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For Snippets from the study, click here

Zinnov today released the annual report on compensation & benefits titled, ‘Compensation and Benefit Study 2010’. The study targeted at the MNC R&D centers in India, brings to light how Compensation & Benefit is shaping up post recession and what are the global changes and its impact on the centers in India.

Setting stage, the study revealed that the R&D spend growth did go  down significantly in  the last 24 months; wherein  major verticals such as software/ internet, telecom/ networking, semiconductor and industrial automation witnessed a downward slip of growth by 5-10%. However, while the economy is starting to show signs of upward movements, the recovery in the R&D growth has so far been only ‘minimal’.

The report said that the diminishing cost arbitrage due to historic salary increments and overheads caused due to productivity differentials and inexperienced talent pool will be a cause of concern for the R&D fraternity this year. Centers in India would need to react to this by optimizing on the salary hikes for the current year and there on.

Talking about the report, Mr. Pari Natarajan, CEO, Zinnov said, “As the cost pressures continue to exist, we foresee companies trying to execute more R&D work at the same or even lesser budgets as compared to last year. Companies would be forced to focus on new growth engines in the form of emerging markets (such as India and China) and newer technologies (such as SaaS/ Cloud). And this will fundamentally push all R&D centers to deliver higher value & higher productivity at lower costs”.

“We also see that this demand for cost control  will indeed force R&D centers in India to put a check on the salary escalations for the next couple of years”, he added.

The study highlights that the industry will see an average salary increment between 6 – 10% this year based on their growth at the India center and global performance of the company. It adds that companies will be forced to offset low hikes by creating more responsibility areas, increasing ownerships and defining attractive career path to retain critical resources. While companies will be cutting down on salary increments, the ever increasing experience pool will continue to put lot of pressure on costs.

Putting light on attrition, the study said that lesser increments could indeed result into a short term spike in attrition. However, with clear communication around the economic situation, career growth and performance led incentives, clubbed with the increased maturity of employee base, will put attrition in control over the next 12 months. Zinnov does not expect the average attrition figures for the year to go beyond 9%.

Hiring will continue to be slow and selective, highlighted the study. While the availability of talent pool will continue to exist, companies would be going slow on hiring and would only be looking at backfilling existing positions and selectively hire at new positions based on requirements. Campus hiring will be slow as deferral hiring from last year resulted in late joining for many fresher, it added. Companies would only maintain their existing working relationships with the universities and hire minimally from campuses.

Dwelling into the aspect of future outlook, it read that many of these R&D subsidiary centers in India will re-define their approach towards globalization over the next 12 months. In the drive to optimize costs, they would also explore opportunities with tier 2-3 cities in India to execute some non-core functions at these ultra low-cost destinations. A result of this focus on tier 2-3 locations is a fact that 43 tier 2-3 locations are emerging as IT hubs in India, thereby reducing pressure on tier 1 locations, the report highlighted.

Last but not the least, the study brought to light that Service providers will also play an important role in the product development value chain. These providers would add significant value in cost optimization by undertaking non-core, non-complex functions, thereby allowing companies to save some funds for futuristic investments. At the same time, these 3^rd party providers would also take increased responsibilities with mature/ sunset products in arrangements such as risk reward, revenue share and outcome based pricing. Mid-sized companies are also now likely to benefit as the service providers augment their focus on the long tail of product companies in the drive to explore new growth engines for their respective growths.

For Snippets from the study, click here

Our recently released study on “University-Industry Collaborations” analysed various collaboration models that industry players have with varied universities across India. In addition to analysing the landscape, it also showcased the various drivers for university-industry partnerships and some challenges that exist in the ecosystem which will have to be overcome in order to get to the next level of collaborative research.

The study reported that the university-industry collaboration landscape in India is currently confined to Tier-1 universities and institutes, as they have proven research capabilities and offer a lot of scope for collaboration. However, collaboration with Tier-1 universities present a multitude of challenges in terms of rigid terms & conditions, IP policy constraints, bureaucratic setup etc. which the Tier-2 universities can address better given their readiness to be highly flexible.

Many of the Tier-2 universities, whose research potential is comparable to the Tier-1 universities, offer other advantages in terms of cost, existing collaborations etc. Though the collaborative research scenario is still nascent in Tier-2 universities in the country as of now, it is heading northwards due to proactive initiatives by them and increased government participation, e.g., increased government funding for sponsored research projects.

Additionally, Tier-2 universities whose research potential is comparable to that of Tier-1 universities, offer other advantages in terms of cost, existing collaborations etc. The cost difference is typically 50 percent but it can go as high as 80 to 90 percent for Tier-2 universities. In fact, some Tier-2 universities already have existing collaborations with Tier-1 universities that help leverage research/ IP and best practices.

Focus on R&D Services is a Prime Driver for Infosys’s Good Results.

Infosys’s change in forecast is a harbinger of better outsourcing outlook in the next 12 months. Its focus on cost optimization has positioned it well to take advantage of the recovery signs. While the recession fed on the vicious cycle of fear and decision freeze, the slow recovery process now seems to be feeding on the virtuous cycle of hope and positive action. The US continues to be the biggest contributor as a geography. Although the investments made by Infosys in other geographies such as Europe and APAC have paid off, the returns from the Middle East will take a longer gestation period owing to the ongoing economic crisis.

Despite recession, Infosys has consistently invested more than 1 percent of its revenue over the past 3 to 4 years in building capabilities in R&D services. This is higher as compared to its peers who have typically invested around 0.2 to 0.3 percent of their revenues into R&D services. These capabilities include lab infrastructure, centers of excellence (CoE) in specific industries and skilled talent from the relevant industry. Being an R&D service provider requires a different mindset as compared to running a standard ITO delivery center, and over the years, large Indian service providers like Infosys have risen up to this challenge by investing in the right kind of people from the industry.

The ongoing global economic meltdown, has ensured that the ‘biggies’ in  the product development domain such as Microsoft, Intel, IBM, Google, Apple etc have also felt the heat. Earnings and market capitalization of these companies have considerably withered in the last 12 months. For instance, between January 2008 and 2009 sales growth of Microsoft was 1.6% while its market capitalization eroded by 33%. Likewise in the same period, market cap of Google went down by 29% although sales grew by 18%. The ‘blue-eyed’ poster child of the product industry, Apple, too had a tough year. Sales grew by 6% but the company’s market cap declined 42%. This has been a clear indicator of investor confidence on these companies which is at an all time low.

How does this translate for start-ups? With high ambitions, products in the pipeline, high development and distribution timelines and VC’s and angels cutting back on investments the horizon has never been much more blurred for start-ups. However, these tough times provide both opportunities and challenges.

Key challenges

1. Sustaining the company through the downturn
2. Managing cash flow and budgets diligently
3. Declining access to VC and angel funds
4. Managing motivation level of employees
5. Lack of experience of management in handling crises

The challenges are mitigated by opportunities present

Key opportunities

1. Able to compete with incumbent players
2. Creating customer value at lower cost
3. Able to tap local market opportunity effectively as existing companies might not be able to serve the market as they used to before
4. Penetrate new markets that companies might have pulled out off or reduced focus
5. Hire best in class talent that was previously difficult to come by

In recent years open web platforms (OWP) are challenging the way products are developed and distributed. And the present state of economic crises has only emphasized the importance of open web platforms further. OWP are increasingly offering start-ups the opportunity to reduce product development times, extend distribution reach and enhance brand image. Traditionally product development companies followed the typical ‘S’ curve for development and revenue realization. However, with the advent of OWP, companies especially start-ups are beginning to have multiple ‘S’ curves thereby changing the very fundamental dynamics of the industry.

Facebook, LinkeIn, Ning, Yahoo and Google are few of leading companies which have opened up their platforms for developer communities and companies to publish their applications. Developers gain access to API libraries, infrastructure, and training and support along with the brand of the companies while service providers have the opportunity to drive user traffic with new features/attractions. Monetization at the moment revolves around advertizing and revenue sharing. As platform service providers and distributors begin to enrich user engagements the monetization models could evolve well beyond the existing ones. Location based apps and games are the leading favorites of user communities at the moment but as developers get innovative with changing user preferences this could change as well.

Challenges such as lack of integration between various platforms leading to platform dependencies, training and support for developers, unclear monetization and SLA agreements etc do exist. Start-ups such as Zynga, with their popular games are spreading like wildfire through social networking sites and in that process are quelling any apprehensions that exist.

More about this topic on CONFLUENCE 2010

Hear global experts brainstorm on more such topics.

March 17th 2010, Santa Clara, CA

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MNC R&D centers rapidly expanded their presence in India during the 2003 to 2006 period. The number of companies set up the centers and found that the experience level of talent was much lower than they are used to in their home countries. They needed adult supervision of the engineers and hired senior managers and directors who can manage relatively junior teams in these locations. These managers were hired locally as well as brought from the home location. The salaries for these managers were 5 to 10 times the salary of junior engineers. It was a sound investment as they played a key role in building the organization. The role of the R&D center and their contribution has not changed in a number of companies. Senior managers and directors who don‘t have direct product responsibility continue to play operational role at these centers. Over the last 2 years, the growth rate has slowed down and the experience level of the engineers has improved.  The value organizations gain from these managers is lower now due to the higher experience level of the engineers they manage. They however continue to make 5 to 10 times the salary of the junior engineers. Their relevance to organizations might reduce in the next few years and remove the need for such roles as they will be considered as overheads by their counter parts in the HQ. The middle management teams at R&D centers should work with their bosses to review their role and long term relevance to the company or else it will become too late.

More about this topic on CONFLUENCE 2010

Hear global experts from R&D brainstorm on Global Talent Virtualization

Only@ CONFLUENCE 2010 Panel 10 – Talent Virtualization: creating and managing global talent

March 17th 2010, Santa Clara, CA

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Our recently launched study discusses the common perception that companies are aggressively leveraging globalization. However, only about 15 percent of the total R&D budget is being spent on emerging geographies by software product companies, leaving a huge opportunity untapped.

The total Global Software Product Market currently stands at USD 300 to 320 billion, of which the total R&D spend (approx.15 percent) stands at USD 45 to 48 billion. Nearly USD 6.8 to 7.2 billion of the total R&D spend is allocated to emerging geographies by these companies.

While the R&D spend on software products continues to grow at a relatively lower pace owing to the global economic crisis, companies have also re-aligned their R&D spend strategy to focus on new revenue streams (emerging markets), new customers (SMBs) and new models (SaaS etc). Additionally, companies are willing to leverage the offshoring / outsourcing models to save on R&D investments dollars and invest them in the areas of focus going forward. Infact, many of the consumer software (including mobile software, gaming) companies  are now looking towards India and China for the next wave of their revenue growth owing to the availability of a fast pace of technology adoption in these two geographies.

A majority of companies are increasing R&D spend in emerging geographies such as India and China, as they believe that emerging geographies are a good ground for work associated with the low end of the Product Life Cycle value chain. Most of the R&D investments of larger companies (more than 80 percent) are still being kept in the US, as they believe that high quality talent to work on next generation products is tough to find in remote locations.

Small to mid-sized software product companies (less than USD 1 billion in revenue) have been faced by more cost pressures and hence they continue to offshore a significant portion of their R&D to low cost destinations such as India and China.  While revenue expectations from these companies on new products continue to increase, they are looking to keep the total R&D investments low. And this has mandated them to aggressively leverage globalization in order to reduce investments on mature and existing products. The current outsourcing to third party service providers is very less (< 5 percent of the total R&D spend). Large companies taking the outsourcing route are looking at the value that they can derive and pure cost arbitrage is no longer appealing.

Large companies are still looking to invest more on new products and hence the task of managing mature products on behalf of these large companies is something that all third party service providers are now proactively looking at. Therefore, we see the existing models of fixed price and time & material giving way to innovative models such as IP led solutions, risk reward etc. to add value to ISVs.

As the MNC centres move up the value chain, work associated with the low-end of the product lifecycle value chain is increasingly moving to the service providers ensuring the growth of both MNC centres as well as service providers. Many ISV are planning to generate at least 20 percent of their revenue from new products over the next 3 years with a major focus on emerging markets such as India and China. It would require increased R&D investment in these products and one of the strategies will be to move more work associated with mature/ sunset products to low cost offshore destinations such as India and China to get investment dollars for new products, keeping the total R&D spend at the same level.

In fact, some companies are already moving maintenance/ sustenance of sunset products to service providers in a revenue share agreement. Service providers are also being leveraged as channel partners for product sales due to the extended reach that they can provide in the domestic market. On the other hand, service providers are also willing to invest on R&D (i.e. IP led solutions) to augment their offerings with their customers’ products. L&T Infotech and Wipro have recently come up with platforms for OEMs/ ISVs to develop/ enhance products.

Zinnov anticipated a vibrant R&D ecosystem in India by 2019 comprising of increased domain expertise, skilled talent pool, strong start-up ecosystem, and strong domestic market. While more and more MNC centers will operate in strategic independence mode of maturity, service providers will make significant R&D investments and will have capability starting from conceptualization to manufacturing. There indeed is a huge opportunity in the offshoring space, and thereby industry stakeholders have to start acting as globalization agents, and play a key role in the overall R&D ecosystem development.

More about this topic on CONFLUENCE 2010

Hear global experts from R&D brainstorm on Global Talent Virtualization

Only@ CONFLUENCE 2010 Panel 6 - Optimizing R&D for maximized cost savings from globalization

March 17th 2010, Santa Clara, CA

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Our study titled “India R&D Talent Pool” brings to light the kind of impact that the current economic recession has had on the talent pool in India and what has been the upside of it. Specifics of the kind of talent pool of the MNC R&D fraternity, in addition to that of Indian service providers, have been covered in great detail.

Owing to the large presence of MNCs in India, the installed base of talent pool continues to increase, though at a slower pace due to the global economic meltdown. Currently the MNC R&D talent pool in India stands at 1,73,000 and is expected to grow to 2,84,000 by 2015. The growth rate of the total R&D talent pool has surely seen a dip from 10 percent last year to 8 percent this year. While the talent numbers have gone up from 1,60,000 in 2008 to 1,73,000 in 2009, the relative growth has been slow and would continue at 8 percent for 2010, thereby reaching a mark of 1,87,000.

This huge base of talent pool is split across five key destinations, namely Bangalore, Mumbai, Hyderabad, Chennai, NCR and others, of which Bangalore continues to lead in terms of the total talent pool availability.

Software, Telecom, Semiconductor and Electronic Equipments are the key verticals in terms of MNC R&D talent pool availability in India. Out of the total number of 1,73,000, software companies employ approximately 48 percent of the talent, while Telecom and Semiconductor firms are the next big employers  with 12 to 13 percent of the R&D employees. Sustenance and Quality Assurance (QA) testing are still the key focus areas for majority of MNC R&D centers in India.

The presence of some of the large service providers in the country also adds to the product engineering talent pool. With 37 percent of the R&D offshoring market in India being captured by vendors, the total pool of R&D Talent of Indian Service Providers for 2009 stands at 85,000. Telecom and Software are indeed the largest verticals being served by the service providers’ community in India.

R&D talent pool supply comprises varied components like migrations from other industries, software professional returnees and fresh engineering graduates. India still continues to produce a significant number of fresh engineers who are available to work for all MNC R&D centers. In addition to this, migrations from service providers and India software product businesses are the other two potential streams to access talent.

The majority of talent migrating from the service providers to MNC subsidiaries is towards the Quality and Maintenance teams; while talent from domestic product companies is better skilled thus can be employed in various complex functions of the value chain. With the slowdown in developed geographies, the talent is expected to continue to migrate from these locations to growth markets such as India and China

Despite availability, R&D centers have not been able to attract the right set of talent and hence, certain practices need to be followed to be able to do so. Aspects like talent pool mapping, transitioning global talent, effective training, building technical talent, tapping service providers talent and leveraging university partnerships, should be looked into in greater detail.

The Auto industry has incurred several years of loss of goodwill amongst their internal and external stakeholders such as customers, communities, government, suppliers, employees etc. To ensure that the energy industry is well positioned to weather this storm in the future, leaders in energy industry should think leap years ahead to preserve the goodwill through creating impact on the society.

Social networks, online communication platforms as well as innovative ideas such as leveraging gas stations as a knowledge hubs can achieve these objectives. HR leaders in the energy companies are best suited to pay the pivotal role in transforming the image of the company in the communities.

Click here for the report on the Thought Leadership report

With more than 100 years of legacy the automotive industry is entering a new era. Several trends continue to shape the future of the industry. Some of these mega trends that would determine the future in the long run are emergence of new markets, a distinct focus on green technology and also increased use of electronics in automobiles. Automakers are constantly redefining their business strategies and are also deploying new technologies to address these challenges and leverage opportunities.

Dwelling into the specifics of each of these mega trends, emergence of new market seems to the biggest trend which is redefining the automotive market paradigms. The population growth with some sound economy indicators in India & China seems to be positively impacting the well-established traditional markets like North America & Western Europe in automotive sector. The performance indicators of GM is a good case in point which has recorded flat growth rate for the traditional markets and is growing northwards for China(18 %) and India(74 %). The definition is emerging in true sense for these so called emerging markets. Stretched delivery schedules for most of the cars & automobiles is good news that the economy and the buyers’ mood is indeed positive.

Affordability, urban population growth and macro-economic indicators are leading factors for the growth in emerging markets. The dip in traditionally stable markets can be attributed to over-capacity in developed markets, globalization, technology advances, regulation, environmental consideration, market fragmentation and product proliferation.

These positive developments are reinforced by the Global surveys which depicts that within the next ten years, these emerging auto markets will account for nearly 90 percent of global auto sales growth. As a result of this, leading auto manufacturers of world are setting up factories in emerging markets, in order to reduce manufacturing and shipping costs and also enable faster time to market. In addition, these arrangements are enabling leading global auto manufacturers to compete with local auto manufacturers who are till now flourishing in the absence of quality competition.

Growing concerns of climate change is another trend that has highly impacted the Automotive Industry. While the debate by green brigade on reduced emissions, fuel efficiency is reaching high pitch, at the same time this has raised concerns for the government with regard to energy security. Legislations are being introduced with a growing frequency. Oil price fluctuation has compounded the rapid shifts in consumer demand as well as vehicle usage. All these and consumers resonating to the change have become the key leverage points for Automotive design beyond the traditional design parameters such as comfort and luxury. To add to this Obama’s Climate Change Policy would be one of the key factors which would drive innovations in Fuel Efficient technologies.

Vehicle Safety and Entertainment are increasingly becoming a high priority for consumers. This again has presented a new opportunity for Automakers. Automobiles today resemble “computers on wheels” because of the increasing number of digital systems under the hood and inside the passenger cabin. In many ways automotive industry has become a leader in the use of advanced electronics. The ongoing efforts towards energy efficiency has created a need for automotive electronics. The costs associated with these sophisticated systems are also rising. Automotive electronics now account for 22 percent of a vehicle’s cost and are projected to increase to up to 40 percent by 2010.

Get more insights in our study on “Global R&D Service Providers Rating”.

Karan Kamal
Consultant

Service providers have some inherent advantages that they bring on board to their clients, and these inherent advantages have only become more evident and apparent due to the setting in of the economic downturn. Important aspects like domain expertise due to the experience of working with multiple clients, scalable delivery model since most of them have long-term engineering practices, mapped with metrics driven performance system and a strong economic sense of helping address challenges of high cost of staffing, infrastructure investments, cost of building domains etc., only to add up to the uniqueness of service providers.

To assist business leaders in spearheading global engineering initiatives in their organizations and in order to facilitate them in identifying right partners to enable them serve customer needs better, Zinnov has released this first-of-its-kind Global R&D Service Providers’ Rating.

Global R&D Service Providers’ Rating also elaborated on vertical specific ranking of each of the R&D service providers. The vertical specific rankings were undertaken to understand the capabilities of the various service providers in providing end-to-end product engineering services in their respective verticals. Industry verticals that were analyzed included Aerospace & Defense, Automotive, Consumer Electronics, Healthcare, Semi Conductors, Telecom, & Software. The analysis of the capabilities of the R&D Service Providers across these verticals showcased their capabilities across different geographies to service the R&D needs of large global clients.

Detailing on the kind of strategies that have been redefined by service providers to use the economic reset as an opportunity to emerge stronger, the study highlighted that building on existing client relationships was one of the most important aspects, coupled with the introduction of a lot of new business model innovations like outcome based pricing model, revenue share and risk-reward business model.

Our Global R&D Service Providers’ Rating also stated that R&D offshoring to India, China, Russia and Central & Eastern Europe (CEE) is expected to grow at 6 to 7 percent with India and China continuing to constitute close 90 percent of the overall market. Though large firms have neither dramatically cut down nor increased their R&D spends. Hence, R&D offshoring to India, China, Russia and CEE is expected to remain flat.

Even though the growth of R&D service providers in India has been relatively flat over the last one year, many of them have seen an improvement in their operation margins because of conscious efforts to optimize the cost of operations. The improvements of margins for them have been in the range of 6-8 percent.

The study brought to light that the market is currently witnessing positive sentiments, which will most likely drive a recovery in the market during the Q4 of FY10, and this recovery will be driven by new business models that are being currently explored by various firms in the industry.

To learn more on how the landscape of global R&D service providers’, look for our first-of-its-kind study ever conducted in the industry titled, “Global R&D Service Providers Rating”.

For executive summary of the report, click Here