Archive for April, 2010

Research and Development in a distributed world…

Tuesday, 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

Wednesday, 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

    Tuesday, April 20th, 2010

    Globalization: An innovation imperative

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    Globalization: An innovation imperative

    Monday, 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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    Shared Services Planned ROI and Actual ROI

    Sunday, 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

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