Making Carrier Operators Strike The Right Chord For Mobile Music Services

July 12th, 2010

Summary

The market opportunity for mobile music services is definitely a lucrative option for carrier operators. There exist few major challenges which include a risk for exclusion from the delivery value chain because of other parties pushing their platforms or solutions at competitive prices. But creating a favorable ecosystem for music delivery by fostering value partnerships to offer cheaper options to its customers is one of the best approaches for a sustainable and profitable existence for carrier operators in the value chain. Moreover, higher engagement with its customers in suggested ways as below will also allow operators to maintain increasing share in the mobile music services business.

Market Size and Opportunity

With traditional revenue sources for operators (voice and SMS) declining, they are looking at VAS like music for riding their future growth. Money spent by mobile phone users on music that is received on mobile handsets (in the form of downloadable tracks and streamed music) will grow to represent ~4 percent of Mobile Media and Entertainment (MME) market in 2013, up from 2.3 percent in 2008. As high bandwidth (3G/4G) networks evolve across the world, along with advancement in handset technology with sufficient memory and feature-sets to support music downloads and transfers, consumers are estimated to buy over-the-air content more actively, which will drive the service adoption for mobile music. Another distinct factor driving the demand for mobile music service is ‘demand for on-the-go entertainment’, which will affect the replacement of portable music players (PMPs such as iPod) going forward.

Though the market for mobile based music services is estimated to rise at a CAGR of 28 percent, there exists competition from various digital music players, along with host of challenges faced by telecommunication players in delivering these services.

With adoption rates as well as ARPU levels increasing at decent rates going forward (though not as fast as TV on mobile),the market for music services on mobile seems to be a quite attractive one for carrier operators, since it represents a higher share of the total MME services revenues for carrier operators.

While mobile music is growing from a small base, it represents a good revenue opportunity for providers that get it right. When it comes to the ‘entertainment’ side of mobile music like streaming and full track downloads, they risk losing share to other players, which might include device vendors, record companies and other solution providers. Hence, carrier operators need to capitalize on the availability of next generation networks that can support high data traffic and production of high end handsets with enhanced audio-playback capabilities, which also translates into boom for mobile music industry.

Challenges with Mobile Music Value Chain

The number of layers in the value chain is one of the key obstacles for finding out a workable business model for operators. The operators are vying for a bigger share in the revenue stream, from other parties involved such as content aggregators, publishers, handset manufacturers, etc. Internet giants such as Google, Yahoo are reaching out with their music services directly to the user through mobile portals. There also exist challenges of figuring out the right content partnerships, pricing strategies, licensing deals, distribution channels and marketing. There are also a host of technical challenges to be addressed, such as Digital Rights Management (DRM), storage capacity on the mobile device and network coverage.

Another looming threat is the pricing i.e. how to reduce the cost of downloading for the consumer, where companies like Apple with their iTunes software have taken a lead. End users may be willing to pay a higher amount, with a premium afforded towards mobility, despite Apple’s iTunes which has essentially set a psychological barrier at USD 1 for a download. In predominantly prepaid markets, with the end users downloading music over the internet using their mobile, challenge posed by internet companies will be a hard nut to crack unless carriers find ways to reduce the final price to below 1 USD per song levels. Operators have tried leveraging subsidized handsets, but this has backfired since handset companies are increasingly tying up with publishers like iTunes, Napster, etc, cutting operators out of the loop.

Considering all the points above mentioned, it is definitely hard to say at this point whether operators really are in a better position than either handset manufacturers or third parties to make money from mobile music services, but there certainly are specific things that operators must to in order to turn the table on other parties in the value chain.

Recommended approach for Carrier Operators

With a slew of challenges to operate in this market, where the industry has not readjusted to a more conducive revenue sharing business model, there definitely exist few ways in which operators can best approach the mobile music opportunity. 

Favorable Ecosystem for delivery

The ability of operators to build an attractive environment around their portal will be a key, also maintaining overall control over the partnerships with internet players, media and music providers. Also, operators need to harmonize the ecosystem by providing favorable flexibility to content providers for e.g. working with aggregators of choice; such methods can reduce cost of supply for operators. Like Apple iTunes does, even operators need to work with all its content providers individually in order to cater to their interests.

Engaging with the customer

Besides agreeing on successful revenue sharing schemes with these partner companies, the operators need to promote consumer awareness for their mobile music applications in order to boost adoption. Moreover, an operator must offer exclusive content aimed at niche markets, given the fact that most of the content is common for all operators. This will enhance consumer willingness to pay for premium services and operators need to leverage on this opportunity, to reduce the price for its service offerings.

As consumer awareness for such operator applications rises, standalone mobile music services could be partly funded by advertising. This can allow operators to offer music download services at a further rationalized cost to its customers.

Another way in which operators need to enhance service adoption and offer more viable music services proposition is if they are sold as part of service or device bundles with their voice or mobile broadband packages. Moreover, operators must look beyond mobile as a delivery platform and provide its customers seamless access and downloading services across various devices like PCs, PMPs, netbooks.

For more related blogs, keep a check on this space.

Author: Devay Gupta, Consultant

Sources:

Gartner Newsroom Press Releases

ABI Research Newsroom and Blogs

Huawei Corporate website publications



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India’s Problems, a Source for Product Development Companies

May 26th, 2010

In Hinduism you always pray to Lord Ganesha (Deity) before you start any work, be it small or big.  I was wondering, if there is something similar which can be done while starting to write a blog.  Then it struck me, probably its good to think about Google, before you write anything, because a) Reminds you that you need to be innovative b) Google is watching you, and finally c) Google can punish you really bad. So to please the almighty, I decided to write something interesting that I had heard about Google from one of its top executives.

In one of my recent engagements, my team conducted a study to understand the Captive (R&D/IT/BPO) Landscape in India.  Apart from many things, we were interested in knowing the key drivers for MNC’s to set up their captive centers here in India and how they are shaping up with time.  Also what drives them to continue business in India and what challenges do they face?  For this purpose, I had interviewed country heads of various captives from various technology companies.

One of the very interesting and strikingly different conversations I had was with one of the top management leaders of Google (here after referred to as John in this post).  I started off the interview by introducing myself and posted the standard set of questions. It is a very well known fact that cost and talent pool are the key drivers for offshoring R&D activities to India.  I was just waiting for a similar answer, but I heard something different.  John’s answer to this question was a big NO.  I was surprised and asked for reasons.  He gave me a very interesting and a different perspective of globalization.

He said, “I don’t think there is any cost advantage as Google pays really well to their employees; the difference is very less.  Also in terms of talent pool, for the kind of work we do I think we can find better people in the US than in India. India has nothing. There is no advantage to do R&D related work out of India. I dont see cost or talent pool as the reasons. Even if they were, the ROI on these two factors is very minimal for us.”

“However what India has is a whole set of problems. Problems for which people still struggle to find solutions.  We are here in India in search of those problems and solutions for them.  These problems give us lot of scope of develop new products.”

“Take for example the Indian cities.  It is just impossible to locate a particular place.  Looking at India, it brought us the thought of Google Maps. India did not have maps for 90% of the cities.  We developed Google maps for 160 countries and India was the 57th country to be launched.  The strategy here is to look at the problems in countries like India and take it to a global level.”

“Another good example, is the translation tool that we developed.  It was released in 47 languages of which 42 were non-Indian.  But the inspiration was from the multi lingual culture in India. This product was very successful the first day of its launch in countries like Japan, US and Europe. Fortunately or unfortunately, the power users reside in the developed countries like US and the adoption is very fast.”

“The Indian users caught up with it only after 3 to 4 months. So for us the strategy has been to develop products for global issues by getting inspired by the problems in India. That is the reason why we are in India”

This was a completely new story with interesting insights giving a new dimension to my understanding of globalization.  My takeaway from this interview was a whole new set of questions.

How did Google come up with this as the reason for globalization? What stops other companies to think in this fashion? Can this model be used by other companies? Can small companies or companies new to globalization think this way? or Is it restricted to only the big players?

I will attempt to answer some of these in my next post.

Thanks for reading.

Author: Kartik Vittal, Consultant

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Telecom equipments market and R&D avenues

May 17th, 2010

Global market for telecom equipments

The global market for telecommunication equipments, also including mobile handsets, is estimated to grow at moderate growth rates. Few of the key macro drivers fueling the demand for equipments are the growth from emerging markets, spread of internet and mobile communication, convergence of data, voice and video. At the same time, there are key areas of concern for TEMs* that may hamper the zeal to innovate and hence the market for telecom equipments are declining operator CAPEX spending. New 4G technologies like LTE and E-UTRA are leading the way in catering to huge demand for bandwidth guzzling applications. Some of the unique features that are driving huge investments in 4G enabled equipments are seamless connectivity, global access and interconnection, interoperability, business 24*7. Service providers will play a key role in minimizing the time and cost required for research and standardization of 4G related technologies. With 7 trillion devices expected to be connected in the near future, and an ever increasing proportion of operator revenues being attributed to wireless services as opposed to wireline, the world shall witness carrier operators opting for network evolution in the form of ubiquity and reliability and advanced technology deployment.

Pockets of Growth

All IP based wireless, along with optical infrastructure and end devices are poised to precipice the growth momentum, expecting double digit growth rates, in the otherwise more plateau-like ~5% annually growing telecom equipment industry . Few designated areas may be video conferencing, VOIP or IP telephony solutions, Optical amplifiers, nodes, modems and gateways, GigaBit Ethernet, etc. More than 100 operators are now deploying HSPA, with a coming wave of HSPA+ upgrades, WiMAX, and LTE, all to handle the skyrocketing mobile data traffic. Few technology focus areas for TEMs are robust video delivery through open networks, collaboration and web 2.0 technologies, improving service quality – consolidated billing and security, fixed and mobile broadband through CDMA-EVDO, WiMax, LTE-A, HSDPA/HSPA+, and rationalizing mature lines such as 2G products (CDMA 1x and GSM), ATM, ADSL and DLC, mature optical platforms. The biggest challenge faced by the TEM incumbents is the stiff competition from global challengers like Huawei, ZTE in China along with other emerging players who are able to provide comparable or even better quality solutions at better cost points. The legacy structure of such incumbents doesn’t allow them to restructure so easily. Also, their inability to as easily comprehend emerging market (future growth geographies) needs can hit back hard.

R&D services growth avenues

The Global Telecom M&A space has seen increased activity in the recent past, in turn creating a huge opportunity for R&D Services in area of re-engineering and value engineering. Consolidation of OEM’s will drive the need for innovative and cost effective solutions and hence will drive R&D Services growth. Service providers will play a key role in minimizing the time and cost required for research and standardization of 4G solutions. Moreover, interoperability at the network, device and content levels, the efficient management of spectrum to facilitate the emergence of new wireless technologies, and the availability of content. All this places demands on new embedded system solutions to realize these concepts. For TEMs, demand for convergence from operators means increased complexity and additional requirements for development teams. Some of these include taking advantage of new open-standards technologies without sacrificing previous investments in core intellectual property, run-time environments, and development tools. Whether it is about keeping up with the latest hardware advancements and standards or it is about having the flexibility to use best-of-breed solutions for a variety of projects (e.g. maintaining middleware across multiple platforms), convergence of devices and services definitely  impacts the R&D on the embedded solutions. The market is starting to see development of next generation networks beyond 3G, which will enable a single mobile handset to access a growing array of mixed mobile networks. This is only practicable by a heavy use of Embedded Systems, as also the trend for evolving consumer patterns on content, convergence of services on mobile phones, evolving user interfaces, cellular broadband, etc.

Conclusion

Over time, less attention on “equipment” and more focus on “solutions” could lead to new opportunities for TEMs. Such a transformation requires alterations to the core, TEMs will need to enter into new partnerships with more flexible business models, achieving improved time-to-market through the adoption of commercial-off-the-shelf (COTS) components, pre-integrated solutions and proven, standards-based software protocols acquired from third-party suppliers. OEMs have started to re-position themselves to serve the increasing demand for telecom devices  supporting aforementioned technologies and trends. Hence, for R&D service providers, it is an opportunity to actively partner with OEMs in helping them meet their customer requirements, who are in a mad race to serve the end consumer demand for richer and more real time applications.

Thanks

*TEM – Telecom Equipment Manufacturer e.g. Ericsson, Nokia Siemens Networks, ZTE

Author: Devay Gupta, Consultant

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The global Marketing & Sales organization

May 4th, 2010
As referenced in my earlier entry about globalization of corporate wide functions:
Research & Development
Marketing & Sales – Covered in this blog
Finance & Accounting
Human Resources
Internal IT
Procurement
End Customer Services & Support
This entry will focus on the globalization aspects and the newer models in marketing & sales.
To classify broadly Sales consists of Sales Management (Customer profiling, proposal documentation, cross/up selling, sales force planning etc.) and Sales Support (account management, customer relationship management, training, database management etc.) and Marketing consists of Marketing & Brand Management (Advertisements, collaterals, media planning & strategy, public relations, events & campaign management) and Market Intelligence (Market research, competitive analysis, market segmentation & sampling, business analysis)
With every company small and large going global these days bits and pieces of the above are probably done out of every corner of the world. Statistically speaking, companies typically spend 22 – 30% of their net sales on marketing & sales which accounts for 30 – 35% of the total headcount. In this function the cost per resource is considerably low since globalization here is an imperative here and not an option if companies want extended customer reach and better market understanding.
A company with say 100,000 employees has about 30,000 – 35,000 of its employees working in Marketing & Sales spread out in scores of countries. Interesting thing to know is what exactly these resources are doing. With sales support and market intelligence being the relatively more people intensive groups, the math would suggest that a significant chunk of these folks would be working for these activities. Each location would need a bunch of people into these activities to effectively cater to that that market but in reality these majority of these resources perform redundant tasks and are under-utilized which makes us question their presence in the first place.
In the wake of this reality and popularization of a model, which I am sure most of the readers of this blog are aware of, called Shared Services, companies are increasingly exploring to offshore their Marketing & sales teams in this model.  To narrow down on the scope of offshorability, Sales Management and Marketing & Brand Management are relatively harder to segregate out given their close ties to the HQ and multiple other stakeholders.
The sales organizations of technology product companies typically drive sales through multiple ways: Direct Sales, Channel Sales, OEM Sales etc. and this is a tightly knit network and pulling these people away from each other would be nothing short of committing a corporate suicide.
So the beauty of this Shared Services Model (without going into the finer details) is that redundant tasks can be eliminated, resources can be fully utilized and the best part is they can work in an offshore model (at least a few of them) – ergo, cost optimization.
Some quick analysis of a bunch of companies that actually are well into this model shows that the ones with revenues less than USD 5 billion have about 3 shared services locations and the ones between USD 5 – 20 billion have about 5 locations and the ones above USD 20 billion have about 7. Having spoken to the senior management teams of these companies, on an average they have been able to realize about 15 – 20 % cost savings in this model.
I think this as a trend would continue to rise in the coming years, primarily because the highly offshorable/ transaction driven functions like R&D and F&A are pretty much under cruise control for most of the companies and M&S is the next logical thing to look at.

Author: Anand Tatambhotla, Consultant – Globalization Advisory

As referenced in my earlier entry about globalization of corporate wide functions:

  1. Research & Development
  2. Marketing & Sales – Covered in this blog
  3. Finance & Accounting
  4. Human Resources
  5. Internal IT
  6. Procurement
  7. End Customer Services & Support

This entry will focus on the globalization aspects and the newer models in marketing & sales.

To classify broadly Sales consists of Sales Management (Customer profiling, proposal documentation, cross/up selling, sales force planning etc.) and Sales Support (account management, customer relationship management, training, database management etc.) and Marketing consists of Marketing & Brand Management (Advertisements, collaterals, media planning & strategy, public relations, events & campaign management) and Market Intelligence (Market research, competitive analysis, market segmentation & sampling, business analysis)

With every company small and large going global these days bits and pieces of the above are probably done out of every corner of the world. Statistically speaking, companies typically spend 22 – 30% of their net sales on marketing & sales which accounts for 30 – 35% of the total headcount. In this function the cost per resource is considerably low since globalization here is an imperative here and not an option if companies want extended customer reach and better market understanding.

A company with say 100,000 employees has about 30,000 – 35,000 of its employees working in Marketing & Sales spread out in scores of countries. Interesting thing to know is what exactly these resources are doing. With sales support and market intelligence being the relatively more people intensive groups, the math would suggest that a significant chunk of these folks would be working for these activities. Each location would need a bunch of people into these activities to effectively cater to that that market but in reality these majority of these resources perform redundant tasks and are under-utilized which makes us question their presence in the first place.

In the wake of this reality and popularization of a model, which I am sure most of the readers of this blog are aware of, called Shared Services, companies are increasingly exploring to offshore their Marketing & sales teams in this model.  To narrow down on the scope of offshorability, Sales Management and Marketing & Brand Management are relatively harder to segregate out given their close ties to the HQ and multiple other stakeholders.

The sales organizations of technology product companies typically drive sales through multiple ways: Direct Sales, Channel Sales, OEM Sales etc. and this is a tightly knit network and pulling these people away from each other would be nothing short of committing a corporate suicide.

So the beauty of this Shared Services Model (without going into the finer details) is that redundant tasks can be eliminated, resources can be fully utilized and the best part is they can work in an offshore model (at least a few of them) – ergo, cost optimization.

Some quick analysis of a bunch of companies that actually are well into this model shows that the ones with revenues less than USD 5 billion have about 3 shared services locations and the ones between USD 5 – 20 billion have about 5 locations and the ones above USD 20 billion have about 7. Having spoken to the senior management teams of these companies, on an average they have been able to realize about 15 – 20 % cost savings in this model.

I think this as a trend would continue to rise in the coming years, primarily because the highly offshorable/ transaction driven functions like R&D and F&A are pretty much under cruise control for most of the companies and M&S is the next logical thing to look at.

*Unless specified Views/Opinions Expressed in the blog are those of an Individual Consultants.

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Benchmark Philosophy

May 3rd, 2010

Author: Chandramouli C S, Director – Globalization Advisory

We recently launched our benchmarking services in the areas of R&D, FA, HR, M&S functions.  The focus of the benchmarks is to help companies understand what is the optimal level of investments, globalization leverage, SLA’s to be measured, best practices etc.  In the last few weeks we have found good traction for this study and we are all excited about this.

We conceptualized the service offering post Confluence 2010 and I happened to meet Vijay Swaminathan, Co-founder Zinnov in Sanfrancisco to discuss the finer aspects of service offering.  Though our discussions started with the business model, operations plan etc. we quickly moved on to talk about the need for benchmarking services in real life scenario.  The following blog is an excerpt of our discussion.  At a philosophical level the idea was to identify the underlying need for benchmarks/baselines among humans and also to build a conviction in our mind about the huge untapped opportunity this underlying need presents in business.

Flight Experience:

This is a flight experience which i witnessed few days ago.  I don’t think this is any different from what you have experienced during long travels.  Half way through the flight take-off, there was lot of turbulence in mid air and all the passengers started panicking on the flight.  Some of the less frequent travelers started relating this scenario to the worst that’s happened in the past.  Few of them started talking about instances where they lost their dear ones in flight accidents.  This triggered the thought process of many others about the worst that is looming on them.  Few of the elder passengers start praying and helplessly search for courage within themselves.  While few others start thinking about how the world for them is coming to an end.  Amidst these moments of uncertainty and panic there is one voice in the cabin which made a difference.  And the best of all the comfort word is from a benchmark.  He mentioned that “There are more deaths due to road accidents in US than in the air.  We will be alright”

Suddenly there was a positive energy in the cabin.  This one line was enough to console us that we are safe.  We compared the worst that happens on road and felt we are better off.  The statistics behind this benchmark helped but the guidance which we got was timely.  It helped us understand how vulnerable we are on roads and this is relatively safer.  I would emphasize on the word relative later on.

Just few minutes later there was an announcement in the cabin by the pilot.  He said “This is not the worst of the turbulences we have faced in our experience.  We will sail through it safely, we would request you all to sit back and relax (Or something in these lines)”.  This again provided the comfort we were seeking for.  Just the fact that this is not the worst helped us build the confidence and courage.

Again the power of baselines and benchmarks was proven.

Moral: Human’s by nature are fragile and cruel, we tend to seek the baselines of the past to predict the future.  When the baselines are worse than the situation, we find comfort in it.  Contrary we identify our status is worse compared to the stimulus we panic further.  In either ways we need baselines and benchmarks.  We like it or hate it this is reality of life.

Doctors doctrine:

This is an example of very caring parents.  You can relate to this if you are parent.  The parents I am talking about are blessed with a healthy child and based on what I know this kid is definitely privileged with good health, moral values and IQ.  In one of those routine check-ups the parents take the child to a doctor.  Doctor examines the kid on the regular parameters and then declares the kid is healthy and doing fine.

However, As usual the parents are worried if the kid is under-weight, is he eating growing normally.  The point is parents are expecting to hear some words of wisdom which can soothe their anxiety (In other words they are seeking for benchmarks).  This is where the doctor/physicians expertise comes into picture.  The doctor I am talking about is a smart cookie.  He says “Your son is doing great, your son is among the top 75%ile of the kids I have examined in the last few years”.  The point is that the doctor is statistically right.  He may have all the data and experience to prove this.  But the comfort which he is able to generate to the parents is unbelievable.  That one statement gave the parents months of sleepful nights.

Moral: Humans want to know their position in relation to the world.  And the frequency of it is regular.  It is not a onetime phenomenon/data with which you can quench your thirst for relativity.

There are many more business analogies we can derive.  The point is that we need baselines/benchmarks to know how well/bad we are doing and we need this dose frequently.

After this conversation I was thrilled about the opportunity.  An opportunity which is based on the fundamental premise of existence.  Numbers don’t matter, all I know is that there is money to be made.

P.S: Nassim Nicholas Taleb may disagree with this philosophy, If he does thus proves the Black swan theory

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Research and Development in a distributed world…

April 27th, 2010
To take my previous entry here on Globalization being an innovation imperative further, I am going to elaborate on my learning from performing multiple globalization benchmarking and portfolio optimization studies in the past couple of years.
I am going to cover all the corporate wide functions (detailed below) in individual entries.
Research & Development – Covered in this blog
Marketing & Sales
Finance & Accounting
Human Resources
Internal IT
Procurement
End Customer Services & Support
Quick disclaimer – The data/ insights are for technology product companies spanning across software, computer hardware, telecom/ networking, semiconductor verticals; In my opinion offshore locations typically mean India & China, I would not to the extent of including Israel here because the cost is significantly high and the engineers there for some reason have ridiculously high innovation levels.
Ok so moving on from introductions and disclaimers, technology product companies typically have spent about 16% of their net sales on research & development. This number is higher for companies in hardware/ infrastructure intensive verticals such as telecom/ networking or semiconductors by about 5 – 6 percentage points. A lot of changes have happened to this number over the last 6 – 8 quarters because of our friends in Wall Street. But historically speaking, the companies that have bet their money on R&D and innovation have assured future revenue streams and are actually doing much better than the others even in the short term.
Talking on the headcount context, Research & Development accounts for about 32 – 38% of the global headcount of the companies.  These two numbers show how the whole globally distributed R&D team is neatly packed cost wise.  The average leverage ratio (Headcount outside of the HQ country to the total Headcount) for these companies is about 47%. That’s huge considering that the large sized companies like Microsoft or Cisco have about a total of over 30,000 people working under R&D.
In my earlier post, I have elaborated how the offshore teams predominantly exist to offset costs or cater to the lower end of R&D value chain. This saps about half of the innovation bandwidth of a company. Although I am not saying that innovation does not happen in offshore locations like India or China but the “innovation gap” is so huge that if plotted on an excel chart, it would take a person six feet high standing on the offshore column to reach the column for the HQ.
The large sized companies (Net Sales > USD 20 Bn) have got it right, at least now, largely through trial and error but nevertheless right. Some of them have even gone to the extent of having dedicated 30 member research (not R&D, just hard core research) teams in the remotest, hostile locations deep in the south American rain forests or Siberia, Russia and hire the smartest of the talent in that country and are able to independently innovate.
The root cause of all the innovation related challenges in the offshore locations can be understood by looking at how the globalized R&D value chain looks like in this distributed world – The core and most critical part of the value chain, Product Conceptualization, is predominantly restricted to the HQ. The chunks of less complex tasks are sent to these offshore locations who engage with the service providers, who honestly don’t know the “I” in product innovation.
In my opinion companies should have regional leadership teams who handle the entire product development cycle from the offshore locations itself. This solves two purposes first one being the complete and effective leverage of the local talent and the second being reverse innovation.
Stay tuned for more insights about the globalization insights into the other corporate functions.

To take my previous entry here on Globalization being an innovation imperative further, I am going to elaborate on my learning from performing multiple globalization benchmarking and portfolio optimization studies in the past couple of years.

I am going to cover all the corporate wide functions (detailed below) in individual entries.

  1. Research & Development – Covered in this blog
  2. Marketing & Sales
  3. Finance & Accounting
  4. Human Resources
  5. Internal IT
  6. Procurement
  7. End Customer Services & Support

Quick disclaimer – The data/ insights are for technology product companies spanning across software, computer hardware, telecom/ networking, semiconductor verticals; In my opinion offshore locations typically mean India & China, I would not to the extent of including Israel here because the cost is significantly high and the engineers there for some reason have ridiculously high innovation levels.

Ok so moving on from introductions and disclaimers, technology product companies typically have spent about 16% of their net sales on research & development. This number is higher for companies in hardware/ infrastructure intensive verticals such as telecom/ networking or semiconductors by about 5 – 6 percentage points. A lot of changes have happened to this number over the last 6 – 8 quarters because of our friends in Wall Street. But historically speaking, the companies that have bet their money on R&D and innovation have assured future revenue streams and are actually doing much better than the others even in the short term.

Talking on the headcount context, Research & Development accounts for about 32 – 38% of the global headcount of the companies.  These two numbers show how the whole globally distributed R&D team is neatly packed cost wise.  The average leverage ratio (Headcount outside of the HQ country to the total Headcount) for these companies is about 47%. That’s huge considering that the large sized companies like Microsoft or Cisco have about a total of over 30,000 people working under R&D.

In my earlier post, I have elaborated how the offshore teams predominantly exist to offset costs or cater to the lower end of R&D value chain. This saps about half of the innovation bandwidth of a company. Although I am not saying that innovation does not happen in offshore locations like India or China but the “innovation gap” is so huge that if plotted on an excel chart, it would take a person six feet high standing on the offshore column to reach the column for the HQ.

The large sized companies (Net Sales > USD 20 Bn) have got it right, at least now, largely through trial and error but nevertheless right. Some of them have even gone to the extent of having dedicated 30 member research (not R&D, just hard core research) teams in the remotest, hostile locations deep in the south American rain forests or Siberia, Russia and hire the smartest of the talent in that country and are able to independently innovate.

The root cause of all the innovation related challenges in the offshore locations can be understood by looking at how the globalized R&D value chain looks like in this distributed world – The core and most critical part of the value chain, Product Conceptualization, is predominantly restricted to the HQ. The chunks of less complex tasks are sent to these offshore locations who engage with the service providers, who honestly don’t know the “I” in product innovation.

In my opinion companies should have regional leadership teams who handle the entire product development cycle from the offshore locations itself. This solves two purposes first one being the complete and effective leverage of the local talent and the second being reverse innovation.

Stay tuned for more insights about the globalization insights into the other corporate functions.

Author: Anand Tatambhotla, Consultant

*Unless specified Views/Opinions Expressed in the blog are those of an Individual Consultants.

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Productivity Benchmarking – Survey Results

April 21st, 2010

Measuring productivity of engineers has always been controversial and a perception driven topic.  We at Zinnov designed and executed a survey among US based product companies with global centers in India and China in 2008.  Based on our interviews with several clients we realize the productivity issues continue to be a challenge for most companies.  These issues impede an organization’s ability to innovate and respond to customers faster. The key findings of the survey are listed below:

Perspective of Headquarters on productivity

  • 75% of the executives interviewed feel that the productivity of their global centers are lower than their teams at HQ
  • 40% of the executives feel that the productivity of the global centers are lower than 30% (Global centers are only 70% productive compared to HQ)
  • 35% of the executives feel that their global centers are only 50% productive

Common Reasons for Lower productivity

  • 70% of executives feel that Lack of project ownership is the key reason for lower productivity
  • 60% of the respondents feel that dependence on the HQ teams for decisions and lack of domain expertise among engineers in global centers attribute to lowered productivity
  • 56% of the respondents feel Lack of access to end customer as a reason
  • 50% attribute communication overhead as a reason
  • 30% of the respondents perceive high employee turnover/attrition rate as a another reason

    Key initiatives to Improve productivity

    • 85% of the respondents feel that providing complete product/project ownership to teams will help in improving productivity
    • 50% of the respondents feel that hiring engineers with higher experience (Middle and Senior level technical talent) along with better planning and effective knowledge transfer (KT) mechanisms will increase the productivity
    • 35% of the respondents feel that increasing the travel between teams will help in building trust and relationships (Increase access to technical talent at HQ)
    • 30% of the respondents feel that increasing the duration of stay during travel (3 to 6 months) will have positive impact
    • 20% of the respondents feel that seeding expatriates in global teams along with strong HR leadership will also improve productivity

    Research studies in the past have made several attempts to define an objective methodology to measure the performance and compare the engineers.  However, based on our survey and experience working with clients we realized that frameworks are great theoretically, but the practical challenges involved in implementation are overwhelming and quite often outweigh the benefits that can be derived from the exercise (Will be covered in the next blog)

    Also, Zinnov periodically updates the productivity benchmarks.  Feel free to write to us at info@zinnov.com to get access to the latest benchmark data.

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    Posted in Benchmarkig services | No Comments »

    Podcast: Globalization: An innovation imperative by Pari Natarajan, Co-Founder and CEO, Zinnov

    April 20th, 2010

    Globalization: An innovation imperative

    Posted in Globalization | No Comments »

    Globalization: An innovation imperative

    April 19th, 2010

    A few weeks back, Zinnov had organized a conference in the bay area with the theme – Business Transformation through Globalization. One of the presentations that I found interesting was on the topic Globalization – An Innovation Imperative given by Pari Natarajan, CEO – Zinnov. Below are a few excerpts from my notes:

    • The current wave of globalization started in 1980s with pioneers like Texas Instruments & Motorola entering India where there was no infrastructure, the fastest connection was 64 kbps and an actual satellite dish was transported using a bullock cart !!!
    • The economic reforms and liberalization in 1990s in India and China witnessed an increasing number of companies setting up global centers to capitalize on the cost arbitrage
    • With all this, the talent pool in India gained significant experience and between 2002 – 2007 companies started to hire hundreds and thousands of engineers not only for the cheaper cost but since they had access to talent
    • Interesting facts about India & China presence of top global 100 R&D spenders
      • 1990 –3%
      • 2000 – 33%
      • 2008 – 84%
    • Survey findings of about 50 VPs – Engineering of technology product companies; Cost & Talent Access are critical globalization drivers, New Market Access and Innovation not so much.
    • Majority of the global centers are in the lower part of the value chain delivering engineering support and working in module leadership mode (Implication: If a third of a company’s talent in located globally working in support mode, the innovation bandwidth of the company is reduced only to two-thirds)
    • Similarly for shared services, IT and F&A started early and are currently at high maturity levels when compared to marketing & sales which started quite recently. The shared services ops are well optimized for cost as well as providing regional support
    • Three key trends from emerging markets:
      • Top 1000 global companies are increasing working with IT service providers and account for about 50% of the revenues
      • Every company is looking at Small & Medium Businesses as a potential market
      • Consumers with their increasing disposable income presents a huge opportunity
    • Based on multiple analyst estimates, the IT spend / Revenue for companies in India, China & Eastern Europe is going to be more than 10% – Significantly higher than matured/ developed markets
    • The critical components of an innovative ecosystem are talent, universities, venture capitalists and start-ups (not only by graduates but by domain experts too)
    • In India & China the R&D centers account for about 310,000 engineers; estimated conservatively to reach about half a million in 2015. The interesting thing here is that in 2015 you will have about 60% of the engineer base with over 6 years of experience, close to the booming marketing with deeper understanding customer needs
    • Though the patent filing numbers from India & China are low compared to the US, an exploding trend is that increasing number of local companies are investing in R&D with the government providing a lot of incentives. Expecting to see a large number of patent filing from local companies in the future
    • Over last 5 – 10 years a lot of global companies have partnered with top tier universities in India for research. Even the universities have moved away from pure teaching focus to look at sponsored research and consulting engagements. Learning from this even the tier 2 universities are following suit
    • In terms of start-ups the conservative mind set of India & China is rapidly transforming in clusters in the countries such as Bangalore, Pune, Shanghai and Beijing
    • The middle management in the global centers of multi-national companies frustrated with micro-management in the support mode are starting up with the support of acclaimed VC firms like Kleiner-Perkins, Sequoia Capital, Accel Partners etc.
    • The IT service providers have also started the same time as Texas Instruments & Motorola and have evolved to create IP, reduce time to market, take complete ownership of sunset products
    • Case Study of Huawei: Stared in 1998 to build PBX switches; Started R&D for rural routers in 1992; Revenue from international regions was USD 100 Mn in 2000; In 2008 it is a USD 24 Bn and grew by 40% in 2007-2008 – Not even Google is able to manage that today; Today competes with Cisco, Nokia Siemens, Alcatel-Lucent in both developed and developing market. Huawei has established a Bangalore center though the cost points are higher (Shenzhen – USD 35,000/ R&D Resource; Bangalore – USD 45,000/ R&D Resource) for product innovation
    • Case Study of Micromax: Nokia is the India market leader in handsets with 40% market share; Overcame branding challenge by signing up bollywood stars and cricket players; Overcame customer reach challenge by signing up 55,000 retailers across India but is unable to crack the customer requirement fast enough. As prepaid is the preferred option for customers, companies such as Micromax have come up with dual SIM handsets where typically one of the SIMs are fixed as a permanent line and the second one keeps rotating depending on the deals/ offers by the TSPs. For Nokia to do this the cycle time is higher as the requirement needs to go back to Finland, innovation needs to happen for the product to come to market. Micromax’s manufacturing setup is based out of China and they are able to offer handsets are a much cheaper cost in India
    • “Micro-management is an innovation killer – I need to write a status report to send it to my managers in the US every day, How am I going to be productive?” – Anonymous
    • Perceived Productivity Benchmark Findings: About 70% of the managers in the US felt that the engineers in India & China are only 50 – 70% productive when compared to their global productivity
    • The attrition, perceived as a major challenge is predominantly with the call centers. Even in the worst times of the recession the attrition was about 15% for R&D teams
    • Cost escalation, another key concern, has been masked by the currency depreciation leaving negligible impact
    • Looking at technical leadership, it is imperative for companies to have a defined technical career path. This is why companies such as Google focus on product management. The ratio of product mangers to engineers was one of the higher for Google compared to others companies in India
    • Customer Engagement: Companies like Oracle are running beta programs in India and signed on customers in the APAC region. This helps the local engineers understand customer requirement really well. Companies like Honeywell are partnering with startups in India & China to take products to the market and really embracing the open innovation model
    • Cisco moved Wim Elfrink, Head – Customer Advocacy to India. He manages a very large business for Cisco sitting in India. It is extremely critical for companies to have this organization structure which will enable them to act independently from these locations

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    Posted in Globalization | No Comments »

    Shared Services Planned ROI and Actual ROI

    April 11th, 2010

    As a kid, I was very passionate observing the operations of Indian Bazaars.  For those of you unfamiliar with the term Bazaar, it is a dynamic market place, essentially a street full of shops where goods and services are traded.  It appears chaotic but it is organized in its own way.  Vendors organizing commodities, working from early hours of the day till late in the night with several tea breaks in between: driving up the blood pressures of their owners.  If you think Times Square is crowded, wait till you see the number of heads with buy/sell goals in Bazaars.  You can collect lot of data in Bazaars, goods flowing in and out, number of customers visiting, number of people employed:  a gold mine for people who love knowing more about the melting pot of various trades.  But one data point will be difficult to obtain: how much money did the vendor actually make?  There is no straight answer for this.  The vendors have an idea of how much money they want to make and if asked, will report this number- on occasion, you may be allowed the honor of seeing their cash box only to discover  that it often holds a lower amount than expected.

    Despite a complete change of scenery, there are a lot of similarities between the bazaar scenario and Globalization, especially when it comes to Reporting and Tracking ROI.  Planned ROI and Actual ROI are two different things and very often they are used interchangeably.  So in shared services, if you outsource within US you can get 15% ROI and if it is off shored you can expect 30% to 40% ROI.  For a very long time, these were the numbers that were floating around (with minor variations).  The point of this blog is not to dispute the magnitude of the numbers.  But I think it is important to look at ROI in conjunction with assumptions. Otherwise there will be a huge gap between Planned ROI (what you think will be in the cash box) and Actual ROI (what is actually in the cash box)

    Here are some best practices to minimize the gap between Planned ROI and Actual ROI

    • Communicate clearly what ROI is expected out of Globalization efforts.
    • Differentiate between First Year ROI and Ongoing (steady state) ROI to avoid confusion and set expectations.
    • Factor in all the costs (TCO- Total Cost of Ownership).  Do not leave out any costs required to make the ROI reach a particular target.  Call a spade a spade.
    • Document and communicate top 3 assumptions associated with the ROI (For example, you can state that in order to achieve 35% ROI, you have made the assumption that the implementation process will be completed in 6 weeks).
    • Clearly define what will happen if the assumption is not met, at least directionally.  For example, in the case above you can state that for every additional week delay in implementation process, the ROI for the 1st year will be lowered by 2%.  With little effort you can easily model such impacts (or you can call Zinnov and we love to help you with such modelingJ).
    • Define all the tracking and reporting mechanisms needed to capture actual ROI.
    • And finally, in the event that you deviate away from the goal, do not strike the panic button and state that Globalization does not work.  Conduct a Root Cause analysis and approach it like you would with any other problem.

    So let’s review in simple terms:

    Planned ROI – Actual ROI = Zero (you are doing as planned).

    Planned ROI – Actual ROI = +ve (Not good. Conduct a rapid assessment to decipher what is going on. Often, you do not need consultants for this though we are happy to take your money and find the same problems you would have found anyways).

    Planned ROI- Actual ROI = -ve ( You may be celebrating because you made more than you planned but it also reflects poorly on your planning.  You should call us because we can give you some good peer group “benchmarks”)

    Now that brings me to my next blog topic.  What is a Benchmark?  Why do companies and consultants love it so much but yet don’t understand it well?  What are the uses and abuses of Benchmarks?  More on this next week.

    Author:  VIjay Swaminathan, Co-Founder and Managing Principal

    Posted in Shared Services | No Comments »

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