providers account for the other half.

For service providers, the experience so far has shown that there is more to R&D services than just another protocol stack for a wireless standard. Building products means a lot of pain. If developing 90 per cent of a product requires a certain amount of effort, a customer-ready product probably takes six times the effort.

Many service companies that thought that developing a product once was enough found out that it never is so simple.

Productisation is a different game altogether - but one that they are quickly learning to play.

For companies looking to retain a sustainable competitive advantage, it will always be necessary to have ownership of some aspects of design - ideally the ones impacting the user the most. That shall remain their core competence. All the rest can go on the shopping list!

eworld@thehindu.co.in

More Stories on : Research & Development | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Tapping R&D value out of every $

Clear drive on fuzzy stuff

More goodies on the way...

Tax keeps pace with medical advances

The road ahead

Data transfer from PC to cell-phone

Trouble connecting two ROM drives

Just flash your mobile

A fair race for all

Quiz

Human factor - the weakest link

Cartoon

PDA-phone

Betting on smart search